UK: Weekly Tax Update - 19 December 2016

Last Updated: 20 December 2016
Article by Smith & Williamson

1. GENERAL

1.1 Season's Greetings

We would like to wish all our readers a very Merry Christmas and a Happy New Year. Tax Update will be back on 9 January 2017.

1.2 Treasury committee call for submissions on EU exit transition arrangements

As part of its inquiry into the UK's future economic relationship with the EU, the Treasury Committee has issued a call for written submissions on transitional arrangements on Brexit.

Questions are raised on:

  • the desirability of transitional arrangements;
  • the design of transitional arrangements; and
  • the negotiation of transitional arrangements.

Tax arrangements resulting from Brexit will be an issue for consideration in all of the above. The deadline for written submissions on transitional arrangements is 31 January 2017.

www.parliament.uk/business/committees/committees-a-z/commons-select/ treasury-committee/news-parliament-2015/future-economic-relationship-with-eu-second-launch-16-17/

1.3 Scottish Budget

The Scottish Budget includes proposals for using Scotland's new income tax powers and will extend the higher rate of income tax threshold only by inflation to £43,430 in 2017-18. This will create the first mismatch for 'Scottish taxpayers' with those resident in other parts of the UK under devolved rate and rate band setting powers.

Key tax elements of the Scottish Budget include:

  • Income tax on non-dividend and non-savings income of Scottish taxpayers

    • The rates and bands of Scottish Income Tax are summarised in table below

      Scottish income tax rates Scottish rate bands Rest of UK rate bands
      Scottish basic rate 20% Over £11,500* - £43,430 Over £11,500* - £45,000
      Scottish higher rate 40% Over £43,430 - £150,000 Over £45,000 - £150,000
      Scottish additional Rate 45% Over £150,000 and above** Over £150,000 and above**

      * Assumes individuals are in receipt of the Standard UK Personal Allowance.

      ** Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

  • Land and Buildings Transaction Tax (LBTT)

    • Maintain residential and non-residential rates and bands of LBTT at their current (2016-17) levels
  • Scottish Landfill Tax (SLfT)

    • Increase the Standard Rate of SLfT to £86.10 per tonne and the Lower Rate of SLfT to £2.70 per tonne in 2017-18

www.gov.scot/Publications/2016/12/6610/downloads

2. PRIVATE CLIENT

2.1 Private residence relief – importance of quality of residence

In the case of Andrew Oliver v HMRC the FTT agreed with HMRC that Mr Oliver was not entitled to private residence relief. The quality of his occupation lacked the assumption of permanence and any degree of continuity or expectation of continuity.

Mr Oliver and his partner, Ms Barton, were due to go through a trial separation; so Mr Oliver, a property landlord, left the family home and acquired a 41 year lease on a flat for £515k in January 2007. The short lease period was extended at a cost of £153k. However, the property was put back on the market after a very short period and sold for £895k in April 2007.

The FTT found that the degree of Mr Oliver's occupation was consistent with his intention to let the flat rather than undertaking a venture in the nature of a trade. Mr Oliver did not persuade the FTT, on the balance of probabilities, that he resided at the property as his only or main residence for the short period of ownership. In particular, evidence in support of Mr Oliver's case included:

  • a picture of his daughter at the flat, which it transpired had been taken when the previous vendor was in occupation;
  • bills relating to the property did not support permanent occupation: other than utility bills, which would be issued regardless of the occupation of the flat and a Homebase card, the correspondence provided by Mr Oliver post-dated his acceptance of the offer for the sale of the flat towards the end of the ownership. The FTT also found it unusual that no telephone or internet connections were arranged in 2007; and
  • Mr Oliver's partner's involvement in the purchase was found difficult to reconcile with Mr Oliver moving to reside at the flat because of their separation.

The case contains a useful review of matters the courts and HMRC may consider when looking at the quality of residence.

www.bailii.org/uk/cases/UKFTT/TC/2016/TC05521.html

2.2 Personal Tax Account

HMRC has issued a paper setting out what can be done through a 'personal tax account'.

For individuals who set up and access their personal tax accounts with HMRC, the paper lists some of the features of personal tax management available:

  • filing self-assessment returns;
  • checking income tax;
  • a tax calculation review service;
  • a check of the amount of state pension a person is entitled to;
  • a check of national insurance records;
  • management of child benefit;
  • checking address details, and tracking the submission of forms;
  • permitting family and friends to access the account;
  • applying for the marriage allowance;
  • claiming repayments of overpaid PAYE;
  • update company car details;
  • update HMRC on medical benefit information.

Having a personal account may be helpful should 'making tax digital' obligations arise.

www.gov.uk/government/publications/your-personal-tax-account/your-personal-tax-account

3. PAYE AND EMPLOYMENT

3.1 Consultation on updated draft regulations for the Apprenticeship Levy

Following feedback from the September 2016 consultation, HMRC has issued a new consultation on updated draft regulations for the calculation, reporting, payment and recovery of the Apprenticeship Levy. Responses to the consultation are requested by 3 February 2017.

With effect from April 2017, the Apprenticeship levy of 0.5% of an employer's paybill will apply to those employers or employer groups with a paybill of more than £3m.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/576931/ Draft_regulations_-_Income_Tax Pay_As_You_Earn Amendment Regulations_2017.pdf

www.gov.uk/government/uploads/system/uploads/attachment_data/file/576960/ Technical_consultation_on_draft_regulations_for_the_apprenticeship_levy.pdf

4. BUSINESS TAX

4.1 New information return for VCTs

HMRC has released a note on proposed amendments to the Venture Capital Trust (VCT) Regulations 1995.

Currently, VCTs must provide HMRC with a return of specified information within 12 months of the end of an accounting period. The regulations that specify the required information will be amended to require a VCT to provide details of:

  • the VCT's fund manager;
  • the investments made by a VCT, and how each investee company complies with the conditions in Chapter 4 of Part 6 ITA 2007 (qualifying holdings);
  • any non-statutory view already provided by HMRC of an investee company's eligibility as a qualifying holding;
  • protected monies held by a VCT and any investments made using protected monies.

HMRC is consulting informally with the VCTs on the new returns process, which will use a standard format that can be submitted electronically. The new information requirements will apply to VCT's with an accounting period ending on or after 31 December 2016.

www.gov.uk/government/publications/income-tax-venture-capital-trusts-returns-of-information/ income-tax-venture-capital-trusts-returns-of-information

4.2 Securitisation companies

A statutory instrument has now been issued to give effect to HMRC's October 2016 announcement that securitisation companies will be able to continue to use UK GAAP as it stood at 31 December 2004 as the basis for their tax computations until 2036.

SI 2016/1182 comes into effect on 28 December 2016. It extends the use of old UK GAAP from accounting periods ending before 1 January 2017 to accounting periods ending before 1 January 2037, subject to an election by the company. The election must be made by the later of 31 March 2017 and the end of the first accounting period ending after 1 January 2017.

www.legislation.gov.uk/uksi/2016/1182/pdfs/uksi_20161182_en.pdf

4.3 HMRC guidance on profits of a trade of dealing in or developing UK land

HMRC has published its guidance on the FA 2016 legislation (s76-82) on transactions in UK land (new CTA 2009 part 8ZB and ITA 2007 part 9A.)

The guidance comments 'the legislation should always be understood in the context that it is taxing only what are, in substance, trading profits'. It sets out new sections for HMRC's business income manual at BIM60515 – BIM60900.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/576932/ OPDmanual_LMcK.pdf

4.4 Draft HMRC guidance on hybrid and other mismatches

HMRC has issued guidance on the application of the 'hybrid and other mismatches' legislation introduced in FA 2016 s66 and Sch10. Comments on the draft guidance are requested by 10 March 2017.

The draft guidance sets out new sections of HMRC's international manual – INTM550000 – INTM597030. It consists of 404 pages and includes a number of examples illustrating how HMRC see the rules applying.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/575880/ Hybrid_and_Other_Mismatches_-_draft_guidance.pdf

4.5 FRS102 implications for income tax

HMRC has issued guidance on the implications of adopting FRS102 for income tax.

With respect to financial instruments, it says:

'For businesses within the charge to Income Tax there is no equivalent to the loan relationships (under Part 5 CTA 2009), non-lending money debts (treated as loan relationships under Chapter 2 of Part 6 CTA 2009) or derivative contracts (under Part 7 CTA 2009) legislation which apply to companies within the charge to Corporation Tax. This may lead to significant differences from Corporation Tax in tax treatment. In particular, items which are capital in nature will generally not be taken into account for Income Tax purposes.

Tax legislation at section 29 ITTOIA says that, for calculating the profits of a trade, interest is always a revenue (as opposed to capital) item.

The distinction between capital and revenue items is an important one for Financial Instruments as this will to a large extent determine the tax treatment. What constitutes a capital item isn't defined by statute and there is no single test that will determine the issue in all circumstances.

Where a business has entered into a loan on interest-free terms, and this is accounted for under FRS 102 as a financing transaction, the notional interest debited as an expense to the Income Statement as the loan is returned back to its face value over the period to maturity isn't an allowable deduction for tax. As there is no outlay, no expense has been incurred for the purposes of the business (section 34 ITTOIA).'

www.gov.uk/government/publications/accounting-standards-the-uk-tax-implications-of-new-uk-gaap/frs-102-overview-paper-income-tax-implications

5. VAT

5.1 OTS VAT review terms of reference

The OTS has issued terms of reference for its review of aspects of the VAT system. It will call for evidence in spring 2017 and produce a final report in autumn 2017, with an update on its work. The review will consider how to help ensure the VAT system works appropriately in tomorrow's economy.

The work is not directly being undertaken as a result of Brexit, but it may shape thinking in a post-Brexit world where the UK may have greater freedom to legislate for VAT changes.

The review will consider:

  • the impact of a higher or lower VAT threshold;
  • how the current exemptions, reduced rates and zero rates fit in the modern context;
  • the demand and practical challenges arising from having a more widely available clearance system for uncertain VAT areas, such as transfer of a going concern (TOGC);
  • the potential for simplifying a number of areas of VAT, such as partial exemption, option to tax, and the capital goods scheme, focussing on smaller businesses;
  • special accounting schemes;
  • the general administration of VAT, including penalties and appeals;
  • opportunities for aligning VAT with other taxes as part of the making tax digital plans;
  • the relative significance and impact of issues identified on different sectors and business sizes.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/575953/ Terms_of_Reference_-_OTS_VAT_Simplification_review_Dec_2016_final.pdf

5.2 VAT treatment of interest payments on loans to purchase goods

The CJEU has held (case C-208/15) that a Hungarian integrated agricultural cooperation granting a producer a loan to purchase seeds from it is in principle paying for the supply of the goods, with the consideration for the single supply being the price paid for the goods (loan) plus the interest on the loan. In this case the granting of the loan was not held to be a separate VAT exempt supply. This meant that the interest on the loan was also liable to VAT.

A company, Stock 94, within a Hungarian 'cooperation' (a Hungarian term) granted a loan to a producer on the basis that the loan could only be used to purchase 'current assets' (seeds) from the cooperation. Stock 94 did not have authorisation to act as a credit institution and thus could not grant loans, other than for the purchase of its goods. The producers agreed in return to cultivate the seeds on certain farmland and to use the loans granted solely to purchase the seeds from Stock 94. Stock 94 charged VAT on the price of the seeds, while treating the quarterly invoices for interest costs as VAT exempt.

In the UK, VAT notice 701/49 indicates that where goods are sold on credit by an organisation, provided the finance charge for the credit is separately identified, it is regarded as a separate supply of VAT exempt finance.

In 'Stock 94' the CJEU referred to case C-276/09 (Everything Everywhere),where it was held that a separate charge depending on the method of customer payment for their monthly bill, did not represent a separate supply from the mobile phone charges for VAT purposes.

While the CJEU decision in case C-208/15 may be specific to the circumstances that exist in Hungary, UK suppliers may like to consider the VAT implications of the way they offer credit for payment in respect of the goods they supply.

http://curia.europa.eu/juris/document/document.jsf;jsessionid= 9ea7d0f130d62c08bf5903c743b4884ab3776ce002d2.e34KaxiLc3eQc40LaxqMbN4PahaLe0? text=&docid=186064&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first∂=1&cid=623661

www.gov.uk/government/publications/vat-notice-70149-finance/vat-notice-70149-finance

6. AND FINALLY

Stretching Credulity

Regular readers will recall that And finally pointed out St Nick's Turkish domicile, at least of origin, last year. Some of our younger tax colleagues could not leave the poor fellow alone. Our junior correspondents have now added, in breathless tones:

We established that many believe he resides in the North Pole and with many US children writing 'wish lists' to Santa Claus, North Pole, Alaska evidence points to Santa being US resident.

However, what if Father Christmas was deemed UK resident, perhaps due to his long summer holiday spent in Scotland, for example, then how many tax laws would he and his sole trade business, Santa's Grotto, be liable to comply with?

  • As all presents are gifts from Father Christmas then these will need to be valued at market value for IHT and CGT purposes (although most children will come under the £250 small gifts exemption for IHT

    • we certainly used to!).
    • However, as Father Christmas is 'ageless' then the 7 year test is a real moot point as he isn't likely to have a death estate for IHT purposes.
    • We would of course need to consider whether there were any brought forward losses to offset against the gains for CGT.
  • Luckily, as Santa's Grotto is a sole trade he wouldn't need to consider any benefit-in-kind rules on the provision of the business' sleigh – although any private use is likely to be minimal; so if it is a commercial vehicle, designed to carry goods rather than passengers, there is some argument that it would be taxed like a van. The incidental private use and home-to-work commuting would be ignored (lucky really because if the sleigh was taxed like a company car then the reindeer emissions would be off the chart for the BIK percentage!).
  • Father Christmas does of course employ elves to do the work. On the assumption that they work for payment in the UK and not pro bono, he needs to consider paying the new living wage. Would the young trainee elves fall into the catch of the Apprenticeship Levy?

    • PAYE/NIC needs to be deducted from earnings – we wonder if a workplace pension scheme is in operation yet? At least he won't need to determine which part of the UK individual elves have their main place of residence (if any) as this something for the elves to sort out with HMRC with him only having to apply the Scottish rates based on the PAYE (pay as you elf) code issued.
    • Would the provision of homes for the elves count as board and lodging – if so, would the provision of a home be covered by the 'proper performance of duties' or 'customary' exemptions for accommodation benefits?
    • If the elves were self-employed instead then do they qualify for Maternity Allowance rather than Maternity Pay when they go off to have a new baby elf?
  • From a practicality point of view, we wonder what credit terms Father Christmas has with his suppliers? There must be imports for all the toys as the North Pole certainly doesn't have wood/electricity and so on. Could there be import VAT due? Is there a deferment scheme in place to pay on the 15th of the following month?

All things considered we think Father Christmas would be glad not to be UK resident but, who knows? he may spend his summer over in Bermuda (for the nice weather only and not tax-related in the slightest!)

We look forward to our young correspondents growing up a bit, and getting beyond this preposterous fantasy. Perhaps then, we can take this seriously and examine his real issues: BEPS and diverted profit tax.

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.

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