1.1 ICAEW survey of smaller agents' views of HMRC service standards
The ICAEW 2016 research survey, involving 350 interviews with smaller agents who interact with HMRC services at least once a month, has found little change to the quality of HMRC's service standards over the past year. This is despite HMRC's own statistics showing steady improvement for the general public.
The survey found a disappointing lack of improvement in HMRC's service standards over the year with 80% of agents reporting no improvement and 32% reporting a deterioration. The ICAEW set out six recommendations for improvement:
- digital services available to taxpayers must also be available to agents;
- set and implement agreed service standards;
- ensure that helplines can deal with complex queries;
- improve contact and response waiting times;
- improve implementation and communication of system changes and assess the impact of tax changes on service performance; and
- raise awareness of Agent Account Manager (AAM) services.
The ICAEW also questioned agents on their opinion of the move to Making Tax Digital:
- only 29% of agents are positive about HMRC moving more of its services online, with 53% having a negative view;
- only a quarter of clients maintain their records using accounting software, most using paper (43%) or Excel (32%) records; and
- 21% of clients do not feel digitally ready.
We support ICAEW's recommendations, especially the focus on digital services for agents. The development of digital services for agents is lagging well behind that provided to taxpayers and, unless the gap is closed, may increase costs for taxpayers, their agents and HMRC.
1.2 The European Union (Notification of Withdrawal) Bill
The Government has published the European Union (Notification of Withdrawal) Bill, a short bill to confer power on the Prime Minister to notify, under Article 50(2) of the Treaty on European Union, the United Kingdom's intention to withdraw from the EU.
The bill follows the recent Supreme Court decision in In R (on the application of Miller and Dos Santos) v Secretary of State for Exiting the European Union  UKSC 5, mentioned in last week's Tax Update, which concluded that a prior Act of Parliament is required.
The bill has been classified as fast-track legislation, under which Parliament is asked to expedite the Bill progress, so as not to delay the formal process of leaving the European Union. Royal Assent is not expected before 13 March 2017.
1.3 House of Lords sub-committee to inquire into making tax digital
The House of Lords Economic Affairs Committee has set up a Sub-Committee (FBSC) to inquire into the draft Finance Bill 2017, with a focus on making tax digital. A call for evidence has been issued.
The areas to be examined include:
- the evidence underlying the case for the Making Tax Digital proposals and their suggested impact;
- the evidence base for mandatory digital reporting;
- the scope of the exemptions and measures to help the digitally excluded;
- the robustness of the proposed timetable from the perspective of each of the groups affected;
- the adequacy of the proposed measures to simplify the calculation of taxable profits and basis periods and the timing of their introduction; and
- the consequential revisions to the penalty regime.
The FBSC will publish its report prior to the Budget in March 2017.
1.4 Public Accounts Committee (PAC) and HMRC's tax collection activities
The PAC has released a report criticising HMRC's record of and processes for collecting tax from high net worth individuals (HNWI) in the period since 2009. The report makes recommendations for improving HMRC's tax take and its public perception.
The report reviewed HMRC's specialist unit established in 2009 to deal with HNWIs - those with a wealth exceeding £20 million, reduced to £10 million in 2016. HWNIs numbered around 6,500 in 2015-16, 1 in every 5,000 taxpayers, and are assigned a 'customer relationship manager' (CRM). This can be seen as a way of the sector getting additional assistance and advice as opposed to scrutiny.
The report notes that from 2009/10 to 2014/15 the level of income receipts from HNWIs fell by £1 billion (23%) while income receipts from all taxpayers rose by £23bn (9%). The PAC was concerned that around one third of HNWIs are under enquiry at any one time.
The report recommends HMRC publish more about its work, clarify the scope and powers of its CRMs, and request additional powers where necessary. The PAC saw the tax treatment of sports image rights as an area requiring legislative change to reduce tax loss.
HMRC rejects some of the PAC's criticisms, pointing to the additional £2.5 billion secured from the wealthiest taxpayers since 2010. It denies giving any special assistance or tax advice to the wealthy – its focus is connected to the tax risk involved.
In view of the areas covered by the PAC enquiry it is disappointing to see that HMRC appear not to have anticipated some of the questions and were unable to satisfactorily explain the reasons for the changes over the period. It is hoped that any measures introduced in response to the report will not reduce tax compliance and the ability of HMRC to work cooperatively with taxpayers.
2. PRIVATE CLIENT
2.1 Updated FB 2017 draft legislation affecting the taxation of non-domiciled individuals
Updated draft legislation for the income tax, capital gains tax and inheritance tax changes affecting the taxation on non-UK domiciled individuals has been published.
These changes taking effect from 6 April 2017 tighten the rules by which an individual can remain in the UK and be regarded as non-domiciled for income tax, CGT and IHT. They also bring into the scope of IHT interests held in UK residential property, however held. There are transitional rules in some cases permitting a CGT rebasing of assets and the establishment of an excluded offshore trust prior to becoming 'deemed domiciled'.
The new draft legislation includes provisions to deliver income tax protections for non-resident trusts. There are no changes to the provisions relating to the CGT aspects of the protections or to the deemed domicile rules. There are also minor changes to the rebasing protections and to the legislation on the proposals for cleansing mixed funds.
Comments on the draft legislation are requested by 23 February 2017.
3. PAYE AND EMPLOYMENT
3.1 Whether unauthorised payment surcharges were just and reasonable
The FTT has held that unauthorised payment surcharges levied by HMRC, in respect of funds loaned from a pension scheme in a manner that breached the permitted loan rules for pension funds, was just and reasonable.
The taxpayers in this instance sought to use the full value of their pension savings as a loan to their business and were advised to transfer their pension funds into a 'Bespoke Pension Trust'. While their intention was to use the funds for their business, the pension fund tax rules treat a loan from a pension fund to a company controlled by the pension beneficiaries as a payment to the beneficiaries (FA 2004 s.160 – s.164).
The taxpayers contended that their intentions were commercial rather than any form of 'pension liberation'. They contended they had taken advice from someone who they thought was professionally qualified. The FTT considered, however, that the rules required the pension surcharge to be applied, and that this did not require the taxpayers to have acted dishonestly or negligently. The FTT also considered the effective 55% charge was not penal or disproportionate, despite the fact that the taxpayers may not have obtained tax relief at 40% on their pension contributions.
The case is a reminder that accessing pension funds in a manner outside the pension tax rules can lead to significant tax charges.
4. BUSINESS TAX
4.1 Online ATED services
HMRC has made available its new ATED online service. This is a beta trial and requires a Government Gateway account and the agent's and/or taxpayer's unique taxpayer reference (UTR).
If an agent is to be used for filing ATED returns, it is possible for them to perform the online filing on behalf of the taxpayer, but HMRC must receive notification the agent has been authorised by the taxpayer. In most cases this authorisation must be online and it appears that it must be initiated by the client through an HMRC account.
It is not completely clear how the agents' registration process or agent authorisation process will work and whether separate offices of firms can retain separate identities. Hopefully HMRC will provide more information shortly.
4.2 State pension rights and failure to pay class 2 NIC
The FTT has held that Mr Arens' failure to pay class 2 NIC for the periods 1973/74 to 1989/90 and 1994/95 to 2007/08 was not due to a failure to exercise due care and diligence. As a result Mr Arens could make further contributions covering these periods to entitle him to the full state pension.
During the periods in question Mr Arens was self-employed, but did not pay class 2 NIC. In the intervening period he was unemployed and his house was repossessed. He only discovered the deficiency in his NI contributions record on contacting the Pension Service two weeks before his 65th birthday.
The case summary indicates the correspondence from the Department of Social Security (DSS) or Department of Health and Social Security (DHSS) may have been sent to a former address, or not reached Mr Arens. The FTT noted there was no automatic class 2 NIC registration process, despite the DSS having knowledge of MR Arens self-employed status and his new address. Factors taken into account by the FTT in holding that Mr Arens had exercised due care and diligence included the following:
- he was not a professional person and had little financial or legal expertise;
- as soon as he was aware of the shortfall he made efforts to correct it; and
- he honestly believed he was paying his tax and NI liabilities and was unaware of the distinction between class 2 and class 4 NI.
With the new State Pension requiring 35 years' NI contributions, any non-qualifying 'gap year' can reduce the pension entitlement by about £230 each year. In such cases taxpayers may wish to seek financial advice on whether to fill the gap and how this can be done as there can be a choice of options.
4.3 Failure to pay class 2 NIC not due to lack of care
The FTT has held that despite the taxpayer accepting his failure to pay class 2 NIC resulted from his error and ignorance, he had still exercised due care and diligence. As a result he was held to be entitled to make late contributions.
The taxpayer was a self-employed musician. He applied to HMRC to pay backdated class 2 NICs for the period 1967-68 to 2007-08 because he had paid only class 4 contributions. He accepted that his failure to pay class 2 was the result of his error and ignorance, but this was not because he had failed to exercise due care and diligence. He said the National Insurance agencies had also failed to contact him about the class 2 liability, even though he was making class 4 contributions.
HMRC refused to allow backdated contributions.
The FTT found the taxpayer was not familiar with the class 2 National Insurance system. In 1976, he had appointed an accountant to ensure that his affairs were in order. He had asked about class 4 contributions and had accepted the response that these were his contributions as a registered self-employed person.
The taxpayer was 'uncomfortable, but cautious with paperwork' and used an adviser to ensure he complied with his obligations. Further, his behaviour with regard to his other tax affairs supported his claim that he would have paid class 2 contributions had he known they were due.
The judge concluded that the taxpayer had shown the non-payment was not due to a lack of care. He was entitled to make late payments.
This and the case above indicate that one of the options for taxpayers with gaps in contributions to consider may be to appeal to HMRC regarding their entitlement to make late contributions.
4.4 Draft legislation for corporate interest restrictions
Updated draft legislation for the FB2017 corporate interest restriction that applies from 1 April 2017 has been issued. It now includes further provisions on a number of areas including an exception for public infrastructure activity. This latter exception requires an election to be made in an accounting period before the election is to have effect, subject to transitional rules.
The corporate interest restrictions limit group interest expense above a net £2m threshold to either 30% of tax EBITDA or a group ratio rule. The updated legislation now includes further provisions on:
- the group ratio rule;
- the public infrastructure exception excluding amounts in respect of certain loans and other financial liabilities from being 'tax-interest expense amounts' or tax interest income for the purpose of calculating the restriction. In addition the company's tax-EBITDA is ignored in calculating the group EBITDA and group interest capacity (subject to an exception);
- It requires a qualifying infrastructure activity, which is 'the provision of public infrastructure asset or any ancillary/facilitating activity'. A public infrastructure asset can include any building that is part of a UK property business, intended to be let on a 'short term basis' (a duration of less than 50 years) to unrelated parties. 'Provision' in this context includes acquisition, design, construction, conversion, improvement, operation, repair;
- specific industries such as oil & gas, real estate investment trusts, insurance companies, charities, cooperative and benefit societies; and
- finance leases and an election to treat creditor relationship amounts using amortised cost basis accounting instead of fair value accounting.
If the public infrastructure exception is relevant, the transitional rules provide that an election to apply it can be made by 31 December 2017 for accounting periods beginning on or before that date. Accounting periods crossing the commencement date are split around that date.
Comments on the revised draft legislation are requested by 23 February 2017.
4.5 Draft legislation for carry forward loss relief
Updated draft legislation for the FB2017 carry forward loss relief rules has been published. These take effect for accounting periods beginning on or after 1 April 2017. Periods crossing this date divided with profits and losses being apportioned to the two periods
Subject to a £5m threshold this legislation will limit the ability of companies to offset carried forward losses to 50% of future profits, though the banking sector's ability to apply the offset is restricted to 25% of future profits. Carried forward losses deriving from losses incurred on or after 1 April 2017, will be available for offset against a wider range of income streams than is currently the case.
In addition to the provisions set out in the legislation published in December 2016, the updated legislation now includes provisions dealing with: specific rules for insurance companies, the creative industries and anti-avoidance provisions.
Comments on the revised draft legislation are requested by 23 February 2017.
4.6 Social investment tax relief
Draft legislation has been published for the expansion of the limits applicable to social investment income tax relief with effect from 6 April 2017.
The changes provide for the following:
- the amount of qualifying investment a qualifying social enterprise can raise will increase in most cases, from the current three year rolling limit of €344,000 to a maximum of £1.5 million over its lifetime;
- the increased investment limit will be available to qualifying social enterprises up to seven years after their first commercial sale - older social enterprises will continue to be able to raise investments up to the limits of the current de minimis state aid scheme;
- the maximum number of full time equivalent employees of a qualifying social enterprise will be reduced from 500 to 250 - volunteers don't count towards this limit;
- the excluded activities list will be updated to exclude a number of low risk activities from the SITR; and
- the measure makes a number of other changes to ensure the new scheme is properly targeted and meets EU rules under the General Block Exemption Regulation.
Comments on the draft legislation are requested by 23 February 2017.
5.1 Output VAT on sales income paid directly to a lender to the business
In an unusual case involving close working relationships between a lender and a borrowing individual running a similar business to the lender, the FTT has held that the two businesses were distinct and, despite receiving the sales income of the borrower, the lender was not liable for output VAT on the borrower's sales.
The lender, Avalaya.com Partnership ('Avalaya'), made a loan to a similar business, Jewellery 4 All ('Jewellery'), run by a close personal friend of Avalaya's partners. The loan was made interest free to the sum of $60,000, with terms that repayments would be made in Sterling. Avalaya needed sterling to pay its creditors, while Jewellery needed dollars to pay its creditors. It was for the convenience of not having to use currency intermediaries that the sales income from Jewellery, which traded through the Amazon Sales Portal, was paid to a UK bank account of Avalaya (net of Amazon's commission).
HMRC contended that Avalaya and Jewellery were the same business. The FTT disagreed holding that the level of cooperation between the businesses did not rise to the level of partnership. As a result Avalaya was held not to have made taxable supply of goods equivalent to the 'loan receipts' and was therefore not liable for output VAT.
The VAT new joint and several liability rules placed on operators of online marketplaces for goods, effective from 15 September 2016 (FA 2016 s.124), now means that HMRC will deal with the online operator in such cases. Online operators' terms and conditions for those using their services are likely to have been revised to take this into account. Please get in touch with your S&W VAT contact to discuss the VAT implications of doing business online.
6. AND FINALLY
Ahead of the annual deadline for submission of personal tax returns, 31 January, HMRC have released its latest list in which it considers the most outlandish items that have been claimed as business expenses. Some of the more optimistic claims are mentioned below.
The full list contains ten of the most outlandish items that taxpayers have attempted to claim on their self assessment returns. With items ranging from luxury holidays to designer watches for staff (for a company with no employees), it was always going to be an uphill battle to convince HMRC the items were valid business expenses.
Some of our personal favourites are:
4. Pet food for a Shih Tzu 'guard dog'
Whether guard dogs fall under the classification of working dogs, and so incur tax reliefs, or pets, which clearly do not, is a contentious issue with HMRC with little clear guidelines. While the taxpayer may have had more luck with a more traditional guarding breed, such as a German Shepherd, it is interesting to note that similar small breeds such as the Lhasa Apso were originally bred as household sentinels for Tibetan nobility and Buddhist monasteries. Perhaps HMRC have a list they consult?
9. Betting slips
HMRC have previously contemplated introducing a tax on gambling winnings, in which case we hope their view on betting slips would be reassessed. However it seems that in the current state of affairs that about the only form of gambling that is tax allowable to HMRC is that of hedging instruments. There are certain bookmakers, we are reliably informed, that will take wagers on foreign exchange or the state of the FTSE; could these be allowable?
The 31 January 2017 deadline for submission of 2015/16 self assessment tax returns is fast approaching. If you have any concerns over the relevance of your expense claims, we recommend getting in touch with your usual Smith & Williamson contact.
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.