1. GENERAL NEWS
1.1. Draft Legislation for Finance Bill 2013
HM Treasury has published a Written Ministerial Statement dated 18 September 2012 by the Exchequer Secretary to the Treasury:
"The Government's approach to tax policy making places great emphasis on policy consultation and scrutiny of legislation.
Over the summer, HM Treasury and HM Revenue & Customs have been seeking the views of interested parties on over 35 of the tax policies announced at Budget 2012. Responses to these consultations will be published on or by 11 December 2012.
As part of the next stage of consultation, draft legislation for these measures, to be included in Finance Bill 2013, will also be published on that date. This will be supplemented by draft Explanatory Notes and Tax Information and Impact Notes. The draft clauses will be open for consultation until 6 February 2013."
1.2. Vardy Properties, SDLT and the transfer of rights legislation
The First-tier Tribunal has considered a second SDLT sub-sale scheme, in the case of Vardy Properties. Unlike the earlier case (DV3), the decision has been given in favour of HMRC's position. However no reference was made to the earlier decision in DV3.
The Upper Tribunal hearing for the DV3 case was scheduled to take place on 13 July 2012 and their decision should be coming out soon.
The First-tier Tribunal in the DV3 case considered in detail what was the secondary contract referred to in FA03 s45. In the DV3 case there was a contract for the purchaser company to acquire a property from the vendor company. However there was a second contract for the acquisition by a partnership (in which the purchaser company had the major partnership interest) from the purchaser company, with both the original and secondary contracts completed virtually simultaneously. The taxpayer contended that by virtue of the operation of the partnership rules, there was no consideration chargeable to SDLT as a result of the application of the sub-sale rules (FA03 s45).
The First-tier Tribunal in DV3 concluded that the secondary contract referred to in FA03 s45(3) was a contract between A, B and C (para 93 of that decision), but rejected HMRC's argument that it should represent a tripartite combination of the A-B and B-C contracts, through an examination of the exception applicable at the time where alternative finance arrangements were used. They concluded that the secondary contract had to be considered from the perspective of the acquisition by C, and that this could only be by reference to the partnership transaction that actually occurred. Hence the taxpayer succeeded on the basis of the mechanics of the partnership SDLT computation rules.
However in the Vardy case the First-tier Tribunal took a different view of the operation of s45. A basic summary of what happened in the Vardy case is as follows:
Vardy Property Group (VPG) had a wholly owned subsidiary Vardy Properties (Teeside) Ltd (VPT). An unlimited company was set up (Vardy Properties (VP)), where VPT subscribed £7.4m for ordinary shares in VP, using money loaned to it by VPG. VPG also held one other share in VP on trust for VPT.
- On 30 August 2006 VP entered into a contract (with the third party vendor) to purchase a property for £7.25m.
- On 31 August 2006 VP reduced its share capital to £1,000, creating a special reserve of the balance. The shareholders of VP convened to approve a proposal from the Board to distribute in specie the property as a final dividend. As VP was an unlimited company it required no sanction of the Court to permit this as VPT was liable for all the debts of VP.
- On 4 September 2006 the balance of funds due to the third party vendor was paid by VP to the third party to complete the original transaction, with the property conveyed from third party vendor to VP, and then VP to VPT.
It emerged that no single document representing the accounts of VP was prepared to determine whether the unlimited company was able to pay a dividend as required by the Company's Act. There was some discussion as to what was required in terms of accounts to demonstrate the ability to pay a dividend, and the Tribunal concluded a single document showing the company's financial position was required. They therefore concluded that there was no lawful dividend and therefore the SDLT legislation required to make the scheme work (FA03 s45 – the 'sub-sale' or 'transfer of rights' legislation) could not be engaged.
Although the company law point determined that s45 was not in point in this case, and therefore SDLT was due based on the original contract, the tribunal did go on to discuss how s45 would be interpreted if there had been a valid dividend.
Like the Tribunal decision in DV3, they concluded that there was a hypothetical secondary transaction for the purpose of s45(3). However instead of focusing on the form of acquisition by C (in the A to B, B to C transaction), they viewed s45 in the round. They concluded there was no focus on the type of transaction, but a focus on the consideration to be attributed to the acquisition. They agreed with HMRC's interpretation that as it was envisaged from the outset that VPT would acquire the property, s45(3)(b)(i) envisaged VPT providing VP with the funds to acquire the property, and that therefore it was appropriate to include the consideration in the form given by VP (i.e. the £7.25m)
In coming to its decision, the following points were also brought out by the Tribunal:
- Is a dividend a "transaction"? HMRC argued it is not as there is no "consensual or multipartite element", a dividend being a unilateral action. This argument failed – it was found to be a "transaction".
- The "transaction" was actually agreed to be the declaration of the dividend, not its payment.
- HMRC also argued that there was not a moment in time before completion of the original contract when the end acquirer had an entitlement to call for a conveyance since this entitlement only arose on completion of the original contract; hence it could not fall within s45. This argument was rejected.
- The Tribunal decided that entitlement arose as a result of the earlier declaration of the dividend (hence the importance of this being the "transaction") and there was nothing in the legislation to suggest that, at that time, it had to be an unconditional or immediate entitlement.
Both the DV3 and Vardy cases concerned transactions that took place before March 2010 when FA03 s75C was amended to remove the application of the partnership rules to the notional transaction referred to in s75A, and indeed before the introduction of s75A (the SDLT targeted general anti-avoidance rule) itself took effect from 6 December 2006.
The application of s75A was discussed in the Pollen Estate's case in relation to a hypothetical transaction for a joint purchase. However it was quickly dispensed with as the hypothetical transaction did not include 'a number of transactions' as required by s75A(b). However we will need to wait for a further case to see how the Tribunals and Courts would apply s75A SDLT anti-avoidance in transactions similar to the DV3 and Vardy cases.
http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02242.html
1.3. SDLT, subsale schemes and requirement to notify post 1 November 2012
Regulations have been issued coming into force on 1 November 2012 requiring a further DOTAS notification.
SI 2012/2396 concerns sub-sale (transfer of rights) scheme by a promoter where he had previously notified HMRC of it before 1 April 2010 and he continues to promote it after 1 November 2012. The notification obligation applies where the secondary contract contains one or more of the following features:
- a distribution in specie;
- an acquisition by a partnership;
- an acquisition by a settlement;
- an element of gift or transfer at an undervalue;
- the grant of an option;
- an assignment or novation.
SI 2012/2395 amends SI 2005/1868 to:
- Change the definition of 'connected' for the purpose of the SDLT avoidance schemes regulations to CTA10 s1122 from s839 ICTA.
- Remove any exclusions from disclosure by reference to value.
- Exclude from exemption from disclosure re pre 1 April 2010 arrangements, sub-sale schemes where the secondary contract has one of the features mentioned above in SI2012/2396.
- Update the list of claims in Step B, the single use of which does not bring a scheme into the disclosure rules except in certain circumstances.
http://www.legislation.gov.uk/uksi/2012/2395/pdfs/uksi_20122395_en.pdf
http://www.legislation.gov.uk/uksi/2012/2396/pdfs/uksi_20122396_en.pdf
1.4. David Gauke MP: 'HMRC and the taxpayer: improving compliance'
David Gauke's speech to the IFS on 14 September 2012 covered two areas of an effective tax collection system:
- The need for a high performing tax administration, supported by the right systems to make collection, compliance, and enforcement easy, efficient, and effective.
- The need to command confidence from the taxpayer that the system is being administered effectively and fairly, promoting a self-sustaining culture of compliance.
In relation to the above Mr Gauke discussed how HMRC is using effective systems to improve the efficiency and effectiveness of tax administration, and effective practices and communication to maintain the public confidence that it is doing its job effectively and fairly. He mentioned tax transparency and the increasing use by HMRC of updated technology such as CONNECT to cross-match data and communicate with taxpayers more effectively (from April 2014, 20 million taxpayers will receive a new personal tax statement). He also discussed measures being taken to ensure everyone pays the right amount of tax, including the consultation on the GAAR and activities by the High Net Worth Unit.
http://www.hm-treasury.gov.uk/speech_xst_140912.htm
1.5. HMRC Issue Brief – approach to tax compliance
HMRC has published a Brief setting out their approach to tax compliance in the context of tackling tax evasion and avoidance. It follows some of the themes introduced by David Gauke (see item 1.4).
http://www.hmrc.gov.uk/about/briefings/tax-compliance.pdf
2. PRIVATE CLIENTS
2.1. HMRC task forces targeting tax avoiders
HMRC has announced task forces to tackle tax avoiders who do not pay the right amount of tax in the following areas:
- The legal profession in London.
- Grocery and retail in South and North Wales, the North West and the South West.
- Hair and beauty in the North East.
- Restaurants in the South East and Solent.
- The motor trade in Scotland.
Task forces are specialist teams that undertake intensive bursts of activity in specific high risk trade sectors and locations in the UK. The teams will visit traders to examine their records and carry out other investigations.
3. PAYE AND EMPLOYMENT MATTERS
3.1. Boyer Allan Investment Services Ltd - prevailing practice and discovery in relation to EBT contributions
The First-tier Tribunal has considered the issue of whether there was a prevailing practice in 2000 and 2001 to the effect that contributions to an EBT were not regarded as potential emoluments subject to the restrictions of FA89 s43. If they had been treated as potential emoluments then a deduction in the tax computation would be deferred until those emoluments were actually paid over.
If there was a prevailing practice then there could be no discovery assessments by HMRC into the 2000 and 2001 tax returns of Boyer Allan Investment Services Ltd (BAISL). In common with many businesses at the time, contributions were made by BAISL to an EBT. The amounts in this case were £23.17m in the year ended 30 April 2000, and £750,000 in the year ended 30 April 2001. These were regarded as deductible for accounting purposes according to UITF13 as the EBT was not regarded as under the control of the company.
Following the House of Lords' decision in MacDonald v Dextra ([2005] UKHL 47), no tax deductions were strictly available at that stage. However BAISL contended that for the years in question there was a prevailing practice of permitting such deductions.
In order to meet the conditions so as to establish prevailing practice, the practice had to:
- have substance;
- be sufficiently precise and devoid of uncertainty as to its application;
- be a practice of relatively long standing;
- have been adopted by HMRC and generally, if not universally adopted by the taxpaying community;
- be a settled practice (not subject to change depending on the particular circumstances or facts of a particular case).
Evidence was taken from a number of witnesses, from large and medium accounting practices, solicitors and barristers, as well as from HMRC. The Tribunal concluded that although HMRC gave advice to inspectors to pursue factual lines of enquiry, in particular focusing on control and the accounting, rather than directly on FA89 s43 matters, this did not amount to an acceptance by HMRC that FA89 s43 could not apply.
The Tribunal also concluded that there was no consistent evidence of practitioners articulating any element of Revenue practice as regards the application of FA89 s43 except, limited by circumstances only, to the Revenue's own published materials. A Revenue regional technical update to inspectors included the comment that 'providing they [employers] have made a reasonable effort to walk the tightrope, we are content that they should secure relief without regard to FA89 s43.'
In particular the Tribunal did not believe advisers would have been able in 2001 to articulate the Revenue's practice in respect of this matter. They therefore concluded there was no generally prevailing practice as contended by BAISL.
The Tribunal also commented on whether they would consider the case of BAISL to be one of 'channelling' of emoluments from the company to the employees through the EBT. In the particular instance of BAISL they concluded this would have been the case, and that FA89 s43 would then have had application to deny the company a deduction for the contribution to the EBT.
The discovery assessments were therefore upheld.
http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02235.html
3.2. Whether reliance on first class post for next day delivery appropriate
In the case of Browns CTP Ltd the First-tier Tribunal considered an appeal against penalties for late payment.
The question was whether posting cheques by first class post in settlement of PAYE obligations could be relied on for next day delivery. In considering whether the taxpayer had a reasonable excuse in this instance, the Tribunal noted that, in relation to VAT, HMRC's practice for businesses not required to pay electronically has been to accept that cheques sent at least one working day prior to the due date as posted in time. However they accepted that what was appropriate for VAT may not be appropriate for PAYE.
The Tribunal noted that in relation to PAYE, HMRC advises employers to post cheques in settlement of PAYE obligations at least three working days prior to the due date to allow for possible postal delays.
The Tribunal did not consider that HMRC could effectively set the standard of reasonableness themselves, but felt that the Tribunal could assess what is reasonable taking account of HMRC's guidance. However that guidance merely states that HMRC will not be responsible for postal delays. The Tribunal noted the general deterioration in reliability of postal services in the recent past.
Taking all these matters into account the Tribunal considered that a reasonable employer, having due regard to his responsibilities in relation to PAYE, is generally entitled to rely on next day delivery in the ordinary course of first class post. The particular circumstances will still be relevant to individual cases. There is also still a burden on the employer to establish the actual date of posting by reference to cogent evidence. The penalties in question were reduced to nil.
http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02244.html
4. BUSINESS TAX
4.1. EU report on cross border dividend payments
The EU has considered the extent of double taxation on cross border dividends within the EU and what might be done to resolve the problem. The report suggests that the amount of juridical double taxation is in the region of €3.7 billion. Options considered for reform include (with option one being no change):
Option 2: Abolition of withholding taxes on cross-border dividend payments to portfolio/individual investors.
Option 3: The residence country grants full credit for the withholding taxes levied in the source country.
Option 4: Net rather than gross taxation in the source country.
Option 5: Application of a general EU-wide reduced rate of withholding tax with information exchange (Neumark solution) if the taxpayer opts for information exchange.
Option 6: Limitation of both source and residence taxation of dividend income and granting of limited underlying tax credit for foreign corporate taxation.
Option 7: No WHT in the source country and no taxation of foreign source dividends in the residence country.
The report considered that options 2,3,5,6 and 7 could result in less double taxation, reduced cost of capital and a consequent increase in the EU's total GDP of 0.03%-0.05%. All options would result in some reduced tax revenues for member states, corresponding to the reduction in investors' tax burden, but the report concludes in most options the welfare gain from reducing the cost of capital outweighs the loss in tax revenue as a percentage of GDP. Moreover, there are also legal reasons to improve the current situation, since it may be infringing EU law.
4.2. Consultation on implementing the UK/US FATCA agreement
HMRC has issued a consultation (open until 23 November 2012) on implementing the UK/US FATCA Agreement. The consultation describes each section of the Agreement and sets out how it is intended to work.
The Agreement (and therefore the policy) is fixed although various options are provided within the Agreement, most prominently the ability for the Government to allow UK financial institutions to follow the due diligence procedures in the US Regulations rather than the UK/US Agreement.
Representations are welcomed on how to draft the Regulations and guidance in order to implement the Agreement in a clear way.
5. VAT
5.1. EU VAT rules concerning non-EU telecoms suppliers to telecommunications, broadcasting or electronic services to non-taxable persons
The EU has issued regulations coming into force on 1 January 2015 for the provision in EU member states of a one-stop shop VAT facility for non-EU taxable providers of broadcasting or electronic services to non-taxable persons.
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:249:0003:0010:EN:PDF
5.2. VAT refund scheme for museums and galleries
HMRC has issued a consultation (open until 19 October 2012) on draft legislation amending the VAT refund scheme for named museum and gallery institutions. Amendments are proposed to:
- introduce two new institutions that the Department for Culture, Media and Sport wish to add;
- add details of new premises for institutions that are already on the list;
- remove museums/galleries which charge for admission or have closed, and make routine corrections such as a change of address.
http://www.hmrc.gov.uk/drafts/museums-order-draft.pdf
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.
