UK: A Round Up of Recent Tax Issues

1. General news

1.1 Finance (No. 3) Bill 2010

The government is expected to publish the Finance (No. 3) Bill 2010 on Thursday 30 September, during Parliament's Conference Recess. Second Reading is provisionally scheduled for Monday 11 October.

The House of Commons is due to pass a Motion on the Finance Bill resolutions on Wednesday 15 September.

www.publications.parliament.uk/pa/cm/cmfbusi/a01.htm

1.2 Agent authorisation

HMRC has updated its guidance regarding the agent authorisation process (both online authorisation and using paper form 64-8).

www.hmrc.gov.uk/agents/authorisation.htm

HMRC has also produced some 'top tips' to help agents ensure that their applications for authorisation are dealt with as effectively as possible. www.hmrc.gov.uk/news/top-tips.htm

1.3 Withdrawal of agent's copies of some PAYE and SA forms

HMRC has notified the professional bodies that as part of the drive to save costs it plans to stop issuing copies to agents of some mail which is sent to clients.

The text of the note is copied below:

Background

Agents will be aware that all Government Departments have been asked to look critically at the measures they can take to reduce spending and save on costs. HMRC is no exception to this and we expect to face some significant financial challenges over the coming years.

In anticipation of these challenges we are reviewing the forms we send to agents and we have decided that some of these will no longer be issued. We are sorry if some of these changes are unwelcome but we have tried to look for savings in those areas where there will be minimal impact on our customers.

Forms to be Withdrawn/Suspended :

Form	Date of Withdrawal	Impact/Effect
P2 – PAYE Coding Notice	December 2010 – before 2011/12 coding run	Agent copy to be withdrawn. Customer/client copy to include a new message suggesting that the form is shown to their tax agent or adviser.
P800 – Tax Calculation	August/September 2010	Agent copy to be withdrawn. Customer/client copy to include a new message suggesting that the form shown to their tax agent or adviser.
P810 – Targeted review form – sent to customers who don't complete a Self Assessment tax return.	April 2010 –Decision taken not to "bulk issue"	Agents are not notified of the issue of form P810 to their clients. These forms were not issued in 2009 and a review of the form is currently taking place.
SA 250 – Letter advising the customer of their Unique Taxpayer Reference (UTR) and detailing the requirement to complete an annual Self Assessment tax return.	October 2010	Agent copy to be withdrawn. Customer/client copy to include a new message suggesting that the letter is shown to their tax agent or adviser.
SA 251 –Letter advising the customer that HMRC will not require future Self Assessment tax returns to be completed.	October 2010	Agent copy to be withdrawn. Customer/client copy to include a new message suggesting that the letter is shown to their tax agent or adviser.
SA 252 – Letter to customers who don't submit a Self Assessment tax return but are liable to Income Tax at the higher rate.	September 2010	Both agent and customer copies to be suspended this year and a review of the form is taking place place. (These forms were not issued in 2009)

We hope that agents will understand our decision to withdraw these communications. We estimate, for example, that we will save in the region of £1.25 million by discontinuing the issue of agents' copies of Forms P2 and P800 alone.

Hard decisions and choices will inevitably have to be made and we will continue to seek opportunities to:

• Improve our current forms
• Reduce the number we send out
• (In the longer term) Consider whether there are other forms which could be replaced or even removed entirely.

We will also be introducing system enhancements from December 2010 to delay the issue of P2s to SA customers until all 2010 SA Returns (for those meeting the 31/1/2011 online filing deadline) are captured. This means that the code we issue will be based on the information in the return and will avoid the need for amendments had we issued the code earlier. This change was originally proposed by agents in a National Working Together sub-group and should, we think, be very welcome.

We think that agents will also be pleased to know that recent changes to our National Insurance and PAYE Service (NPS) system mean that multiple forms P161 should no longer be issued every time a new source of occupational pension is notified to us.

We will be publishing a message on our website about these changes very soon but, in view of the imminent nature of some of them, we wanted our agent partners to have as much notice as possible.

2. Private Clients

2.1 HMRC to collect underpaid PAYE taxes

What are the facts behind the recent press stories?

• The PAYE system is a blunt tool and, although it does the job in most cases, it cannot deal with every eventuality and it is still everyone's responsibility to ensure that they pay the correct amount of tax.
• If one is within the Self Assessment system any inaccuracies within the PAYE are taken account of and the correct amount of tax due for the year should be collected.
• With its new computer system HMRC can identify those outside Self Assessment who have potentially under or overpaid tax and it will provide them with a tax calculation based on the details held. It has always been the case that some people pay too much tax under PAYE and others not enough but in the past it has only been possible to identify some of those people and large sums of possible tax due have remained not collected and tax overpaid left unclaimed.
• If a tax calculation P800 is received from HMRC it should be checked to ensure that the details pulled from the system are correct.
• If the calculation shows a tax overpayment the instructions on how to reclaim it should be followed.
• Where the calculation shows tax due:
• • HMRC has a tolerance level, recently confirmed as increased to £300, below which they would not normally issue a calculation. However, if a computation is issued and the amount adjusted down to below this amount HMRC's PAYE manual indicates that it is likely to still seek recovery of the underpayment as the process had started. (We wait to see whether the reference to HMRC "will not pursue cases when the amount owed is less than £300" by The Exchequer Secretary to the Treasury, Mr David Gauke, means that HMRC will not seek collection where the amount is adjusted down to below the £300 figure or just that HMRC will not instigate where its system shows a potential underpayment of £300.)
  • Where the amount is between £300 and £2,000 HMRC will look to adjust next year's PAYE tax code to collect the underpayment. In cases where hardship is claimed HMRC may spread recovery of the tax underpayment over three years. (It would appear from press comments that HMRC will view such claims favourably.)
  • The PAYE regulations only allow tax underpayments of up to £2,000 to be coded out. For any underpayment in excess of £2,000 HMRC will 'invite' a direct voluntary payment. If this is not forthcoming the taxpayer is likely to be brought within the Self Assessment system and issued with a tax return.
• HMRC can write off tax underpaid where HMRC failed to use the information provided within 12 months after the end of the tax year in which it was received and it was reasonable for the taxpayer to believe (prior to receiving the Tax Calculation) that their tax affairs were in order. This concession might be helpful in respect of 2008/09 but for 2009/10 it will be too recent. (See the item below for more details.)

www.hmrc.gov.uk/p800/paye-tax-calcs.htm

2.2 Tax underpayments and ESC A19

The news that HMRC are writing to millions of taxpayers regarding PAYE tax underpaid over the last two years has prompted the question of whether our clients may be able to claim relief under ESC A19 in respect of tax underpaid in years up to and including 2008/9. The Concession says that "tax will normally be given up only where the taxpayer could reasonably have believed that his tax affairs were in order" and HMRC sets out its interpretation of this requirement in its Employment procedures manual at EP6618 - see below.

You will see that HMRC take the view that: "If the taxpayer has been professionally represented then it will usually be harder to claim that the reasonable belief test is satisfied, because we would expect an agent to spot failures or errors more readily".

EP6618 - Underpayments/Overpayments: ESC A19: Reasonable Belief

For tax to be given up under ESC A19 the "reasonable belief" test must be satisfied. The important point to remember is that the test is not whether the taxpayer believed his tax affairs were in order, but whether it was reasonable for him to believe it.

You will meet cases where the taxpayer might genuinely believe that he does not owe any further tax, but where it was not reasonable for him to hold that belief, given all the circumstances. This is a matter of judgement and you will need to reach a decision taking into account all the surrounding factors, for example, the taxpayer's likely level of understanding of tax matters, his state of health and his age. The serious ill health of a close relative should also be taken into account, but not claims that the taxpayer was too busy or otherwise preoccupied to pay full attention to his tax affairs.

In all cases your aim should be to reach a common-sense decision using all the known facts, and you should always make a brief note of your reasoning on the taxpayer's record (EP6622).

There will not always be an obvious answer, but in a great many cases it will be clear at once that the test is not satisfied; for example, a large car benefit not coded out or an obviously unjustified repayment. Where the issue is less clear-cut you will need to take account of a range of factors, including

• The nature of the arrears and what caused them.
• The size of the arrears. Generally speaking, the larger the sum the less likely it is that the reasonable belief test will be satisfied, but you will need to take account also of the taxpayer's own particular circumstances. What might be a substantial sum to the average taxpayer may be less so to a wealthy individual with several sources of income and gains.
• What information had been given to the taxpayer over the relevant period, for example notices of coding, explanatory leaflets such as P3, letters, phone calls etc? You will have to weigh up what the taxpayer has, or has not, been told and form a view as to whether it was reasonable for him to believe his tax affairs were in order.
• Had we given any misleading information to the taxpayer, for example, telling him repeatedly that his code was correct, and then belatedly discovering that it was not? In these circumstances it will often be hard to resist a claim that the reasonable belief test has been satisfied.
• Had our actions caused the case to become especially muddled or hard to follow? (It is not normally enough that a taxpayer's affairs might be complex anyway).
• If the taxpayer has been professionally represented then it will usually be harder to claim that the reasonable belief test is satisfied, because we would expect an agent to spot failures or errors more readily.
• Reasonable belief may change over time. For example, an incorrect code may continue without change beyond the point when it is reasonable for the taxpayer to believe his affairs are in order. The reverse may apply if, during the build-up of the arrears, an event took place that caused the taxpayer's reasonable belief to change, such as a letter from the tax office telling him that his affairs are in order. In any casewhere you consider there has been a change over time in what it was reasonable for the taxpayer to believe, or if he makes such a claim, seek the advice of PAYE Technical Advice - Shipley before agreeing to any time apportionment.

This list is not exhaustive and you will come across other factors that you feel should have a bearing on your decision. Where the issue is so finely balanced that you find it hard to form a judgement, give the taxpayer the benefit of the doubt. BS Shipley will advise in any case of difficulty.

2.3 Overpayment relief: Form of claims

HMRC has published its guidance on the form in which a claim to overpayment relief should be made – see extract from SACM12150 below.

"From 1 April 2010, persons may claim overpayment relief for any period provided that they are within time to do so, see SACM12005-15.

The person applying for overpayment relief must make a claim to HMRC for repayment or discharge of the amount of tax which they believe they should not have paid, or should not be due.

A person cannot make an overpayment relief claim by including it in an individual, trust, partnership or company tax return. Claims should not be accepted if they are made on an SA return form (SA100) or equivalent, such as the Trust and Estate Tax Return SA900.

Overpayment relief claims must be made by the person who is due the relief except for overpayment relief claims arising from mistakes in partnership returns - see SACM12045.

Overpayment relief claims must be made in writing and

• state that the person is making a claim for overpayment relief under Schedule 1AB TMA 1970
• identify the tax year for which the overpayment or excessive assessment has been made
• state the grounds on which the person considers that the overpayment or excessive assessment has occurred
• state whether the person has previously made an appeal in connection with the payment or the assessment
• if the claim is for repayment of tax, include documentary proof of the tax deducted or suffered in some other way - see SACM3015
• include a declaration signed by the claimant stating that the particulars given in the claim are correct and complete to the best of their knowledge and belief."

3. Employee Benefits

3.1 Change in bonus rates for SAYE Share Option Schemes

Changes have been made to bonus rates for Save As You Earn (SAYE) Share Option Schemes (sometimes referred to as 'Sharesave') that will maintain them in line with other interest rates.

The new bonus rates effective from 12 September 2010 (last changed on 14 May 2010) are:

Contract Type	Bonus Rate (Previous rates in brackets)				Annual Equivalent Rate (Previous rates in brackets)
Three year	0.00 × monthly payments	(0.0)		0.00%	(0.00%)
Five year	0.9 × monthly payments	(1.8)		0.59%	(1.16%)
Seven year	3.2 × monthly payments	(4.9)		1.15%	(1.74%)

The Early Leavers' Rate will remain unchanged at 0 per cent. Employees who are already saving under existing SAYE contracts are not affected by these rate changes.

www.hmrc.gov.uk/shareschemes/saye-change-bonus.htm

4. Business tax

4.1 IASB exposure draft on revenue recognition

The IASB is currently revisiting revenue recognition along with the FASB. An exposure draft was published in June 2010, with the consultation period running to 22 October 2010.

The exposure draft proposes a principles-based approach for recognising revenue on sales contracts, though it excludes from its scope some financial, instruments, insurance contracts, leasing contracts and some nonmonetary transfers to facilitate third party sales.

If adopted there would be some key changes to the time at which revenue is recognised. Under the exposure draft the trigger would be when the business satisfies a performance obligation in a contract, which is defined as when it transfers a promised asset (which can include a service) to the customer. The asset is transferred when the customer has control of it.

In relation to services IAS18 currently provides that revenue should be recognised depending on the stage of completion of the transaction. Under FRS5 Application Note G it depends on the right to consideration in exchange for performance. The exposure draft says revenue should be recognised when the seller transfers control of an asset to the customer – i.e. when the customer receives the service. It is not yet clear how different the interpretations will be and much will depend on individual circumstances and how the following points (among others) are interpreted:

• the transfer of significant risks and rewards of ownership;
• the acquisition of a right to consideration in exchange for performance;
• the transfer of control.

Nevertheless, for a number of professional services, including audit, the service may not be received by the customer until it is completed.

Responses to the consultation and further round table meetings are expected in the 4th quarter of 2010 with the standard expected to be finalised in the 2nd quarter of 2011. The effective date for application of this revision has yet to be set.

www.fasb.org/project/revenue_recognition.shtml

There are currently no plans to change UITF40 so this may not result in change in the short term. It is not yet clear how the exposure draft would be incorporated into IFRS for SME's, but if incorporated and if UK GAAP is replaced, there could well be accounting and tax implications.

The process for applying any change on revenue recognition in the UK arising from IAS18 is that it must first receive EU approval. Thus it is unlikely mandatory application of new rules on revenue recognition would apply to accounting periods beginning before 1 July 2013. In relation to IFRS for SME's there is again an EU approval process to negotiate before it could be applied in the UK, and while there was informal intention that it should apply for UK GAAP for accounting periods beginning on or after 1 January 2013, this date is not yet confirmed.

As regards the FRSSE (FRS for smaller entities), small companies may opt to prepare its financial statements in accordance with FRSSE provided its meet the following two out of three thresholds:

• its turnover is less than £5.6 million;
• its gross assets is less than £2.8 million; and/or
• its employees is less than 50. However, there are small companies that meet the above thresholds that are NOT eligible to apply FRSSE in its financial statements:
• a Plc company which is considered large company;
• a subsidiary company which its parent company is listed on the stock exchange;
• a company regulated by Financial Services Authority;
• a company classified as not small in the previous financial year.

The future of the FRSSE is not yet certain, and a number of issues are under consideration including:

• retaining FRSSE;
• reviewing the FRSSE after a period of implementation of IFRS for SMEs;
• awaiting the outcome of the EU review of micro-entities (consideration is being given to reduced reporting requirements for businesses with turnover level below €1,000,000, assets below €500,000 and 10 employees
• consequential amendments to FRSSE
• remove references to current FRS [=full UK GAAP]
• update technical accounting references to look to IFRS for SMEs.

HMRC's webpage on the UK tax implications of accounting standards was last updated on 24 July 2006.

www.hmrc.gov.uk/practitioners/int_accounting_index.htm .

The review into small business taxation by the Office of Tax Simplification may shed light on the future of the tax implications of changes in accounting standards for small businesses.

4.2 Draft Statutory Instrument on 'available amount' for debt cap

HMRC has issued draft regulations increasing the scope of 'available amount' against which the 'tested expense' amount is compared to determine whether or not there is a disallowance under the debt cap.

www.hmrc.gov.uk/drafts/available-amount.htm

The available amount for the period of account of the worldwide group is the sum of the amounts disclosed in the financial statements of the group for that period. Section 332(1) of TIOPA 2010 describes those matters in respect of which amounts are included within the available amount. Subsection (1)(g) provides that HM Revenue & Customs may specify other descriptions of matters. These regulations do that.

There are a number of arrangements which, although they are not loans in legal form, have the economic effect of loans and are treated for the purposes of Corporation Tax in the same way as loans. These include alternative finance arrangements (Islamic finance), sale and repurchase arrangements and certain structured finance arrangements. Debts that arise from the supply of goods or services, rather than from lending money, are similarly treated.

A company entering into such an arrangement as the 'borrower' will normally be allowed a tax deduction for amounts payable by it that are equivalent to interest, and such amounts will form part of the UK financing expenses taken into account under Part 7 of TIOPA 2010. These regulations provide that the same amounts are also taken into account in computing the available amount, thus ensuring that the comparison between UK and worldwide financing costs is made on a fair basis.

The regulations provide that amounts payable in respect of the specified matters are included in the available amount, provided that they satisfy two general conditions:

• the amount is actually deductible for tax purposes by a UK company within the scope of Part 7 of TIOPA 2010 and
• the amount is shown as a cost of finance in the consolidated accounts of the worldwide group.

The latter condition means that amounts relating to intra-group arrangements, which are eliminated on consolidation, will not be included in the available amount.

4.3 COP10 clearances and non statutory clearances

COP10 clearances are still available. However concerning questions on HMRC's interpretation of the law, the COP10 clearances for business customers can only be made if one of the following points applies:

• interpretation of legislation passed in the last four Finance Acts (Note there will be three Finance Acts in 2010, although we expect HMRC will interpret 'four Finance Acts' as four years.)
• application of double taxation agreements
• whether someone is employed or self employed
• Statements of Practice and extra-statutory concessions
• other areas concerning matters of major public interest in an industry or in the financial sector.

www.hmrc.gov.uk/pdfs/cop10.htm

The substantial shareholdings legislation (TCGA92 Sch7AC) was introduced by FA2002 but has been amended by FA03, FA(no2)05, FA07, and CTA09. Unless the query concerns something amended by FA07 or CTA09, then the only practical way of obtaining an idea of HMRC's interpretation is by using the nonstatutory clearance process (http://www.hmrc.gov.uk/cap/links-dec07.htm ).

HMRC will accept applications for a non-statutory clearance from business taxpayers (it is not intended for personal tax issues for individuals or for employment contract matters) according to the following: "Clearance applications will be accepted from businesses and their advisers where there is demonstrable material uncertainty about the tax consequences of transactions affecting their business."

Non statutory clearance applications can be sent to:

• the Client Relationship Manager (CRM) if the business is a Large Business Service customer
• HMRC Clearances Team, Alexander House, 21 Victoria Avenue, Southend on Sea, Essex SS99 1BD (an email address can be used with attachments no larger than 2MB - hmrc.southendteam@hmrc.gsi.gov.uk ).

The non statutory clearance process was introduced in April 2008. An attempted census of Non-Statutory Business Clearance applicants was undertaken between October and December 2009 to measure customer satisfaction with the service, and to assess it against a target of 85 per cent of customers being satisfied overall. This target was met overall though with some dissatisfaction from those requiring VAT clearances. The report of this survey can be found at http://www.hmrc.gov.uk/research/clearances-satisfaction.pdf . Extracts from the summary of the report include:

• overall satisfaction with the whole clearance process stands at 90 per cent, at which level it is significantly higher than a year ago, and exceeds the target of 85 per cent set for this year;
• the level of satisfaction varies between the different tax types concerned, being highest (as last year) among CGT applicants. Some of the overall growth in satisfaction resulted from changes in the sample's composition from 2008 to 2009. The results also indicate that satisfaction has grown among applicants in the PAYE/NICs and VAT areas, although this growth is not statistically significant;
• higher satisfaction is seen to be driven by receiving a favourable outcome from the application; by the perceived timeliness of HMRC's response; and the quality and comprehensiveness of HMRC's communication. Similarly, those dissatisfied with the process tended to comment on a slow response and poor communication;
• beside satisfaction, perceptions of two other key measures – the ease and speed of the clearance process – have also improved significantly since last year;
• overall satisfaction with the amount of time HMRC took to respond has increased significantly since last year. Three-quarters of applicants reported receiving HMRC's response within 28 days, but among VAT applicants fewer than half reported this. Across the total audience base, applicants' recall of response time was a stronger determinant on their views than HMRC's own record of the time taken, and a difference in opinion of whether the deadline was met exists compared to HMRC's records in around a quarter of cases;
• almost nine out of ten applicants said HMRC's response had addressed most of their issues, and threequarters said their issues were addressed fully. But this varied by heads of duty; over a third of VAT applicants felt that there were outstanding issues in HMRC's response;
• a minority of applicants reported that HMRC's response had increased rather than decreased their uncertainty or commercial risk – most commonly VAT applicants. Half cited poor information returned from HMRC as the reason for this.

4.4 HMRC meeting on reforms to taxation of foreign branches and CFC rules

An HMRC open meeting to discuss reforms to taxation of foreign branches and CFCs was held on 7 September 2010. The format of the meeting followed the consultation document and recently issued notes of working group meetings.

www.hm-treasury.gov.uk/consult_taxation_of_foreign_branches.htm

www.hm-treasury.gov.uk/controlled_foreign_companies.htm

Slides from the meeting can be found at: www.hm-treasury.gov.uk/d/foreign_branches_cfc_event_slides.pdf

The background to the proposals was to make the UK tax system the most competitive of the G20, considering both tax rate and tax base. There was also a desire for a more territorial approach to UK taxation. The foreign branches measure was being introduced ahead of full reform of the CFC legislation due to commercial factors affecting the insurance sector in particular.

Foreign branches

• Options for tax treatment of profits

The two options discussed were either to follow the tax treatment provided for by double tax treaties, or to construct a UK definition of foreign branch profits to be exempt from UK tax. In the latter case, the rules would be based on OECD model treaty (a decision would need to be made on whether to include or exclude new article 7 – business profits), but could still lead to double tax issues. There were indications that the option of basing exemption on double tax treaty provisions was seen as the most appropriate by HMRC. However there would be exclusions for certain sectors such as air transport and shipping – where the treaties normally reserve taxing rights to the state of residence.

• Tax treatment of gains

If gains of foreign branches were to be exempted consideration would need to be given to gains accrued to the date of any change, apportionment of certain assets where used in more than one territory (as may happenwith IP for example), and other transitional issues. There were indications that HMRC thought exemption for gains would be extremely complex to introduce and they were considering leaving gains of foreign branches within the charge to UK tax.

• Avoidance

The suggestions is that foreign branches should be subject to similar rules to CFC's, so that if the branch were a subsidiary and the CFC rules would apply to that subsidiary, those rules should also apply to the foreign branch. Full reform of the CFC regime will take place in 2012, whereas foreign branch reform will be introduced in 2011, so initially branch exemption legislation will refer to current CFC rules as amended by the 2011 interim amendments. Branch exemption legislation may need to be updated subsequently, to reflect the final CFC regime.

• Losses

The options being considered include electing out of exemption (thus retaining the right to offset foreign branch losses against profits of the UK business), and using some form of allowance for losses with a clawback once the branch became profitable. In the case of the election for exemption the following needed to be considered:

HMRC made clear it is not suggesting re-opening old years in relation to loss relief if any change was to be introduced.

• Other points

Consideration would need to be given to capital allowances, possibly involving some sort of apportionment, and whether there would be a disposal on transition. As for the CFC regime for foreign companies, there would need to be a consideration of passive income connected to a permanent establishment. The treatment of interest costs would need to be considered, perhaps by using capital attribution rules.

Patent Box regime

It was made clear that the Government were still on target to issue a consultation in the autumn on this proposal along with reform of the R&D regime, and that currently there was no intention of widening the patent box regime to other forms of IP.

CFC

The aim of the interim improvements for Finance Bill 2011 is to modernise the regime (aspects relating to monetary assets and intellectual property will be dealt with at a later stage), assist UK businesses with their overseas acquisition and reorganisation activity and make appropriate improvements according to suggestions made. One of the points being considered in relation to IP was how to define IP with a UK connection.

The proposals include an extension to the period of grace for complying with the CFC regime to three years, and extending this to non-UK companies migrating to the UK, as well as non-UK groups migrating regional holding companies to the UK.

Thought was being given to a 'commercially justified activities' test, which it was thought could be a specific new test, and also to exempting certain one off transactions from the CFC regime.

Other improvements being considered included:

• increasing the deminimis profit limit to £200k;
• extending the transitional rules for superior and non-local holding companies from July 2011 to July 2012;
• relaxing the effective management rule for satisfying the exempt activities test (so that it no longer has to be effectively managed in the country of residence to satisfy the exempt activities test);
• simplifying the excluded countries regulations;
• updating HMRC's CFC guidance, particularly in relation to US LLCs;
• amending the capital interest requirement to satisfy the gross trading income test from related companies for the exempt activities test.

HMRC is looking for other suggestions for interim improvements to the CFC regime.

4.5. Government response to stimulation of the private rented sector

The Government has published responses to the consultation on stimulating the private rented sector.

The report commented that: "The biggest factor affecting individual investment in the PRS is the availability of mortgage finance and buy-to-let. Individual investment into the PRS ought to return once the flow of mortgage lending recovers. There are, however, uncertainties over future prospects for capital growth, which has been an important component of overall investment returns. And it seems unlikely that individual investors will favour new-build properties.

Institutional investment is likely to remain niche and small scale, so long as the level of income returns to residential property remain low. Significant tax incentives to improve these would be necessary to guarantee substantial institutional investment in the PRS."

• The Government will not be taking forward proposals to reduce the incidence of SDLT at the present time.
• The Government has no compelling evidence for reducing the VAT rate on residential property portfolio management fees to 5% at this time.
• It would be an expensive and unnecessary duplication of relief to relax the exclusion of capital allowances in plant and machinery for use in a dwelling house by property businesses, so the government will not consider any such relaxation for the private rented sector at this time.
• The Government proposes to carry out further work looking at the barriers to residential investment through UK-REITs, and whether changes to the entry requirements of the regime might encourage the emergence of new REITs, including residential REITs.
• The Government will consider the proposal to increase the threshold for rent-a-room relief as part of the Budget process in the context of the wider housing market and other Government measures, including recent changes to the Local Housing Allowance. The Government will consider whether this is the most appropriate method of increasing the supply of affordable accommodation in the private rental sector and if a change to the threshold is appropriate.
• Further announcements, particularly on REIT's may be made at Budget 2011.

www.hm-treasury.gov.uk/consult_investment_private_rented_sector.htm

5. VAT

5.1. VAT and Leisure Trusts providing all inclusive membership schemes

HMRC has issued Revenue & Customs Brief 37/10 setting out their change of view of the VAT treatment of membership schemes allowing unlimited access to leisure facilities in a leisure centre. The Brief has implications for 'eligible bodies' (principally non-profit making bodies not subject to commercial influenced)

Prior to 1 April 2009 HMRC's view was that where a scheme offered, over a period, unlimited use of a variety of both taxable and exempt facilities, typically in return for a monthly or annual payment, there was generally a single supply of the standard-rated right to use the facilities. However, following representations from the leisure industry and taking into account the comments made in the Court of Appeal in HMRC v Weight Watchers (UK) Ltd (2008) (STC 2313) about the typical consumer, HMRC no longer see the supply as a right to use the services, but as being the supply of underlying services.

The revised view is that in cases where the predominant reason for purchasing an all inclusive package is to use the range of available sports facilities, the single supply is exempt. If the predominant reason a typical consumer purchases an all inclusive package is to make use of standard-rated facilities the single supply is standard-rated.

The effect of this change is that since 1 April 2009 non-profit making bodies, including leisure trusts which were previously charging VAT on their all inclusive packages, will in the majority of cases have to treat them as exempt. If businesses make both exempt and taxable supplies they will be partly exempt and will have to apply the partial exemption rules to determine how much of the Input Tax incurred on their costs can be deducted.

With respect to the VAT implications of the capital goods scheme (for example in relation to input VAT costs on the construction of the leisure facilities), after affected bodies begin treating their supplies as exempt there will be an apparent change of use from taxable to exempt. However, the policy change represents what the true liability always was, assuming that sports providers have not changed the way they operate. The CGS adjusts the true amount that was initially claimable ignoring any errors that may have occurred whether they can be corrected or not. HMRC indicate that they therefore expect no significant CGS adjustments provided that the way sports facilities are supplied has not changed since any capital expenditure was incurred.

If you are affected by this change of view please get in touch with your usual Smith & Williamson VAT contact to discuss the implications.

www.hmrc.gov.uk/briefs/vat/brief3710.htm

5.2. Option to tax land and reverse premiums

The First Tier Tax Tribunal has considered the VAT status of a reverse premium and whether HMRC were right to refuse an option to tax land and buildings by British Eventing Limited (BEL) http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00664.html .

A brief summary of the situation is that BEL was in occupation of Tweseldown Racecourse (owned by the Ministry of Defence) under an unwritten lease but subsequently accepted a written lease (for a 20 year period) at an annual rent of £9,000, with full repairing conditions covering some buildings on the site which subsequently became listed. Initially BEL hired a manager to run the site. The manager became a tenant at will of BEL and BEL invoiced the manager the same rent as it was charged by the MOD (£9,000). No VAT was charged, thus creating exempt supplies of land and buildings.

The building was damaged by fire and insurance compensation was received amounting to £140,000. However the obligation to repair the property to the required condition under the lease was then estimated to be between £350,000 and £500,000.

BEL then began negotiations with the manager to assign the lease to him (he used a company set up for the purpose – Tweseldown Equisport Limited (TEL)). It was agreed the assignment would be for a nominal amount (£10) while BEL would pay a sum of money to TEL to meet the necessary building works. This sum of money amounted to £340,000 exclusive of any VAT, being initially the insurance compensation of £140,000, plus a further amount of £200,000. Approved alterations to listed buildings would be zero rated, permitting recovery of input tax, but not normal repairs.

TEL wrote to HMRC asking whether there would be VAT on the initial payment of £140,000 and was told it was consideration for agreeing to take on the liability to repair the building and was therefore a taxable supply. BEL therefore agreed to pay TEL £59,500 representing VAT on the £340,000, and applied to HMRC requesting permission to opt to tax the land. Permission was required as there had been previous VAT exempt supplies, so BEL did not meet the conditions for automatic permission to opt to tax.

HMRC refused permission on the grounds that the input VAT recoverable (£59,500) would be disproportionate to the output tax to be generated (£1.75) if permission to opt to tax was granted. BEL appealed against the refusal and in the alternative that the input tax was recoverable by them as the supply to them in respect of the racecourse was exempt and input tax should not have been charged.

The Tribunal judge (Barbara Mosedale – formerly of PKF's VAT team) and member Sonia Gable, also considered whether the input tax at stake was entirely attributable to the supply of Tweseldown Racecourse.

There was consideration of whether the reverse premium was subject to VAT which included a review of the ECJ cases of Mirror Group plc (c-409/98), Cantor Fitzgerald International (C-108/99) and Lubbock Fine & Co (C-63/92). The Tribunal did not find any support in these cases for the contention that the supply was not consideration or was exempt. At paragraph 96 they comment that:

"TEL agreed to take on an onerous lease and was paid £340,000 to do so. That supply by it was not a supply of an interest in land. There was no other potentially applicable exemption or zero rating so the supply was subject to the standard rated VAT. The mere fact that TEL had a pre-existing interest in the land is irrelevant as it did not supply it."

They then examined the attribution of the input tax to determine whether or not it was recoverable. The first question was whether the assignment of the lease by BEL was a supply at all, and secondly whether the input tax was attributable to it.

VATA94 sch4 describes matters to be treated as supplies of goods or services. A major interest is classified as a supply of goods while the transfer of land forming part of the assets of a business shall be treated as a supply of goods, and except in relation to a grant or assignment otherwise than for a consideration, references to a supply of goods shall have effect as a supply of services. (VATA94 Sch4 paras 5(1) and 9(subparas 1-3)). The Tribunal held that para 5(1) (as well as article 16 of the EU VAT directive) referred to "business assets" which did not include liabilities. They considered the lease had a negative value to BEL and therefore was not an asset, so there could only be a supply for VAT if there was consideration.

The Tribunal considered that the £10 consideration given by TEL for the assignment was nominal and not consideration as it was vastly outweighed by the reverse premium paid of £340,000. Thus the £10 should be viewed as a reduction in the price of TEL's acceptance of the onerous lease (i.e. a net £339,990), and not consideration for a supply made by BEL.

The Tribunal thus concluded that the assignment of the onerous lease by BEL was not a supply.

In considering whether the reverse premium was attributable to the assignment the ECJ cases of BLP Group plc (C-4/94), SKF AB (C-29/08), Abbey National plc (C-408/98) and Midland Bank plc (C-98/98) were considered. The Tribunal considered that motive was not relevant in determining whether there was a direct and immediate link between transactions. There initial conclusion that the assignment was not a supply meant that the reverse premium could not be attributable to it, as the reverse premium itself was a supply. However if they were wrong in determining whether the assignment was a supply, they concluded that the reverse premium could not be a cost component of the assignment.

The only conclusion they could reach was that the reverse premium was attributable to the general overheads of BEL's business. The repairing liability must have been foreseen by BEL at its agreement to the head lease, and that the reverse premium to get rid of that liability could not be seen as arising entirely after the letting activity. BEL would therefore be permitted to recover input tax according to their partial exemption method.

The lesson here is to take account of intended revenue activity and expected future expenditure and the related VAT implications before making exempt supplies of land, and ideally determine whether to opt to tax the land before making exempt supplies.

HMRC do accept that inducements paid by landlords to enter leases in return for acceptable normal lease obligations do not constitute supplies for a consideration. However where the payment is directly linked to a specific benefit supplied by the tenant to the landlord there may be a taxable benefit, one example being a payment for the carrying out of building works to improve property or undertake necessary property repairs, or carrying out fitting work which the landlord has responsibility for. Acting as an anchor tenant can also amount to a taxable supply, though publicity indicating a business has taken occupancy does not in itself indicate the business is an anchor tenant.

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.