Tax Update - Round Up Of Recent Tax Issues, 31 January 2011

General news

1.1 Changes to the penalties for late filed Self Assessment (Income Tax) Tax Returns.

Prospective amendments relating to the penalties for the failure to make returns etc were included in Finance Act 2009.

HMRC has published a draft order for external comment which will bring into effect the new late filing and late payment penalties from 6 April 2011 (in relation to tax years ending after 5 April 2010) for personal, trust and partnership returns.

The rule that the personal/trust late filing penalty was the lower of £100 and the balance of tax due will be replaced. The penalties for late filing will include:

• £100 penalty immediately after the due date for filing (whether or not the tax has been paid);
• daily penalties of £10 per day for returns that are more than 3 months late, running for a maximum of 90 days;
• penalties of 5% of tax due for the return period (or £300 if greater) for prolonged failures (over 6 months and again at 12 months)
• higher penalty of 70% of the tax due where a person fails to submit a return for over 12 months and has deliberately withheld information necessary for HMRC to assess the tax due (100% penalty if deliberate with concealment).

The penalties/surcharges for late payment of any tax due will be:

• penalty of 5% of the amount of tax unpaid, generally 1 month after the payment due date (or at the filing date of the relevant return); and
• further penalties of 5% of any amounts still unpaid at 6 months and 12 months;
• suspension of late payment penalties where the taxpayer agrees a time to pay arrangement (where a tax debt is paid over time) with HMRC.

www.hmrc.gov.uk/drafts/draft-itsa-late-filing.pdf

2. Private Clients

2.1 Trustees of the Bessie Taube Discretionary Settlement: TC00735

The First Tier Tribunal considered three separate issues in this case:

• whether a special dividend was capital or income;
• whether there had been a valid discovery;
• whether the conduct of the adviser was negligent within S29(4) TMA 1970.

Whether a special dividend was capital or income

The Tribunal found that the special dividend in this case was income not capital:

"47. Accordingly, in this case we consider that we are bound to find that the special dividend is trust income unless in substance the transactions amount to something other than a distribution. We are unable so to find. The special dividend was a cash dividend; it was not a capitalisation as in Bouch v Sproule, nor did it have the features of a capitalisation that were present in Sinclair v Lee. There was no increase of capital of the Company analogous to the issue of bonus shares. In contrast to the position in Bouch v Sproule, money did pass from the Company to its shareholders. The amount of the special dividend was paid in cash to the Trusts and did not remain in their hands as paid up capital.

48. We do not consider that the conversion of the ordinary shares of the Trusts into A shares, and the effect of the special dividend upon the future rights attaching to those shares, can result in the transaction being treated otherwise than as a distribution. Although there was a very substantial diminution in the value of the A shares as a consequence, there was no reduction or return of capital, and we reject the argument that the transaction can be regarded as equivalent to a purchase by the Company of its own shares, and thus as a sale of capital assets by the trustees. Economic equivalence requires more than that the same amount of money is received and that the value of a share, having regard to its future rights, is substantially diminished. An own-share purchase involves both a sale and purchase of shares as a matter of substance, and necessarily entails a cancellation of the shares, and an elimination of all rights including rights to share capital itself.

49. The capital reorganisation in this case is very far from the nature of capital reconstruction in Sinclair v Lee. In these circumstances we find that the substance of the transactions with which we are here concerned was a cash dividend, and the transaction is not to be characterised as anything else."

Whether there had been a valid discovery

Mr Taube was life tenant of the Bessie Taube Trust. If the special dividend was taxable as income then Mr Taube was assessable. However that dividend was not shown on his tax return for the year to 5 April 2001 on the basis that the trustees had been advised that it was a capital payment. HMRC subsequently issued a discovery assessment on Mr Taube against which he appealed. The Tribunal found in favour of HMRC:

"71. In our view the statutory rules permit a discovery either before or after the time for opening an enquiry has expired, the only timing constraint being the time limit for the making of the assessment in section 34. Failure on the part of HMRC to open an enquiry on the basis of an insufficiency discovered prior to the end of the enquiry window cannot shut HMRC out from raising a discovery assessment, unless the taxpayer has alerted HMRC to the insufficiency before that time. The taxpayer has all the protection he needs by being able to provide, before the enquiry window closes, an honest and complete return. If he does so, and provided he has not been fraudulent or negligent, he will be entitled to finality at the end of the enquiry window.

72. For these reasons we conclude that the assessment on Mr Taube was an assertion of a newly-discovered insufficiency in his self assessment, and was accordingly a discovery within the meaning of section 29(1). We should add that if, contrary to our own view, it were to have been necessary for HMRC to show that the assessment was based on something newly discovered outside the enquiry window, we would have had no hesitation in finding on the facts of this case that there was such a discovery. Although the original Trust return had given rise to questions as to the nature of the receipt of the special dividend, and HMRC had considered the consequences for Mr Taube as life tenant were it to have been established that the proper treatment was as trust income, it is clear that up to the end of the enquiry window on 31 January 2003 HMRC were seeking to establish the basis on which it had been claimed by the Bessie Taube Trust that the receipt was of capital. Further information was requested in the letter of 6 December 2002, in the reminder letter of 7 February 2003 and finally in the section 19A information notice issued on 30 April 2003. It is abundantly clear that the view of HMRC that there was a probable insufficiency in Mr Taube's self assessment (as distinct from a mere suspicion or possible insufficiency) crystallised only after receipt of that information and after the legal analysis had been the subject of debate with the Trust's advisers. We have no doubt therefore that even if it were correct that there must be a discovery after the end of the enquiry window (which we do not accept for the reasons we have given), on the facts of this case that test would comfortably have been passed.

73. We now turn to consider whether the condition in s 29(5) is fulfilled. If it is, then the assessment will have been validly made. In the circumstances of this case what we have to determine is whether, at the time when an officer of HMRC ceased to be entitled to enquire into Mr Taube's individual return (31 January 2003), that officer could not have been reasonably expected, on the basis of the information available to him before that time, to have been aware of the insufficiency in Mr Taube's self assessment, on account of the omission of the trust income.

74. As Mr James recognised, in normal circumstances the fact that no information was included in Mr Taube's return in respect of the special dividend would be fatal to Mr Taube's case. It is clear from s 29(6) following Langham v Veltema that the information in question must emanate from the taxpayer or someone acting on the taxpayer's behalf. The list of categories of information in s 29(6) is exhaustive. In particular, s 29(6)(d)(i) does not attribute to the inspector information which is not reasonably to be inferred from information within s 29(6)(a) to (c). The matters set out in those paragraphs are all categories of information actually supplied by the taxpayer or his agent. The only information provided by Mr Taube or anyone acting on his behalf was his return, which omitted any reference to the special dividend. There was no possibility that information regarding the payment of the special dividend could have been inferred from Mr Taube's return.

75. Whilst recognising the difficulty presented by the plain words of s 29(6), as construed by the Court of Appeal in Langham v Veltema, Mr James argued that the situation of a trust receipt is a very particular one that necessarily falls outside the normal rule, and that this case ought therefore to be distinguished from Langham v Veltema. He argued, pointing to s 8A TMA, that it is the trustees' return which must return all income for the purpose of establishing the amounts in which not only the trustees, but also the settlor and, crucially, the beneficiaries are chargeable to income tax and capital gains tax. If a receipt is income, it is trust income and is returnable as such.

76. In support of his argument Mr James referred to Mr Taube's tax return for 2000/01. In that return Question 7 asked: "Did you receive or are you deemed to have income from a trust [or] settlement ...?" In the Notes on Trusts accompanying a return for that period the following instructions were given: "...The trustee will be able to tell you which types of income have been received on your behalf." Mr James sought to argue that the return required by an individual with an interest in possession operated at the relevant time not by reference to entitlement to income (and here he contrasted language in the 2010 return and accompanying notes) but by reference to income "received" or, at the very least, notified by the trustees to the beneficiary.

77. We reject Mr James' submissions in this regard. None of the materials referred to by him in this connection can support his argument. It is quite evident on the face of these materials that even in 2000/01 an individual income beneficiary was required to render a return based on entitlement to income and not on mere receipt or notification. That at all events was (and remains) the law, irrespective of any guidance that might have been given. Mr Taube was himself required to make a return of his income, including the trust income to which he was entitled, under s 8 TMA, and to include in that return a self assessment to income tax. This he was obliged to do notwithstanding the concurrent responsibility on the part of the trustees of the Bessie Taube Trust to make a trustee's return under section 8A. The fact that this concurrent trustee's return is for the purpose of establishing the chargeability of the beneficiaries (as well as the trustees and the settlor) does not affect the construction of section 29(6). That provision is, as was clearly decided in Langham v Veltema, exhaustive, and there is no warrant for extending its meaning on account of s 8A to include returns made by or on behalf of the trustees as well as those made by or on behalf of the individual himself. If Parliament had wished to include trust returns as part of the information relevant to the making of a discovery assessment on an individual beneficiary, not only could they have done so, in our view they would have done so, as they did in relation to taxpayers carrying on a trade, profession or business in partnership where it is provided by s 29(7)(a)(ii) that the references in s 29(6) to the taxpayer's return includes a reference to the relevant partnership return".

Whether the conduct of the adviser was negligent within S29(4) TMA 1970

A firm of solicitors had advised the trustees of both trusts that there was a strong argument for saying that the special dividend should be treated as a capital payment. HMRC argued that that advice was negligent for the purposes of S29(4) TMA. That section would be satisfied if the insufficiency in Mr Taube's return was attributable to fraudulent or negligent conduct on the part of Mr Taube or a person acting on his behalf.

The Tribunal found for the taxpayer on this point saying:

"In our view, the expression "person acting on ... behalf" is not apt to describe a mere adviser who only provides advice to the taxpayer or to someone who is acting on the taxpayer's behalf. In our judgement the expression connotes a person who takes steps that the taxpayer himself could take, or would otherwise be responsible for taking. Such steps will commonly include steps involving third parties, but will not necessarily do so. Examples would in our view include completing a return, filing a return, entering into correspondence with HMRC, providing documents and information to HMRC and seeking external advice as to the legal and tax position of the taxpayer. The person must represent, and not merely provide advice to, the taxpayer."

www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=5103

3. PAYE and Employee Benefits

3.1 Appointed day and amendments re PAYE payment penalties under FA09 Sch 56

Statutory Instrument 2011/132 makes amendments to the PAYE payment penalty provisions of FA09 Sch56 and makes 25 January 2011 the commencement day for them.

www.legislation.gov.uk/uksi/2011/132/article/2/made

4. Business tax

4.1 Outstanding Unique Taxpayer Reference (UTR) for partners and partnerships

HMRC has issued the following note.

"HMRC is aware that some existing partnerships may not yet have received Unique Taxpayer References (UTR) for new partners who need to submit a timely, fully complete, partnership return.

Some new partners who expect to file their individual tax return by 31 January 2011 because they have other income also may not yet have the partnership UTR (which they must enter on their tax return).

This message covers partners and partnerships who:

• choose to file a paper tax return and applied for a UTR in plenty of time to meet the 31 October deadline, but did not receive the UTR in time
• must file paper returns because the circumstances fall within the HMRC list of 'specials and exclusions' and HMRC has agreed that they will be unable to file online but have until 31 January 2011 to file a paper return;
• file online and expect to do this by 31 January but are still waiting for UTRs.

If this applies to your client please file the relevant tax return as soon as you receive the UTR(s) and make a claim to 'reasonable excuse' if the return is late because of the delay in receiving the UTR. Follow the link below to download a form HMRC provides to help you make your claim.

Customers who claim reasonable excuse should give details of the dates when the UTR was requested, the UTR was received and they filed their completed return. Each case will be considered on its merits but, where HMRC receive the complete return without any unnecessary delay after the customer received the UTR, the claim will be treated sympathetically. Where there is time to prevent this, HMRC will not send out a penalty notice."

www.hmrc.gov.uk/carter/sa-reasonableexcuse.pdf

4.2 Introduction to EIS

HMRC has republished the third edition of its booklet 'Introduction to the Enterprise Investment Scheme'.

www.hmrc.gov.uk/eis/guidance.pdf

4.3 Draft HMRC guidance on simplification of corporate capital gains

HMRC has published its draft guidance on the simplification of corporate capital gains covering three areas:

• Degrouping
• Value-shifting
• Losses following a change in ownership.

From discussions at an open day with HMRC it appears that the intention of the degrouping legislation is that where a company leaves a group using a share for share exchange and the Substantial Shareholdings Exemption (SSE) does not apply, degrouping charges could arise. Where the SSE applies to this situation, then there would be no degrouping charge – as the degrouping gain will be deemed consideration for the disposal, but will be exempt because of the SSE.

In relation to degrouping the new rules permit a division of a company to be parcelled up for disposal in a new company and where the SSE rules apply, there will be no degrouping charge. However the SSE does not affect any charge that might arise under the intangible asset regime, so that where an intangible asset (subject to the intangible asset regime) of a divisional activity is parcelled up into a company for sale, there could still be a degrouping charge under the CTA09 intangible asset regime (as both companies concerned will not have left the group together).

The proposed new TCGA92 s31 provides that consideration for a chargeable gain or allowable loss on a disposal of shares by a company can be increased where, amongst other conditions the main purpose, or one of the main purposes, of the transaction is tax avoidance. However there is an exception where the arrangements consist wholly or mainly of the making of an exempt distribution (new s31(1)(c)). The guidance clarifies that where a capital reduction is effected prior to paying an exempt distribution, HMRC are unlikely to view this as indicating a main tax avoidance purpose so the value shifting provisions would not apply. However the depreciatory transaction provisions (TCGA s176) would apply to eliminate any allowable loss otherwise arising from a depreciatory transaction (see example 7 of the draft guidance).

Example 5 indicates that where a subsidiary company which has distributable reserves, but no cash, borrows money in order to pay a pre-sale dividend, HMRC will regard this as a value shifting exercise triggering the anti-avoidance.

www.hmrc.gov.uk/budget-updates/autumn-tax/simp-review-draft-guidance.htm

4.4 Icebreaker I LLP – revenue nature of film expenditure

The Upper Tier Tribunal has amended the First Tier Tribunal's decision concerning whether certain expenditure in a film and TV production venture was regarded as revenue or capital expenditure. While increasing the amount of deductible expenditure decided by the FTT, the majority of the expenditure in question remains non-revenue expenditure, though the decision of the FTT was set aside and revised as follows:

1. Disallowing the deduction of the sum of £1,064,000 as not being a disbursement or expense wholly and exclusively expended for the purposes of Icebreaker s trade within the meaning of section 74(1)(a). The same tax effect on revenue expenditure as the FTT decided.
2. Allowing the entirety of the deduction of £209,866 under section 74(1)(a) as a disbursement or expense wholly and exclusively expended for the purposes of Icebreaker's trade. This reverses the decision of the FTT.
3. Allowing the deduction of £120,000 paid under the Administration Agreement under section 74(1)(a) as a disbursement or expense wholly and exclusively expended for the purposes of Icebreaker's trade. This changes in part the decision of the FTT.
4. Disallowing the deduction of £50,000 paid under the Advisory Agreement as a prepayment of allowable expenses to be incurred in future tax years. This disallows the treatment of this expenditure as revenue as the FTT decided.

www.bailii.org/uk/cases/UKUT/TCC/2011/477.html

VAT

5.1 VAT and single or multiple supplies

The Upper Tribunal has reversed the decision of the First Tier Tribunal concerning the VAT status of party services which included the use of a hall. The case considered whether the provision of a hall for children's parties and associated catering and party services were a single exempt supply of letting property, or a single standard rated supply of party services or two separate supplies (one of property and one of party services). The pricing for the parties was on a price per head basis, subject to a minimum fee of £100, and the First Tier Tribunal held that there were two supplies, one of exempt property services and one of taxable party services. The Upper Tribunal has rejected this and found for HMRC's original contention that the pricing for the services were such that they could not be identified with a right to occupy land and were therefore a single standard rated supply of party services.

www.bailii.org/uk/cases/UKUT/TCC/2011/26.html

5.2 Record keeping requirements for Excise Duties

A draft statutory instrument has been published to bring into effect on 1 April 2011 FA(No 3) 10 Sch13 which amends the Customs & Excise Management Act 1979 record keeping requirements (the form of records, as the time limit for keeping them remains six years), time limits for assessments and claims (moving the time limit from 3 to 4 years), and HMRC powers of inspection.

www.hmrc.gov.uk/drafts/excise-commencement.pdf

5.3 Revenue Brief 5/11 and 3/11, change of use and option to tax provisions

Amendments to the Change of Use provisions have been made following initial consultation.

• With effect from 1 March 2011, there will no longer be two adjustment mechanisms (each with its own rules on how to calculate and apply a tax charge) to apply to the two sets of circumstances where a 'change in use' occurs. Instead, there will be a single adjustment mechanism to be applied in all circumstances. It will be based on: the amount of VAT that would have been chargeable on the original supply (or supplies) had the building in question not been eligible for the zero rate;
• the proportion of the building that is affected by the change in use; and
• the number of complete months that the building has been used solely for a qualifying purpose prior to the change in use.

www.hmrc.gov.uk/briefs/vat/brief0511.htm

The date by which the refinements to the disapplication of the option tax rules and provisions where the grantor occupies minor parts of the building, and where ATM's are a factor, is 1 March 2011.

www.hmrc.gov.uk/briefs/vat/brief0311.htm

5.4 VAT and the definition of 'building materials'

In the case of John Price the First Tier Tribunal determined that the roller blinds installed in a building were 'building materials' (see VATA94 Sch8 Group 5 note 22) and qualified for refund of input VAT under the DIY scheme.

HMRC has issued a Brief clarifying that their view remains unchanged in that roller blinds (and other 'window furniture') are not 'building materials' as defined and confirming it will not be changing its policy. The Tribunal chairman did not hear any evidence on the point of what is and what is not a 'building material' for VAT purposes but reached his conclusion as a matter of judicial notice, that is, as a common sense fact.

Given the small amount of VAT at stake in this particular case, HMRC will not be appealing this decision further.

www.hmrc.gov.uk/briefs/vat/brief0211.htm

www.bailii.org/uk/cases/UKFTT/TC/2010/TC00873.html

The UK provisions appear to be the UK's interpretation of the EU VAT directive provisions at Directive 2006/112 article 176 which states that VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment. In the case of housebuilders who typically include certain fixtures in newly built properties to aid their sale, we are aware there is some debate as to whether the UK's implementation of this provision of EU law is strictly correct (note 22 to sch8 group 5 specifically prohibits input VAT recovery on certain electrical and gas appliances and carpets, yet in today's environment these might be considered standard and not luxury items in a property).

6. Tax Publications

Briefing Note:

Corporate capital gains - FINANCE BILL 2011: Draft clauses

This Briefing Note discusses amendments proposed in draft Finance Bill 2011 for changes to the taxation of corporate capital gains

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.