Tax Update – March 2013

By April 2, 2013Uncategorized

Tax Update – March 2013



1.1 HMRC and dishonest tax agents

SI 2013/279 appoints 1 April 2013 as the date on which Schedule 38 to the Finance Act 2012(a) comes into force. Schedule 38 makes provision enabling HMRC to issue a tax agent with a conduct notice if it has determined that they have engaged in dishonest conduct, to obtain working papers from them, and impose penalties. Where an individual incurs a penalty in relation to dishonest conduct which exceeds £5,000, the Schedule provides that HMRC may publish certain information about this individual.

SI 2013/280 appoints 1 April 2013 as the day on which section 101 (late payment of interest on sums due to HMRC) of the harmonised interest regime set out in s101 and s103 of the Finance Act 2009 comes into force in relation to penalties imposed under Parts 3 to 5 of Schedule 38 to the Finance Act 2012 in connection with dishonest conduct by individuals acting as tax agents.

1.2 UK/Isle of Man co-operation to combat tax evasion HM Treasury has issued the following press release:

“The Government has agreed action with the Isle of Man to clamp down on those who try to hide their money offshore. This forms an integral part of the Government’s offshore anti- evasion strategy which will be published later this year. The package includes an automatic tax information exchange agreement and the setting up of a disclosure facility. The disclosure facility will allow investors with accounts in the Isle of Man to come forward and settle their past affairs before information on their accounts is automatically shared.

Under the automatic exchange agreement, a wide range of financial information on UK taxpayers with accounts in the Isle of Man will be reported to HM Revenue & Customs automatically each year. It follows closely the UK-US agreement to improve international tax compliance and to implement FATCA in order to minimise burdens on financial institutions”.

The disclosure facility will operate from 6 April 2013 and run until September 2016. Under its terms, liabilities arising from April 1999 must be fully disclosed and there is a guaranteed penalty rate – 10% for returns to be filed before April 2009 and 20% thereafter. The facility will not be available to those under enquiry by HMRC. Where HMRC uses the information made available under the information sharing agreement, it will be seeking significantly higher penalties.

There is no guarantee against criminal investigation for tax related offences; HMRC’s published criminal investigation policy will apply. Those who have previously been under investigation will not be able to benefit from the guaranteed penalty rates or start date.


2.1 Married couples and joint ownership of rental property

It appears that HMRC is looking carefully at cases where a rental property is owned jointly by a husband and wife and the rents have not been allocated equally between them. This is a classic case where the legislation lays down clear rules which do need to be followed carefully.

The default position for rents receivable in respect of a property owned jointly between husband and wife is that the rents are split 50:50 (section 836 ITA 2007) irrespective of the actual beneficial ownership ratio. However it is possible to claim to split rental income in some other ratio (section 837 ITA 2007) provided the following conditions are met:

  • the property is held by the couple as tenants in common and not beneficial joint tenants – see HMRC Manual TSEM 9850.
  • there is evidence to support the claim for unequal beneficial ownership (for example a declaration of trust). This evidence has to be submitted with the form 17 – see TSEM 9851.

A declaration on form 17 can be made at any time provided it aligns with the factual ownership position as documented – see TSEM 9858.

The declaration must show the beneficial interest in both the income covered by the declaration and the property from which that income arises (Section 837(2) ITA 2007).

The declaration has to be signed and dated and then must reach HMRC within 60 days of the date of signing (section 837(3) ITA 2007 and TSEM9860).

It will then be effective as from the date of signing (section 837(4) ITA 2007).

2.2 Tax avoidance scheme using manufactured overseas dividends

The First-tier Tax Tribunal has considered the case of Peter Chappell and a tax avoidance scheme disclosed in his 2005/06 tax return, which was acknowledged to have no commercial purpose, and which HMRC had identified had been used by another 305 taxpayers. The case was decided against Mr Chappell, and in reaching that conclusion the Tribunal used purposive interpretation (amongst other things) to effectively ignore the specific language in regulation 2B(3) of SI1993/2004 while recognising it was not their place to correct the failings of Parliament.

Mr Chappell was managing director of an investment bank Exotix Ltd and for 2005/06 had total income (before the tax avoidance arrangement) of £553,321. He entered into an arrangement costing him a net £18,000 whereby he borrowed £6,377,000 of loan notes issued by a BVI company and sold them after four days for £6,373,000 (being taxable on £4,164 of interest on a time apportioned basis). Two days later (under the terms of the borrowed loan arrangement) he paid interest amounting to £4,164 and £298,959 which were deemed to be manufactured overseas dividends on which no withholding tax was due. He then re-acquired the loan notes (with a nominal value of £6,377k) the following day for £6,073,000 and settled the account with the lender of the loan notes.

It was contended that as the loan notes were qualifying corporate bonds, there was no CGT element to the transactions. It was also contended that after the sale of the loan notes, Mr Chappell was not liable for any accrued income on interest due after the sale.

However it was held that the interest payments (which were manufactured overseas dividends for the purposes of income tax) made were annual payments made out of profits or gains brought into charge, and were deductible for income tax purposes and from which no withholding tax was due. The net deduction for 2005/06 from the arrangements was claimed to be £298,959.

With effect from 31 January 2008 ITA s581A became effective which specifies that manufactured overseas dividends are not deductible if made directly or indirectly in consequence of or otherwise in connection with avoidance arrangements.

Using the Ramsay approach to interpreting the transactions in the light of a purposive construction of the legislation, the Tribunal agreed with HMRC on the following:

  1. The arrangements represent a pre-planned series of transactions which took place over 8 days;
  2. They involved little more that signing pieces of paper and entries being made in accounts;
  3. They had no commercial purpose and their only objective was to obtain a tax advantage;
  4. The loan stock and the obligations under the arrangement were created solely for the purposes of the scheme – there was no other reason for their existence;
  5. The quantum of loan stock issued was dictated by the tax relief desired;
  6. The loan notes never came into Mr Chappell’s hands in any meaningful sense – they went to the custodian over a week-end;
  7. The sale and subsequent purchase were both at wholly contrived prices, sufficient to ensure that the arrangements fulfilled their purpose;
  8. Realistically, Mr Chappell ran no risk apart from paying the fee for participation in the scheme;
  9. The movement of moneys involved, if real, would have been ‘quite staggering’, but in reality the money went round in a circle from start to finish;
  10. The entities involved in the scheme were simply there to participate in the scheme.

With respect to item 6 there was a more general discussion of the Ramsay approach, and a conclusion that the manufactured overseas dividend legislation could not just be interpreted literally as in Mayes, as it did not set out to create its own artificial deemed transactions for tax purposes. Citing a number of avoidance cases, including Schofield [[2012] EWCA Civ 927] it was appropriate to ignore the taxation effect of an individual transaction carried out as part of a larger preordained series of transactions (or single composite transaction).

HMRC argued that the right to deduction for annual payments for income tax purposes is only available if there can be or is required to be a deduction of tax from the payment. Mr Chappell’s Counsel argued that SI1993/2004 Reg 2B(3) permitted a manufactured overseas dividend to be treated as an annual payment (if certain conditions were met) so that no amount was required to be deducted from the payment on account of income tax.

However the Tribunal felt bound to follow the explicit statements of the law in Earl Howe (Court of Appeal 16 April 1919), Bingham (High Court 13 & 14 October 1955) and Frere, (House of Lords 19 November 1964) that only annual payments which are payable under deduction of tax can be allowed as deductions from the income of the payer for income tax purposes. They considered that it would be wrong to assume that the draftsman of regulation 2B of the SI1993/204 intended to shape that provision otherwise than wholly consistently with the law on the deductibility of annual payments as set out in those cases. In their view regulation 2B(3) had effectively missed its mark, but they accepted that it was not for the Tribunal to make up for the failings of Parliament.

At a late stage in the proceedings HMRC raised the argument that as basic rate tax is deducted from annual payments, if Mr Chappell was entitled to any tax credit in respect of the annual payment he was only entitled to credit at the basic rate. However because of the differences in the treatment of annual payments payable wholly out of profits or gains charge to income tax (previously ICTA s 348) and annual payments not so payable (previously s 349) the Tribunal did not agree with this contention.


3.1 HMRC Spotlights – Employment Benefit Schemes using fettered payments

HMRC has published a new Tax Avoidance Spotlight as follows:

“HMRC is aware of schemes which claim to allow companies to pay their employees directly, without deducting any tax and National Insurance contributions. A number of these have been disclosed under the disclosure of tax avoidance schemes rules, including the schemes given the following scheme reference numbers:

  • 56363346
  • 20373764
  • 40426176
  • 72070132
  • 75714684
  • 88908075

A scheme reference number does not mean that HMRC has approved the scheme.

These schemes often involve the company making a payment to an employee on condition that the employee subscribes for shares in the company of a face (nominal) value equal to the payment. But the employee only pays a small amount of the face value of the shares – they remain partly paid up. The obligation to use the payment in this way is claimed to prevent the employee paying tax and National Insurance contributions on the payment.

But in HMRC’s view these schemes don’t work. For the employee, the payment is earnings from employment and chargeable to tax and National Insurance contributions. For the employer, the scheme is an ‘Employee Benefit Scheme’ for the purposes of the Corporation Tax rules, which restrict deductions for employee benefit contributions.

These schemes could leave both companies and employees worse off – after tax and National Insurance contributions – than if the companies had simply paid the employees through the payroll in the normal way.

HMRC will challenge users of this scheme – through the courts, where appropriate – to make sure that the companies and employees pay the correct amount of tax and National Insurance contributions. If you’ve already used this scheme and now wish to exit it to minimise any potential interest and (were HMRC to find you had been careless) penalties, you should contact HMRC either on Tel 0117 907 2529 or 0161 261 3438.”


4.1 Partnerships and Share Loss Relief

HMRC has updated its Venture Capital Schemes Manual.

In particular there is some clarification on VCM74060 on the effect on share loss relief for shares held through partnerships. The relevant text is:

“Where shares are subscribed for by a nominee on behalf of an individual you may accept that the individual has subscribed for the shares for the purposes of Share Loss Relief.

Note that this does not enable investors to obtain income tax relief if they invest in a partnership which in turn invests in shares (including a limited partnership and a limited liability partnership). This is because rather than having individual ownership of the shares, the individual will instead own a proportion of all the assets, including shares, owned by the partnership (as will all the other partners in the partnership).” .

4.2 XBRL update

iXBRL tagging of corporate tax computations and accounts was introduced with effect from 1 April 2011. HMRC softened the blow by promising a ‘soft landing’ approach, the purpose of which was to allow time for software providers to bring their systems up to the required standard. During this period, companies have had to apply minimal tags to their accounts in order to be able to pass the HMRC gateway checks. HMRC promised that enquiries would not be raised solely or mainly to check the quality of the iXBRL tags applied.

The two-year soft landing period will come to an end in March 2013. This was due to mark the withdrawal of the HMRC Minimum Tagging requirements, but this has since been postponed ‘until further notice’. In effect, it looks like there will be no immediate impact from the end of the soft landing period.

Companies will continue to have the choice of either using the minimum tagging set or fully tagging their accounts. However, the likelihood is that HMRC will begin to more closely scrutinise the quality of the tag being applied. Companies that do not take the opportunity to be as transparent as possible with their use of iXBRL, or submit returns with tagging errors, may find themselves at a higher risk of investigation. In other cases where soft landings have expired, HMRC has immediately moved to apply penalties for missing or incorrect data (for example, the Construction Industry Scheme in 2007) and therefore it is possible that HMRC may take the same approach for corporation tax and raise penalties for incomplete or erroneous iXBRL submissions.

The HMRC document below provides further detail.

Filing Company Tax Returns online: the XBRL tagging requirement

In his ‘Review of HMRC Online Services’ (March 2006), Lord Carter of Coles recommended that companies should be required to file their Company Tax Returns online using XBRL tagging in accounts and computations. The recommendation has been implemented with effect from 1 April 2011.

The vast majority of companies have successfully delivered their first online return using XBRL. HMRC received 1.6 million such returns in the first year. HMRC acknowledges that this has been a major change. The department’s approach during the transitional period in the first two years is to advise and support people to comply with filing requirements, not to reject returns or penalise people for getting things wrong. For example, HMRC does not reject returns where a reasonable attempt has been made with XBRL tagging and does not open Corporation Tax enquiries solely or mainly to check the quality of XBRL tagging.

HMRC undertook that there would be no extension before 31 March 2013 of the list of specified information which, where present in accounts or computations, must have an XBRL tag. The ‘list of specified information’ means items within the ‘minimum tagging requirements’ documents on the HMRC website.

The present Government is committed to an expansion of public services provided digitally. As set out in the ‘Digital by default’ consultation document published on 8 August 2011, HMRC will be playing its part in this initiative. On 29 February 2012, HMRC published its summary of responses to this consultation. HMRC had asked for views on increasing the amount of XBRL tagging when the transitional period expires at the end of March 2013. All responses agreed that there should be no major extension of the list of specified information from April 2013. HMRC has accepted this view and the tagging requirement will not change in April 2013.

HMRC is working with software suppliers and other representatives to make limited changes to the list from autumn 2013. There will be a single requirement for detailed profit and loss account tags, whether appearing in the accounts or the tax computations, and an improvement to the structure of the computations tags. Beyond that, there will be no major change without full consultation.

HMRC is continuing to expand the effective exploitation of XBRL, by quality assurance of XBRL tagging in a selection of returns already received and by development of the effective use of XBRL tags in risk assessment and other compliance work.

Some software products already support fuller tagging of accounts than is required by the list of specified information and others are coming to market. This is welcome, even though HMRC is not yet making full tagging compulsory. More information with XBRL tags helps HMRC’s risk assessment, reducing the demands it needs to make on the majority of companies in assuring compliance with tax obligations. It also helps HMRC to analyse accounts information across all or part of the population for policy research and monitoring.

As XBRL-tagged accounts become available on the public record, HMRC will work with Companies House, software developers and other interested parties to encourage the development of accounts preparation products and online services which best support the wider Government digital agenda.


5.1 Legitimate expectation

The Upper Tribunal has overturned the First-tier Tribunal’s decision in the case of Abdul Noor. The FTT had used the principle of legitimate expectation to rule that HMRC should give credit for £4k of input VAT on the basis that the taxpayer had been given the expectation (via HMRC’s telephone advice service) that he could recover input VAT on costs in connection with the construction of a small commercial property before he had registered for VAT. The invoices were dated more than six months before the date of registration.

It was held that caution should be taken in considering a claim for legitimate expectation on incorrectly given HMRC advice and that even if it could be granted it might not be in respect of the full amount of tax claimed (credit for £4k of input VAT in this instance). In the circumstances, the Upper Tribunal decided there should be no exercise of legitimate expectation (and that the FTT should not have ruled on it in any event).

A more detailed summary of the case by HMRC’s counsel in the case can be found at:

5.2 Place of supply of services

The following questions have been referred to the CJEU from Sweden by Skandia America Corporation USA, filial Sverige:

  • Do supplies of externally purchased services from a company’s main establishment in a third country to its branch in a Member State, with an allocation of costs for the purchase to the branch, constitute taxable transactions if the branch belongs to a VAT group in the Member State?
  • If the answer to the first question is in the affirmative, is the main establishment in the third country to be viewed as a taxable person not established in the Member State within the meaning of Article 196 of the Directive, with the result that the purchaser is to be taxed for the transactions?

5.3 Recovery of input VAT on professional and advisory services in connection with a take-over

The Court of Appeal has finally released its decision in the case of BAA concerning the recoverability of input VAT on professional and advisory costs provided to the bid vehicle Airport Development and Investments Limited (ADIL) for the take over of BAA plc.

The First-tier Tribunal had concluded ADIL was carrying on an economic activity and that there was a direct and immediate link between the supplies to ADIL for which input tax was claimed and supplies subsequently made by the acquired group when ADIL joined the VAT group. The Upper Tribunal agreed with the FTT on the first point, but concluded there was no direct and immediate link between input and output supplies (the FTT had found as a fact that ADIL had no intention to join the BAA VAT group nor make intragroup supplies at the specific time the input costs were incurred).

The Court of Appeal decided unanimously that ADIL was not carrying on an economic activity when it acquired the BAA plc. shares. In reaching those conclusions it relied on the facts as found by the FTT and the principles outlined at the CJEU in their 1993 decision in Polysar Investments Netherlands BV v. Inspecteur der Invoerrechten em Accijnzen that an international holding company, the sole function of which was to hold shares in other companies in a world-wide group, without any direct or indirect involvement in the management of those other companies, was not a taxable person.

It also decided unanimously that there was no direct and immediate link between the input supplies made to ADIL and the subsequent output supplies made by BAA. In reaching that conclusion it commented:

“In a rather loose sense there was a sort of link between the services supplied to ADIL and the services supplied by BAA. The services to ADIL, on which liability to input tax was incurred, were supplied in connection with its takeover of BAA, which itself was making supplies of services. Though supplies were not actually made, or even intended to be made, by ADIL at the relevant date, the outward services, on which VAT was charged, were made by BAA, which was the target of ADIL’s successful take-over.

However, the facts so clearly found by the FtT send out quite a different message, which makes it impossible to describe or assess any link that existed at the relevant date between the VAT input and the VAT output as either “direct” or “immediate.” On this point I agree with the UT and HMRC that the FtT erred in law in holding that there was a direct and immediate link between the input tax on the supplies of services to ADIL and the output tax on the supplies of taxable services made by BAA.”

5.4 Surrender of a lease on a building used for a restaurant – whether amounting to a transfer as a going concern

The First-tier Tribunal case of Massey trading as The Basement Restaurant concerned a situation where a tenant surrendered a restaurant lease to the landlord as he had decided to exit the restaurant business. The lease agreement had resulted in rental payments which were below the VAT registration threshold. An agreement for the purchase of fixtures and fittings put in by the tenant for £6,000 was reached. After a short period of closure (ten days) the restaurant was re-opened, but run on a different basis (serving different food and with different opening times. The landlord contended that there had been no transfer of a going concern and the restaurant was only being run by the landlord temporarily until a new tenant could be found (as the intention was always to generate rental income from the restaurant). The motive behind starting the restaurant in its new format was to preserve its character as a restaurant on the understanding that its value as a restaurant would decrease significantly if it closed for a long period of time. Any employees of the restaurant who chose to remain under the new ownership by the landlord could remain.

The point at issue was the timing of when a business should be registered for VAT.

Currently a UK established business is required to be VAT registered on the earliest date according to the following (VATA Sch1(1) and s49):

  • At the end of the month where the value of taxable supplies in the period of one year then ended exceeds £77,000;
  • At any time if there are reasonable grounds for believing that the value of taxable supplies in the 30 days from that date will exceed £77,000;
  • Where a business is carried on by a taxable person and transferred to another UK established person as a going concern from the date of transfer if:
  •  The value of taxable supplies for the one year period ending with the transfer exceeded £77,000, or

There are reasonable grounds for believing the value of taxable supplies in the following 30 days will exceed £77,000.

It is possible to voluntarily register before these limits are reached and a zero turnover limit now applies to non-UK established businesses. Where there is no transfer of a going concern, the time when VAT registration is compulsory is governed by the first two bullets.

The Tribunal concluded that despite there being two transactions (the surrender of the lease and the purchase of the fittings) and no formal agreement for the transfer of goodwill, the two transactions had to be viewed together. The combined effect of the transactions put the landlord in a position to carry on precisely the same restaurant business as had been carried on by the tenant. The break of ten days was insignificant, and in effect there had been a transfer of a going concern with the result that liability to register for VAT arose the day after the date of the transfer (in this case 14 June 2009, the day after the tenant ceased business and de-registered from VAT).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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