156. Agents may need to file non-MTD VAT returns via their ASA

HMRC has started moving the VAT records of traders who are not signed up to Making Tax Digital (MTD) for VAT from an old database (VAT mainframe or VMF) to a new database (Enterprise Tax Management Platform or ETMP).

The change began in April 2021 and is being phased in over six months. The change will not generally be noticed by businesses that file their own returns.

However, once a VAT record has been transferred from VMF to ETMP, agents can only access the online VAT return filing service for that client through their agent services account (ASA) and not the older agent online services (AOS) portal.

There is a prompt in the AOS that tells agents they need to access the service through their ASA.

The change of systems does not mean that clients have been automatically signed up to MTD by HMRC; it is only a change to how the online VAT return is accessed by agents.
As explained in HMRC’s Agent Update 83, the transfer from VMF to ETMP is more complicated for traders that pay by direct debit for whom HMRC does not hold a valid email address. HMRC will not start transferring these particular records until July 2021 and is writing to each business explaining what they will need to do to continue paying by direct debit.

Contributed by Caroline Miskin

157. Calls to HMRC’s Agent Dedicated Line not limited to one client

Acknowledging that service levels for agents since the start of the pandemic have not been what HMRC would like, HMRC has offered more information on the support that can be expected from its Agent Dedicated Line.

HMRC has confirmed that while there is no set number of clients an agent can discuss with one of its advisers, they are only able to spend an hour at a time on the phone due to health and safety requirements.

On taking a call, the HMRC adviser should now confirm with the agent how much time is left before their next break to allow the caller to prioritise their queries. If a call adviser doesn’t offer this information, then agents are able to ask for it.

Alongside the clarification, HMRC has asked agents to be pragmatic in what can be achieved in the time available.

Contributed by Caroline Miskin

158. HMRC steps up MTD VAT compliance activity

Almost 90% of those that should have signed up to Making Tax Digital (MTD) for VAT have done so, but around 100,000 have not. All these businesses have received more than one letter from HMRC reminding them of their MTD obligations.

HMRC has the right to charge a penalty of up to £400 for filing a VAT return other than by using MTD software and is considering doing this.

In the meantime, HMRC is preparing to close the online VAT return to those that have not signed up to MTD for VAT, on a trial basis at first. This would mean that the business could not file its VAT return other than by using MTD software.

HMRC is writing to 800 selected traders to tell them that while they will be able to file their March/April/May 2021 VAT return by 7 July 2021 using the online VAT return, they will not be able to file subsequent returns this way.

They will be blocked from filing the June/July/August 2021 return using the online VAT return and will need to sign up to MTD in good time to file that return using MTD software by 7 October 2021.

HMRC intends to monitor the response to this approach before considering whether to use it more widely.

Contributed by Caroline Miskin

159. VAT Notice 700/22 updated for MTD

HMRC has updated its VAT Notice 700/22 to clarify the MTD VAT digital links requirements for taxpayers. New examples depict digital record keeping and reporting options, “illustrating where information transfer must be digital and where it need not be”, as well as different ways taxpayers are compliant with the rules. HMRC also clarifies the relationship between digital records, functional compatible software and the ‘electronic account’ that businesses are required to maintain under the VAT Regulations. All updates take into account that the soft-landing period for digital links expired on 1 April 2021 along with the digital links extension application process.

160. Reporting self-isolation payments

Individuals who were required to self-isolate due to COVID-19 may have received a lump sum payment of £500 under the Test and Trace Support Payment Scheme in England, the Self-Isolation Support Scheme in Wales or the Self-Isolation Grant in Scotland. These payments are taxable, but they are not liable to class 2 or class 4 national insurance.

Where a self-isolation payment has been received by an individual who is required to file a self assessment tax return, the payment must be included on the return as income.

A payment that is received by an employee should be included in the ‘Other benefits (including interest-free and low-interest loans)’ box of the ‘Benefits from your employment’ section of the employment pages of the return (SA102).

The self-employed should include the grant in their profits reported on the self-employment or partnership pages of the return. However, they will also need to make an adjustment to exclude the payment from profits for the purposes of working out the class 2 and class 4 national insurance liability. The adjustment is made in box 102 of the self-employment pages (SA103F) or in box 27 of the partnership pages (SA104F or SA104S).

How to report self-isolation support payments

From the weekly Tax Tips published by the Tax Advice Network

161. Top slicing relief and Agent Update 83

In April 2021, HMRC included in Agent Update 83 a piece setting out its approach to the calculation of top slicing relief on chargeable event gains following the judgement in Marina Silver [2019] UKFTT 0263 (TC) and the changes to the legislation enacted as part of Finance Act 2020 (FA 2020).

Agents should treat HMRC’s assertions with a healthy degree of scepticism and be prepared to challenge the HMRC calculation of top slicing relief for chargeable event gains in tax years before and also after the implementation of the FA 2020 provisions. The new legislation makes two changes: it provides for the reinstatement of the taxpayer’s personal allowance (but specifically not the personal savings allowance) when calculating the hypothetical income tax on the annual equivalent of the gain; and it prohibits so-called beneficial ordering of allowances in that hypothetical calculation. Each of these changes is to apply for chargeable event gains occurring on or after 11 March 2020.

HMRC announced that, in the interests of fairness, it would apply both changes for chargeable event gains arising in 2018/19 and the whole of 2019/20 rather than, as the legislation prescribes, from 11 March 2020. However, this policy unfairly and unlawfully prevents some taxpayers from benefiting fully from the judgement in Silver (by restricting the personal savings allowance) and unlawfully applies the beneficial ordering rule retrospectively.

The First-tier Tribunal (FTT) will, in due course, hear an appeal in which both of these points are at issue and which involves a difference in tax liability in excess of £40,000 for the tax year 2017/18.

A separate issue will need to be resolved for calculations of top slicing relief for tax years 2020/21 and later. The HMRC calculator has been programmed to allocate reliefs and allowances in the order of: non-savings income; then savings income; then dividends; and then chargeable event gains. However, the sub-section introduced by FA 2020 merely requires us to allocate reliefs and allowances first to: non-savings income, savings income and dividends (however you like); and then to chargeable event gains. In some instances, the difference in the resultant top slicing relief will be significant.

Agents are advised to check calculations of top slicing relief for all tax years and, if appropriate, to file amendments or make overpayment relief claims.

Contributed by Tim Good, Absolute Accounting Software Ltd

162. Recipient liable for tax on dividend

The Court of Appeal (CA) has found that the taxpayer, whose shares were subject to a share buy-back, was the recipient of the deemed distribution of the proceeds. Although committed to use the funds to repay the loan for the purchase of the shares, this was not a composite transaction.

The taxpayer took over a company with a view to winding it up over two years. He had acted as management accountant for many years and agreed to do this after other attempts at selling failed. He conducted the takeover by purchasing the shares then selling all but one back to the company. HMRC treated the share buy-back as a distribution, creating a large unanticipated liability. The Upper Tribunal (UT) and FTT have previously agreed that this was a distribution, rather than a trading transaction, or one composite transaction.

The CA has also dismissed his appeal, this time on who is liable to pay the income tax on a distribution. The taxpayer argued that, in a technical sense, he was not the person receiving or entitled to the distribution, so should not be taxable on it. Under the terms of the financing, he had to use the proceeds of the buy-back to repay a loan he had taken out to facilitate the purchase from the former shareholders. Regarded as a composite transaction, he had received no distribution. The CA agreed with HMRC that this interpretation was incorrect. Although less than an hour apart, the sale and purchase were distinct transactions, and the taxpayer had received the distribution. The fact that he had no practical control over the monies was irrelevant, as that is not a requirement to be the recipient of a dividend.

Khan v HMRC (Rev 1) [2021] EWCA Civ 624

From the weekly Tax Update published by Smith & Williamson LLP

163. Business rates on empty properties

Many landlords of commercial property are suffering because their tenants have left or gone into liquidation.

If the building is empty and unused, no business rates are due for the first three months it is vacant, but most businesses must start to pay the business rates again after three months. An extension of this three-month relief period can be claimed for certain types of building (industrial, listed, or very small rateable value), or where the owner is a charity or community amateur sports club.

There is also an exception to the requirement to pay business rates where the owner is a company in liquidation and doesn’t occupy the property, or the owner is a company in administration. However, these exceptions have been used within tax avoidance schemes by certain property developers. They form special purpose vehicle (SPV) companies to hold the empty properties, and then put those SPVs into liquidation, avoiding the business rates.

A number of local authorities have challenged these business rates avoidance schemes at the Supreme Court (SC), and the case will now proceed to a full trial. The use of SPVs to avoid business rates may be ended with rates becoming payable for past years.

If your client is facing a business rates bill on an empty property, encourage them to contact the local council as they may be able to claim hardship relief for those rates.

Hurstwood properties and others v Rossendale Borough Council

Business rates relief

From the weekly Tax Tips published by the Tax Advice Network

164. Details of new plastic packaging tax from April 2022

HMRC has published guidance on the new plastic packaging tax due to come into force on 1 April 2022. The new tax will apply at a rate of £200 per metric tonne to plastic packaging manufactured in or imported into the UK, where the proportion of recycled plastic used in its manufacture is less than 30% of the total amount of plastic by weight. The new guidance outlines how the tax will operate and provides support for businesses to check whether they need to register and pay the tax. It also confirms record-keeping requirements.

165. IBAs: ‘temporarily out of use’

The UT has allowed the taxpayer’s appeal in Mark Shaw (as nominated member of TAL CPT Land Development Partnership LLP) v HMRC, which concerns the meaning of the term ‘temporarily out of use’ in the context of claims for Industrial Building Allowances (IBAs) made by the taxpayer (TAL) (prior to the phasing out of IBAs and eventual repeal in 2011).

TAL claimed the IBAs on the basis that, although the buildings concerned were not being used at the time of their acquisition, TAL intended to bring them back into use by finding suitable tenants to occupy them. Accordingly, TAL argued that the statutory provision within s285, Capital Allowances Act 2001 (CAA 2001), requiring a building not to be regarded as ceasing to have been used because it falls ‘temporarily out of use’, applied up until the point that TAL decided to cease its efforts to use the buildings and to sell them. HMRC argued that the buildings were not ‘temporarily out of use’ within s285, CAA 2001 at any time during TAL’s period of ownership because a period of actual use is required at both ends of a period of temporary disuse. If, as was the case here, the building never came back into actual use, then HMRC argued that the period during which it was not being used cannot be considered to be ‘temporary’.

The FTT concluded that the buildings ceased permanently to be used as industrial buildings when they stopped being used by the previous owner. However, the UT held that the correct approach means establishing why the building is empty and what the owner intends to do with it, and that the findings of fact made by the FTT clearly demonstrated that the period of temporary disuse continued up to the point at which TAL decided to cease its marketing efforts in November 2005 in relation to some of the buildings, and in or around October 2006 when it resolved to cease its attempts to use the remaining buildings.

From the weekly Business Tax Briefing published by Deloitte

166. Additional guidance on claiming extended loss carry-back relief

HMRC has published further guidance on the process of claiming the temporary three-year loss carry-back relief. The requirements to claim depend on the amount of relief claimed.

Claims for extended loss carry-back relief in excess of £200,000 must be made in a company tax return. On the Form CT600, box 45 (claims and reliefs affecting an earlier period) should be ticked, and further details on the claim should be included in the tax computation in the same way as for one-year carry-back claims. Companies do not need to submit amended tax returns online for the earlier periods affected by the extended relief claim. The amendment deadline for these earlier periods will have passed, so online amendments will be rejected.

Where the claim is for less than £200,000, it can be made by letter after the Finance Bill receives Royal Assent, which is expected in mid-July. Such claims may be made as soon as the accounting period in which the loss occurs has ended. The letter must include specific details as set out in the guidance, including details of the amount of loss carried back to the relevant earlier periods and draft management accounts as evidence of the loss incurred. 

From the weekly Tax Update published by Smith & Williamson LLP
Editor’s note: Royal Assent was granted on 10 June 2021

167. Mini-umbrella companies

HMRC has issued new guidance on the fraudulent activities of so-called ‘mini-umbrella companies’, which are sometimes created to avoid paying tax and national insurance.

Following the introduction of the off-payroll working (OPW) regime, there has been an increase in the number of umbrella companies. This is because individuals employed by an umbrella do not need to be considered for the OPW rules because PAYE is already being operated.

HMRC has issued guidance on mini-umbrella company (MUC) fraud, outlining what such fraud looks like and listing five key warning signs to watch out for.

HMRC confirmed that criminals create multiple limited companies with only a small number of temporary workers employed by each one to take advantage of tax incentives aimed at smaller businesses.

For example, by creating a series of MUCs that appear unconnected and claiming the national insurance contributions (NIC) employment allowance of £4,000 for each company, and then allowing the company to be struck off after about 18 months, the criminals can avoid paying thousands of pounds of employers’ NIC.

HMRC also warns of significant underpayments of PAYE and VAT by such companies, as well as the risk of the workers who are employees of these MUCs not receiving what they are entitled to.

Organisations and businesses in the public and private sectors are urged to carry out due diligence checks on their labour supply chains and ensure that they know how workers are paid.

HMRC has also updated its advice on applying supply chain due diligence principles to labour supply chains, highlighting the risks should HMRC find non-compliance or fraud in the chain. These risks include:

• liability for unpaid taxes and NIC, including employment allowance overclaimed;
• the denial of the right to claim input tax if the trader should have known their transactions were connected with VAT fraud;
• criminal offences relating to national minimum wage and national living wage;
• loss of gross payment status for businesses operating in the construction industry scheme;
• corporate offences for failure to prevent the criminal facilitation of tax evasion;
• challenges to any tax avoidances arrangements;
• disruption to the supply of labour if HMRC or other law enforcement agencies take action against a labour supplier in the chain; and
• reputational damage.

Alongside risks related to payment of taxes, private businesses should also be aware of the risks posed by these companies in relation to breaches of the Modern Slavery Act.

Meanwhile, ICAEW calls on members to familiarise themselves with HMRC’s guidance and the key warning signs. These include:

• directors that are foreign nationals with no previous experience in UK labour supply, often replacing a temporary UK-resident director;
• employees being moved frequently between MUCs; and
• business activities listed on Companies House entries that often do not reflect the reality of what the company does.

Anyone who has concerns about labour supplies is urged to contact HMRC.

168. Offsetting overpaid CGT on residential property against income tax liabilities

As the first self assessment tax returns are filed for 2020/21, it has become apparent that HMRC systems are not allowing capital gains tax (CGT) payments already made in accordance with the 30-day obligation to be offset against income tax due for 2020/21.

For example:

• CGT paid during 2020/21 on UK residential property: £50,000
• Liability per 2020/21 self assessment tax return:

Income tax: £20,000

CGT: £40,000

Total: £60,000

• Net amount due to HMRC: £10,000

HMRC is currently insisting that the £20,000 income tax be paid, and that £10,000 CGT be reclaimed by amending the original CGT UK residential property return.

Contributed by Caroline Miskin

169. Conditional sale of farmland

Once the shock of the news that CGT rates were not increased in the 2021 Budget has fully sunk in, much immediate CGT planning needs focus. Likewise, the news that there wasn’t any proposed consultation to increase CGT rates in the Tax Day announcements on 23 March 2021 has to be a priority for farmland and a lot of CGT planning will possibly have to be revisited, as there were expectations of increases to CGT rates.

Deferred consideration

Of particular interest will be deferred consideration of farmland development deals. For example, the deferred consideration could be the balance payable provided planning permission is obtained to develop the land. For the vendor, ‘juggling’ between maximising sale proceeds and the tax-efficient split between the deposit and the balancing payment has been a key point of negotiations over the decades. The fundamental tax position is that it is necessary to examine the precise form of the contract. The date of disposal (under a contract) is given by s28, Taxation of Chargeable Gains Act 1992 (TCGA 1992).

In the case of a standard conveyance, s28(1) is clear that this is the time when the contract is made (in other words, at exchange of contracts as long as the contract goes on to complete). However, s28(2) then says that if a contract is conditional the time of disposal is when the condition is satisfied. As a result, there could be a dilemma about the time of achieving payment of the balance and payment of the deferred consideration.

It has been held that the rule of s28(2) applies only to ‘conditions precedent’, and not ‘conditions subsequent’. In essence, in law the parties are not bound under a contract until conditions precedent are met, whereas a condition subsequent simply means that there are circumstances in which it has been agreed subsequently that one of the parties will not be expected to perform their side of the contract. A claim to defer payment of some of the tax may then be possible under s280, TCGA 1992 if completion will be more than 18 months after exchange (see also the Capital Gains Manual at CG14910).

Condition precedent

However, if the contingency is a condition precedent, the deposit would fall to be treated, by virtue of s144(7), TCGA 1992, as if it is a payment for the granting of an option treated initially as a disposal of its own in the tax year of the grant, but subsequently treated as part of the proceeds for the ultimate later sale.

The deposit is consideration for a ‘chose in action’ – an option or right to purchase property at a future date. Where the contract for the purchase of the farmland is subject to a condition precedent – a condition (the grant of permission) that must be satisfied before the contract becomes binding – then the tax will be payable for the year in which such permission is obtained, in accordance with s28(2), TCGA 1992. See HMRC’s Capital Gains Manual at CG14270 for commentary on conditions precedent and conditions subsequent.

The balance of the consideration and the payment for the option are then treated as a single transaction under s144(2), TCGA 1992, and the original assessment on the option is cancelled – see HMRC’s Capital Gains Manual at CG12317. Note that the disposal will be when permission is granted, not (if later) when the balance is payable. For example, see Hatt v Newman [2000] STC 113, where planning permission was granted on 29 March 1995 and the contract was completed on the 6 April 1995.

Tax planners are worried that CGT rates will increase in the future and many do not want to ‘push gains’ into tax years that will result in a higher rate of CGT. All farm development arrangements will have to be reviewed on a case-by-case basis in order to maximise proceeds and potentially minimise the tax liability. The timing and structure of all development deals needs to be reviewed and contemplated in the round moving forward.

Contributed by Julie Butler FCA, Joint Managing Partner, Butler & Co

170. Pre-trading activities did not qualify as a business

Entrepreneurs’ relief (ER) has been denied on a sale of assets by a partnership, because as it was conducting pre-trading activities there was no qualifying business, so the assets were not business assets.

The taxpayer established a partnership, the business of which was to develop and operate power plants. It sold two of the planned three plants before commencing to trade. The taxpayer’s claim to ER was denied on the grounds that the plants were not business assets in the pre-trading period.

The taxpayer submitted that the definition of business in the ER legislation could include pre-trading activities, among other points suggesting that Parliament had not intended to exclude these activities. On a detailed analysis of the legislation wording, and the background to its introduction, the FTT dismissed his appeal, finding that the ‘natural and ordinary’ meaning of ‘business’ required the trade to exist at the time of disposal.

Wardle v HMRC [2021] UKFTT 124 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

171. Guarantee rights ineligible for entrepreneurs’ relief

The FTT has found that a transfer of the beneficial interest in rights, which could not themselves be transferred, was a disposal for the purposes of CGT. The disposal was ineligible for ER as, although the rights carried more value than the shares in the company, they could not be defined as ordinary share capital.

A company was set up with both shares, all of which were non-voting, and ‘distribution rights’. The latter carried the voting rights, rights to surplus assets after repayment of share capital, and a right to share in profits, if they exceeded a low threshold. Distribution rights could not be transferred, but the taxpayer arranged that he would assign a beneficial interest in them in exchange for cash consideration. Effectively, he agreed to exercise his voting rights at the discretion of the purchaser, who wanted to acquire a subsidiary. He claimed ER on this, and following an HMRC enquiry changed position to argue that the transfer was not a disposal at all.

The tribunal found for FTT that there was a disposal. There is no requirement for rights to be linked to an underlying asset to allow transfer of a beneficial interest, the rights themselves are assets. ER was, however, not available, as the rights were not shares, and the ER legislation cannot be viewed as being intended to refer to such rights. In any case, the taxpayer did not have the minimum 5% shareholding to qualify for ER.

Tenconi v HMRC [2021] UKFTT 107 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

172. HMRC publishes TRS Manual

To coincide with the changes made to the Trust Register, HMRC has published its Trust Registration Service Manual. The manual will continue to be developed, but the initial version focuses on the types of trusts required to register, and the information required at the point of registration.

173. Two more multiple dwelling relief claims rejected

The FTT has dismissed taxpayers’ appeals in two similar cases, finding in each that each annexe was not independent enough to constitute a separate dwelling, so no multiple dwellings relief (MDR) was available to reduce the stamp duty land tax (SDLT).

The first case involved a house and annexe joined by a conservatory that had previously been separate buildings and still had lockable doors. The annexe, which the taxpayer was considering letting out, had its own bathroom and entrance. The FTT found that the linking conservatory did not indicate that there was only one dwelling, but the key factor was the kitchen. Although there was both a cooker and a sink, they were too close together for safe use, and the open plan kitchen posed a fire risk. Although capable of separate occupation, the annexe was not capable of safe separate occupation, so could not lawfully be let as a dwelling.

The second case involved an annexe occupied by the taxpayer’s adult children. Although it had its own entrance, heating system and electricity meter, there were no kitchen facilities. There was an area that could be converted for use as a kitchen, with water and electricity, but on the video tour provided to the FTT, no kitchen appliances were present. The FTT found that the annexe and house were only suitable for use as a single dwelling on this basis.

In each case, an SDLT return was submitted for a single transaction, then amended by the taxpayer to claim MDR. In neither case were the properties separate for council tax. There have been a number of these cases recently, possibly due to third parties suggesting to taxpayers that an annexe may qualify. Additional guidance from HMRC could be of assistance.

Mullane v HMRC [2021] UKFTT 119 (TC) 

Mobey v HMRC [2021] UKFTT 122 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

174. Communal garden held not to constitute mixed-use property

The FTT has upheld HMRC’s decision that a taxpayer should pay residential SDLT rates rather than mixed use on a property with which he acquired the right to use a communal garden. His garden access was merely a right attached to the property rather than an interest in the land.

The taxpayer purchased a freehold property on a London square, and with it received a key to the communal square garden, with some usage conditions attached. He amended his original SDLT return to change the residential rate to that of mixed-use property, on the basis that an equitable interest in a communal garden was not residential property. The FTT dismissed his appeal, agreeing with HMRC that the taxpayer’s rights over the garden did not constitute an equitable interest in land. Given that the terms attached to it included a statement that access could be revoked on three months’ notice, use was just an interest pertaining to the main property.

Khatoun v HMRC [2021] UKFTT 104 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

175. Eligibility for the agricultural VAT flat rate scheme

HMRC guidance on joining the agricultural flat rate scheme for VAT (VAT Notice 700/46) has been amended to clarify eligibility rules. This follows changes announced at Budget 2020 that apply from 1 January 2021. Additions to section 1.6, which outlines the rules for joining the scheme, confirm that those eligible for group registration, registered as a division or associated with another person in the preceding 24 months do not qualify for the scheme. 

176. Clarity on VAT treatment of blinds

In October 2020, the FTT ruled that manual blinds and shutters installed in new-build homes do fit the description of ‘building materials’ under the VAT Act 1994. It also ruled that such items did not fall into any of the current exceptions and should therefore be zero rated for VAT purposes. HMRC has now published Revenue and Customs Brief 5 (2021) confirming the change and that in cases where VAT was disallowed an adjustment can be made on the VAT return.

177. VAT registration for overseas suppliers that only sell zero-rated goods

HMRC has updated its guidance on overseas suppliers of zero-rated goods to UK customers. In updates to its guidance for selling directly, HMRC confirms that overseas sellers supplying only zero-rated goods can apply for exemption from VAT registration.

178. Drinks as food replacements for VAT purposes

Following a UT decision, HMRC has published Revenue and Customs Brief 6 (2021), reaffirming its approach to assessing whether drinks are food replacements or beverages for VAT purposes. The UT upheld the decision that juice drinks produced by The Core Ltd for a cleansing programme did constitute meal replacements and were therefore zero rated for VAT. However, the UT also confirmed that a number of factors needed to be assessed in each case when deciding whether a drink is a beverage, and therefore subject to standard rate VAT. In Revenue and Customs Brief 6, HMRC says that this approach is consistent with its own and outlines the factors that it will consider in future such cases, which includes how the drink is marketed. 

179. Nakd bars subject to VAT as confectionery

The statutory definition of confectionery was changed in 1988 to include ‘items of sweetened prepared food normally eaten with the fingers’, which meant that cereal bars held together by syrup were subject to VAT. In Wm Morrison Supermarkets plc, the FTT has ruled that this definition did not apply to Nakd Wholefood Bars, whose main ingredient (37-58% dates) was already sweet, and which were not further sweetened by the addition of other fruit, nuts and natural flavourings.

However, the FTT went on to rule that Nakd bars were ‘confectionery’ in the ordinary meaning of the word. The FTT found that the bars contained similar levels of sugar to Maltesers, were sweet to taste (up to 52% sugar, with a texture like fudge), and had been processed. They were held out as, and normally consumed as, snacks and (like traditional confectionery), they were packaged and marketed as treats. So, although the bars might not be ‘sweetened prepared food’, the FTT concluded that they were still confectionery, and subject to VAT. Morrison’s appeal was dismissed. 

From the weekly Business Tax Briefing published by Deloitte

180. Calculating open market values

Jupiter Asset Management Group Ltd was the representative member of a VAT group (JAMG) that included JFM Plc, which made management charges to a VAT group represented by Jupiter Investment Management Group Ltd (JIMG).

HMRC considered that the level of management charges was too low, directed JAMG to charge VAT by reference to an open market value, and assessed it for output tax. In a detailed decision, the FTT has considered that an arm’s length price (as defined for transfer pricing purposes) might frequently coincide with an open market value, but that it was relevant only to direct tax. An open market value for VAT purposes has to be calculated by reference either to a comparable transaction (in this case, there was none) or to the full cost of JAMG’s management services. The full cost included all the services on which JAMG  had recovered input tax (which, by definition, were cost components of a supply by JAMG). It also included costs that were not subject to VAT, in particular the remuneration of Jupiter’s executive directors, who were employed by JFM Plc even though in practice they were paid by JIMG. JAMG’s appeal was dismissed. 

From the weekly Business Tax Briefing published by Deloitte

181. Amending historical claims

In 2009, Leicester City Council submitted a claim for VAT overpaid on sports and leisure facilities. The Court of Justice of the European Union (CJEU) eventually confirmed the validity of such claims in 2017, by which time the council had submitted several catch-up claims for periods that might otherwise have fallen outside the four-year time limit. In 2018, it sought to amend its claims for 2006-14 (which were still being negotiated) on the basis that VAT on golf course fees and income from sports activities on council parks had been omitted.

The FTT has ruled that this was a new claim, not an amendment to an existing claim. The original claims for ‘sports and leisure facilities’ might also include a claim for golf courses and sports on parks. However, the methodology used for the original claims had excluded this turnover. This satisfied the FTT that the claim had to be a new claim, which was subject to the four-year cap, and it dismissed the council’s appeal. 

From the weekly Business Tax Briefing published by Deloitte

182. Common law claim for historical VAT bad debt relief rejected

Deficiencies in the VAT bad debt relief (BDR) scheme prevented BT from claiming VAT between 1978 and 1989 under the ‘Old BDR Scheme’. In 2014, the CA ruled that BT did not have a legitimate expectation arising from the eventual repeal of the Old BDR Scheme in 1997, and that a claim submitted in 2009 under the scheme was time-barred.

The High Court has now ruled that BT was not entitled, as an alternative, to relief for mistake of law either. Unlike claims for overpaid VAT, VATA 1994 does not expressly exclude common law remedies for bad debt relief. However, in the High Court’s judgement, the Old BDR Scheme was intended by Parliament to be an exhaustive and exclusive scheme for VAT relief on bad debts. Otherwise, taxpayers could circumvent the rules made by Parliament relating to the format, the calculation, and the time limits for BDR claims by seeking an equivalent relief at common law. The High Court concluded that Parliament intended the Old BDR Scheme to oust any common law remedy, and dismissed most of BT’s claim (even though it accepted that there was an arguable case about whether HMRC had been unjustly enriched by limitations of the Old BDR Scheme). 

From the weekly Business Tax Briefing published by Deloitte

183. Partnerships in German VAT groups

One of the potential challenges of compulsory VAT grouping, as operated in Germany and recently considered for the UK, is the need to be precise about what must be included in or kept out of a VAT group. Otherwise, it can create the sort of issue considered recently in M-GmbH by the CJEU.

M-GmbH controlled the majority of the voting rights in PD & Co KG, a limited partnership. Three of the other limited partners were individuals, and although M-GmbH might control the partnership in practice (most decisions were taken by a majority vote), the other partners could conceivably block its control. The German tax authorities concluded that the involvement of these individuals meant that the partnership could not be included in M-GmbH’s VAT group, and assessed the partnership rather than the VAT group for under-declared VAT.

The CJEU has ruled that the limited partnership had close financial, economic and organisational links to M-GmbH, notwithstanding the involvement of the other limited partners. The limited partnership should have been treated as part of M-GmbH’s VAT group and should not have been assessed. 

From the weekly Business Tax Briefing published by Deloitte

184. New service lets firms practice making customs declarations

HMRC has launched the Trader Dress Rehearsal (TDR) service that enables businesses to test making declarations ahead of using the Customs Declaration Service (CDS). The free system is available to traders using an authorised software product, a list of which is available from gov.uk. Users will also need an EORI number, have already obtained necessary authorisations and licences, know how to access the CDS, and have an understanding of the UK Trade Tariff and making customs declarations.

185. HMRC loses Tooth, but gains second bite at discovery

The SC has ruled that there was no deliberate inaccuracy in an income tax return despite the taxpayer ‘fudging’ the return as a result of a technical issue with the software used to prepare it. However, it also confirmed that HMRC can make discovery assessments after initially deciding not to raise an enquiry.

On 14 May, the SC passed its judgement in HMRC v Tooth [2021] UKSC 17, finding for the respondent, Mr Tooth.

Mr Tooth entered into a tax avoidance scheme and attempted to claim an employment income loss as a result for the 2007/08 tax year.

Owing to problems with the HMRC-approved software he was using, he entered the loss in a different box on the return and used the white space on the return to explain the claim he was making.

While HMRC did review his return and concluded that the avoidance scheme he had entered into was not effective, it did not raise an enquiry into Mr Tooth’s return within the normal enquiry window.

Following retrospective legislation that confirmed the scheme Mr Tooth entered into was ineffective, HMRC raised a discovery assessment into his return.

Deliberate inaccuracy?

To make this assessment, HMRC had to demonstrate that an insufficiency of tax had been brought about carelessly or deliberately. HMRC claimed that there was a deliberate inaccuracy in the return which was the basis on which it was able to raise the assessment.

The SC held that there was no such inaccuracy in Mr Tooth’s return. This is not an entirely surprising result given that Mr Tooth had, in the Court’s words, “done his best” with an intractable online form.

The impact of this is that taxpayers can feel reassured that they should not be penalised for making returns to the best of their abilities provided it is clear what they are claiming and why.

Had the discovery become stale?

The SC nonetheless found that there had been a valid discovery, albeit of something that wasn’t a deliberate inaccuracy and was therefore made outside of the appropriate time limit.

In the preceding hearing, the CA had found that, as HMRC had reviewed but not raised an enquiry into the return, despite believing that the avoidance scheme was not effective, this prevented HMRC from making a subsequent discovery assessment.

The SC held that, just because one inspector had looked at a return and decided not to enquire into it did not mean that another inspector could not subsequently make a discovery in respect of that return.

The press summary of the case stated: “There is no principle of ‘collective knowledge’: section 29(1) TMA 1970 focuses on the state of mind of the individual officer of the Revenue who makes the assessment; if an officer had already made a discovery, that must not be regarded as a discovery ‘once and for all’ by the Revenue such that other officers cannot make the same discovery in future”.

The discovery assessment raised after the retrospective legislation had been introduced was therefore valid in the eyes of the SC.

This means taxpayers cannot assume that valid assessments will not be subsequently raised on their returns after they have been reviewed and no enquiries have been raised within the standard enquiry window.

Contributed by Richard Jones

186. New country-by-country reporting penalty factsheet

HMRC has published a factsheet setting out the penalty regime for country-by-country reporting (CbCR). 

The factsheet explains when penalties may be imposed and how HMRC determines the amount to be charged. Penalties of £300 may be charged for failing to file a CbCR return, failing to notify HMRC in relation to CbCR reporting, or failing to provide information requested by HMRC. Daily penalties of £60 may be imposed for continuing failures. The maximum penalty for an inaccuracy is £3,000. It also explains how to appeal against penalties, and what to do if you believe your company has a reasonable excuse for failing to comply. 

From the weekly Tax Update published by Smith & Williamson LLP

187. Taxpayer wins unilateral relief case

The FTT ruled that a UK company could claim unilateral relief against US withholding tax despite being refused treaty relief by the Internal Revenue Service under the limitations of benefits provisions. It found that the UK/US tax treaty does not include express provisions prohibiting relief for the arrangement in question.

The taxpayer was a UK company that suffered US withholding tax on interest payments from its US subsidiary. The US competent authority denied the taxpayer the benefits of the UK/US tax treaty on two grounds. First, the taxpayer was not a ‘qualified person’ under the UK/US tax treaty. Second, it was not clear that obtaining treaty benefits was not a principal purpose of the arrangements. The taxpayer then claimed unilateral relief in the UK, which amounted to approximately £4.5m. HMRC denied relief, arguing that the case fell within the exclusion provisions. Unilateral relief is not available where the tax treaty includes express provisions that deny credit relief. HMRC interpreted the UK/US tax treaty as containing such provisions.

The FTT found for the taxpayer. It held that the UK/US tax treaty, and in particular the limitation of benefits article, is not explicit as to the cases and circumstances in which credit relief is not to be made available. UK unilateral relief was therefore available.

Aozora GMAC Investments Limited v HMRC [2021] UKFTT 99 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

188. State aid: General Court reverses Commission in Amazon, upholds Commission in Engie

Further to the European Commission’s conclusion in 2017 that Luxembourg granted undue tax benefits to Amazon, the EU’s General Court has held that the Commission did not prove to the requisite legal standard that there was an undue reduction of the tax burden. Accordingly, the Commission’s decision has been annulled.

The EU’s General Court has upheld the European Commission’s 2018 conclusion that tax rulings granted by the Luxembourg tax authorities to the GDF Suez group (now Engie) gave rise to a breach of State aid rules.

Commission Executive Vice-President Margrethe Vestager has commented: “Both judgments confirm once more a key principle: while Member States have exclusive competence to determine their taxation laws, they must do so in respect of EU law, including State aid rules”.

Press release: Commission 2017 decision

Press release: Judgement in Luxembourg v Commission (Case T-816/17) and Amazon EU Sàrl and Amazon.com, Inc. v Commission (Case T-318/18)

Press release: Judgement in Luxembourg v Commission (Case T-516/18) and Engie, Engie Global LNG Holding Sàrl and Engie Invest International SA v Commission (Case T-525/18)

Statement by Executive Vice-President Margrethe Vestager

From the weekly Business Tax Briefing published by Deloitte