231. Limited partnerships and incentive plans

The Upper Tribunal (UT) has released a pair of related decisions, in respect of appeals and cross-appeals of different elements of the same June 2020 First-tier Tribunal (FTT) decision BlueCrest Capital Management Cayman Limited and others v HMRC.

The first decision – BCM Cayman LP and other v HMRC – covers two separate corporation tax issues. The ‘profit allocation issue’ concerned the treatment of an interest in a UK limited partnership held via a Cayman Islands limited partnership. The parties disagreed on which of the Cayman partnership’s corporate partners were subject to corporation tax on profit allocations arising from the underlying UK partnership. The UT, taking into account the constitutional documents of the partnerships and other contractual documents, agreed with HMRC that the Cayman partnership’s general partner – which had originally acquired the UK partnership interest before transferring it to the Cayman partnership as a capital contribution – was solely subject to tax on the profit allocations to the exclusion of the other partners in the Cayman partnership. The ‘interest deductibility issue’ concerned a claim by the general partner for corporation tax relief on loans taken out to fund the original acquisition of the UK partnership interest. While the UT disagreed with certain elements of the FTT’s analysis on the availability of a mechanism for tax relief, it held that the FTT was entitled to find that under the facts and circumstances the loans were not trading loan relationships, precluding the relief claimed.

The second decision – HMRC v BlueCrest Capital Management LP and others – focuses on the income tax treatment of payments made to individuals via a Partner Incentivisation Plan (PIP). The UT dismissed HMRC’s appeal that the PIP formed a part of the profit-sharing arrangements of the relevant partnerships. However, it dismissed the individuals’ appeals against the FTT’s conclusions that, once entitled to payments under the PIP, they were subject to income tax on the amounts under both the miscellaneous income and ‘Sale of Occupational Income’ provisions.

From the weekly Business Tax Briefing published by Deloitte

232. Restrictions on deeming provisions confirmed

The Court of Appeal (CA) has followed the lower courts in not extending a deeming provision further than is necessary.

The taxpayer sought to claim capital allowances on the costs incurred by its predecessor in trade on the launch of leased satellites. To do so, it claimed that the satellites were deemed to have been sold to it, and therefore, under old rules now repealed, should be treated as belonging to it.

The CA followed the lower courts in being unwilling to extend the deeming provisions in this way.

The purpose of the legislation was to value property that passed to the successor without a sale and this was done by deeming a sale. This did not mean that the transfer had passed, because the deeming rule was not created for that purpose. As the taxpayer did not acquire ownership of the satellites the deeming provision cannot entitle it to claim capital allowances.

Inmarsat Global Limited v HMRC [2022] EWCA 1076 

From the weekly Tax Update published by Evelyn Partners LLP

233. HMRC wins appeal in interest expense case

The Upper Tribunal (UT) has overturned a First-tier Tribunal (FTT) decision, ruling that interest incurred on the acquisition of an investment business was not tax-deductible. Obtaining a tax advantage was the main purpose of the loan; so, despite additional commercial motivation it was unallowable. It also found that the loan arrangement required a transfer pricing adjustment as it would not have been made between independent enterprises.

The taxpayer was a US company that was tax resident in the UK. It had been incorporated to facilitate the acquisition of part of Barclay’s investment business. It had incurred interest expenses of approximately $4bn. The FTT found that an independent enterprise would have made a comparable loan to the taxpayer if particular covenants had been given, so no adjustment was required for transfer pricing purposes.

It also held that although obtaining a tax advantage was integral to the arrangement and a main purpose of the arrangement, the loan had a commercial purpose and would have been entered into in the absence of the tax advantage. The entire interest expense was therefore apportioned to the commercial purpose of the loan and fully deductible.

The UT overturned the decision on both points. The FTT had erred in law by taking into account third-party covenants absent from the actual transaction in considering whether or not an independent lender would have made such loans. It set aside the FTT decision and confirmed that HMRC’s amendments to the returns should be upheld. This conclusion rendered the unallowable purpose issue immaterial to the appeal, as the transfer pricing adjustment took priority, but it went on to consider the second point as full arguments had been made.

It agreed with the FTT that the loans had both a commercial purpose and an unallowable tax advantage, but in the apportionment it found that the FTT had erred in focusing only on the subjective beliefs of a board member and on the period just before the transaction completed. This is an objective test. The UT found that, but for the tax advantage purpose, there would have been no commercial purpose to the loans, and all relevant facts and circumstances led to the conclusion that the interest should be wholly attributed to the unallowable purposes and disallowed.

HMRC v Blackrock Holdco 5 LLC (Tax) [2022] UKUT 199 (TCC) 

From the weekly Tax Update published by Evelyn Partners LLP

234. ‘Share-for-share’ exchange main purpose case

The Upper Tribunal (UT) has dismissed HMRC’s appeal in the corporation tax case HMRC v Euromoney Institutional Investor plc.

The taxpayer agreed in principle to sell shares it held to a third party for a mixture of cash and share consideration. The substantial shareholding exemption (SSE) would not have applied to a disposal of the shares, and a chargeable gain was expected to arise on the proportion attributable to the cash element of the consideration.

Prior to completion, it was decided to replace the cash element with redeemable preference shares. By doing so, it was hoped that the ‘share-for-share exchange’ rules in ss127 and 135, Taxation of Chargeable Gains Act 1992 would prevent an immediate charge to tax, and that the SSE would later apply to exempt a redemption of the preference shares for cash once a year had passed.

HMRC considered that a restriction in s137 applied (ie, that the exchange formed “part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax”), which would disapply the share reorganisation tax treatment and cause the entire disposal to be taxable. The First-tier Tribunal (FTT) allowed the taxpayer’s appeal in April 2021.

The UT dismissed both of HMRC’s grounds of appeal. It did not agree that the FTT had erred in law by applying the wrong test in determining whether the exchange formed part of a scheme or arrangements, and if so, what the scheme/arrangements were. The UT considered that this was a question of fact, and the FTT was entitled to conclude under the relevant circumstances that the arrangements to be tested related to the totality of the transaction and were not limited to the issue of preference shares in isolation. The UT also dismissed arguments that the FTT took into account irrelevant considerations, or failed to take into account relevant considerations, when it concluded that the avoidance of corporation tax was not a main purpose of the arrangements.

From the weekly Business Tax Briefing published by Deloitte

235. Holding in life assurance company found to be structural asset

The First-tier Tribunal (FTT) has upheld a company’s appeal, finding that a shareholding it owned was a structural asset used in the business, so relief could be claimed on sale. Dividend income and increases in capital value were therefore not taxable as trading profits.

The company, a life assurance company, held a majority stake in a Canadian life insurance company, which was an integral part of its business. It excluded receipts, expenses and changes in capital value arising from this holding from the computation of trading profits on the grounds that it was long-term business fixed capital. HMRC argued that this was not a structural asset of the business.

The FTT found for the taxpayer. The holding was used in the business, and at risk. It was a very similar business to that of the taxpayer company, so operationally enhanced it. The shareholding was also held for almost 30 years, which lent weight to the argument that it was a structural asset. The taxpayer’s appeal was allowed.

Guardian Assurance Limited v HMRC [2022] UKFTT 234 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

236. Trivial benefits – when is it a benefit or cash?

A statutory exemption for trivial benefits was introduced in 2016. Section 323A, Income Tax (Earnings and Pensions) Act 2003 sets out four conditions for the exemption to apply for benefits provided by, or on behalf of, an employer to an employee or a member of the employee’s family or household:

• the benefit is not cash or a cash voucher;
• the cost of providing the benefit does not exceed £50 (or the average cost per employee does not exceed £50 if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person);
• the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements); and
• the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.

A further condition applies where the employer is a close company. Where benefits are provided to an individual who is a director or other office holder of the company (or a member of their family or household) the exemption is capped at a total cost of £300 in the tax year.

If an employer wishes to say ‘thank you’ to an employee and tells them to treat themselves to something up to the value of £50 and claim it back through expenses, this does not qualify for the trivial benefits exemption. The employee is receiving cash rather than a benefit from their employer and the first condition is not satisfied.

What happens if employee A arranges and pays for bereavement flowers (at a cost of £35) for employee B, and employee A is reimbursed by the employer? Employee B has received the flowers and employee A has received cash from their employer. Provided the employer has authorised the purchase of the flowers, the trivial benefits exemption should apply for employee B, as employee A would be acting on behalf of their employer in providing the flowers. Employee A has received no profit as they are reimbursed for exactly the amount spent.

237. Tax implications of cost (non-)recovery

You successfully sue your employer for remuneration owed to you. What you receive is usually taxable as earnings (there’s potentially a limited exception to the principle, but that’s for another day). Anything that you recover as a contribution to your costs isn’t earnings and isn’t taxable. But to the extent that you don’t recover costs and have to bear them yourself, you don’t get tax relief for them. As tax concepts go, it’s not difficult.

In the case of Murphy v HMRC, the First-tier Tribunal (FTT) got it. The Upper Tribunal (UT) didn’t. The Court of Appeal (CA) has just set them right, in [2022] EWCA Civ 1112.

Murphy was a policeman who, along with others, sued the Metropolitan Police (‘the Met’) for overtime and other payments. The Met agreed to pay out £4.2m plus ‘Agreed Costs’. These were defined as the legal costs and disbursements of the claimants’ solicitors and counsel.

But the agreement provided explicitly that the Met wasn’t liable for payments which the claimants were committed to make under a ‘Damages-Based Agreement’ (essentially a percentage ‘success fee’ payable by the claimants to their lawyers) or an insurance premium insuring against the risk of paying the Met’s costs if the claim failed. Payment of those items remained the responsibility of the claimants – although as a matter of mechanics they were paid on behalf of the claimants by the Met, who paid over to the claimants only the net amount after deducting these amounts.

There was no dispute about the tax treatment of the Agreed Costs: they weren’t earnings. The question was whether the claimants were liable to tax on the full £4.2m or only on the lesser amount they actually received.

The FTT had no real difficulty with the case. The £4.2m did not include costs – it was wholly a payment in settlement of a claim for unpaid allowances and overtime that would have been taxable earnings if they had been paid in the first place. The fact that some of it was paid away with the agreement of the claimants to discharge their liabilities did not change that. The full £4.2m was taxable as earnings.

Before the UT, it was agreed that the taxability of the £4.2m depended on its being a “profit … obtained by the employee”. To the extent that the £4.2m reimbursed expenses incurred in securing it, it was not ‘profit’. So only the net amount after deducting the insurance premium and the success fee was taxable.

In the view of the CA, the UT got it wrong. In the context of defining earnings, ‘profit’ does not mean ‘net profit’: rather, the word is used in the sense (quoted from the Oxford English Dictionary) of “a material benefit derived from a property, position, etc; income, revenue”.

The CA summarised the position thus:

“The position in this case was no different from any other case in which the taxpayer is left to defray some or all of his costs and disbursements in the litigation out of the damages or compensation he receives. If, as in the present case, he is paying those costs and disbursements out of money which represents his taxable income from employment, the whole of the money which represents his taxable income remains taxable. Therefore the Met was right to deduct PAYE from the whole of Mr Murphy’s share of the [£4.2m].”

Quite.

Contributed by David Whiscombe writing for BrassTax, published by BKL

238. Inducement to accept changes to pension scheme not earnings

The Upper Tribunal (UT) has overturned a First-tier Tribunal (FTT) decision, finding that payments made to employees to compensate for future reduced pension payments were not taxable as earnings. They were simply made to put the employees in the same position, not as a change to the future conditions of employment.

A large company decided to change its pension scheme arrangements, and made payments to employees to facilitate the change. HMRC held that, for 1,100 of the employees, the payments derived from the employments, and should be subject to income tax and national insurance contributions as earnings. The FTT agreed with HMRC, finding that the change to pension arrangements was part of a wider renegotiation of working conditions, and could not be separated from the integrated package. Although the employees lost a right to purchase additional pension benefits, only 7% of scheme members used that right.

The UT overturned that decision, finding for the employer that the payments were compensation for the expected lower pension payments and reduction in future employer contributions, so were non-taxable as they simply put the employees in the same position as before the change. The FTT had erred in law in finding that the payments were from employment, rather than compensation.

E.ON UK Plc v HMRC [2022] UKUT 196 (TCC)

From the weekly Tax Update published by Evelyn Partners LLP

239. Deductible expenditure

The recent First-tier Tribunal (FTT) decision in Slade v HMRC [2022] UKFTT 227 (TC) may leave the appellants with the reasonable belief that tax law, if not altogether ‘crazee’ (as the rock band Slade would say), is at least sometimes hard to reconcile with fairness.

In her will, Dora had left some farmland to her son Jonathan. He (who was at the relevant time the sole executor) assented to two parcels of land (the ‘Northern Parcel’ and the ‘Southern Parcel’) being transferred to himself and his son (also Jonathan), believing that the parcels formed part of the farmland left to him. They subsequently sold the Southern Parcel for some £221,000 net of costs. The Northern Parcel was worth about £86,000.

Some of the family asserted that the Parcels didn’t form part of the farmland left to Jonathan, but formed part of Dora’s residuary estate, in which they had an interest.

The claim was settled out of court on terms that the Jonathans paid the claimants £240,000 (including their costs). The Jonathans’ own costs were about £41,000.

A person disposing of an asset may, in computing a capital gain, deduct (inter alia) “expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset”. That seemed to the Jonathans to fit the bill: was that not precisely what they had spent £281,000 on? Surely the costs, or at least most of them, were deductible in computing any capital gain on the disposal of the Southern Parcel?

The FTT thought there was a short answer. The sums paid concerned not only the Southern Parcel, but also the Northern Parcel. So, said the FTT, “it cannot be said that the sums paid by JJS and JMS were wholly and exclusively incurred by them in establishing, preserving or defending their title to the Southern Parcel. They were partly paid in relation to the Northern Parcel. There is no provision for apportionment of sums paid which are not wholly and exclusively incurred for that purpose.”

Short, but surely wrong. If I buy two separate assets for a single aggregate price, nothing will have been paid ‘wholly and exclusively’ for either asset: does that mean that my base cost for the assets is nothing at all? Of course not: the Act provides that “any necessary apportionments shall be made of any consideration or of any expenditure and the method of apportionment adopted shall, subject to the express provisions of this Chapter, … be just and reasonable”.

Unfortunately, the FTT’s dismissal of the case on these grounds resulted in its declining to address some more interesting aspects of the case.

By the time the expenditure in question was incurred, the asset in question had been sold. Thus, the expenditure had not been incurred in defending title to the asset but in defending title to the proceeds of sale of the asset.

Should that matter? Does it matter? And if it does, is the answer the same if the claim is intimated before disposal but settled after disposal, so that you start off defending your title to the asset and end up defending your title to the proceeds? And what if (unlike the Jonathans) you lose your case altogether and it is held that you never had good title to the asset in the first place? You plainly cannot be liable to pay tax on a purported gain arising on the disposal of an asset that you never actually owned.

Furthermore, the appellants asserted that the family members were themselves liable to capital gains tax (CGT) on the amounts paid to them, either because the amounts were derived from their purported interest in the Northern and Southern Parcels or because there was no underlying asset and the damages were subject to CGT in full (albeit that by extra-statutory concession D33 damages up to £500,000 may be treated as exempt). The corollary to this, they said, was that “the payments were deductible by the appellants as they related to the same underlying asset”.

Prevaricating on whether the family members were liable to CGT, the FTT adopted HMRC’s coy but correct answer (even if to a layman it may sound like what he would call a cop-out): “the tax treatment of damages in the hands of the other family members is irrelevant to the tax treatment of the appellants’ disposal of the Southern Parcel.”

So: it’s possible that the outcome of the case may have been right (in the sense of technically correct) albeit for the wrong reason.

Contributed by David Whiscombe writing for BrassTax, published by BKL

240. CGT property reporting tip

If you are repeatedly getting the message: “Sorry, we are experiencing technical difficulties, please try again in a few minutes,” when attempting to use HMRC’s capital gains tax (CGT) UK property reporting service, it may be that the taxpayer’s address is not correctly populating the fields in HMRC’s systems.

If you live in the UK, check and, if necessary, update the address held in your personal tax account. From HMRC services sign in and select “Profile and settings” at the top of the page. Then select “Change” from alongside the main address. When entering the address, ensure that the postcode is entered in the postcode field and not within a field above this one. The account homepage may appear to show the correct address, but it’s critical that the postcode field is correctly populated.

Once the address has been checked and corrected, allow 24 hours before using the CGT reporting service.

If you live abroad, check and, if necessary, update the address held in your personal tax account. From HMRC services sign in and select “Profile and settings” at the top of the page. Then select “Change” from alongside the main address. If you also have a correspondence address, do the same for that address. When entering the address ensure that your country of residence is entered in the “Country” field and not within a field above this one. If you start typing in the box, a dropdown of countries to select from should appear. Select the relevant country and then save the address entered. The account homepage may appear to show the correct address but it’s critical that the country field is correctly populated.

Once the address has been checked and corrected, allow 24 hours before using the CGT reporting service.

If you encounter a problem when trying to correct address details, contact the income tax helpline on 0300 200 3300.

This may also be a solution to problems encountered with other HMRC services that ask for a postcode or country of residence.

Contributed by Caroline Miskin

241. The business of establishing car safety testing programmes

The Towards Zero Foundation (TZF) sets up NCAP car safety testing programmes around the world. When seeding a programme in a new jurisdiction, it purchases new cars anonymously, tests them and then publishes the results. Manufacturers whose models have performed poorly in crash tests may then decide to improve them and pay for additional tests. HMRC decided that the initial start-up phase (before manufacturers were paying for tests) represented a non-business activity, and restricted 40% of the VAT on TZF’s UK costs.

The First-tier Tribunal, however, has allowed TZF’s appeal. It considered that the ‘free testing’ was not a separate non-business activity, any more than the construction of a Baltic mythology trail in Sveda or the provision of free vouchers by the Daily Mail (Associated Newspapers). There was therefore no reason for TZF to restrict input tax recovery.

From the weekly Business Tax Briefing published by Deloitte

 242. VAT on boat trips on the Moselle

Tourists visiting Luxembourg can take an hour-long boat trip with Navitours on the Moselle, where the river forms part of the border with Germany. The waters of the Moselle are under the joint sovereignty of both countries. So, given that passenger transport services like boat trips are subject to VAT where they take place, where should Navitours have accounted for VAT?

The Court of Justice of the European Union (CJEU) noted that it is for EU Member States to determine the limits of their territory in accordance with international law. In this case, however, both Germany and Luxembourg considered that the Moselle was “within the territory of the country”, which meant that Navitours’ services were potentially subject to VAT in both jurisdictions. There was no mention of VAT in the treaty that established joint sovereignty over the river, and therefore no formal mechanism for preventing double taxation.

The CJEU concluded that the principle of fiscal neutrality meant that Navitours need not pay VAT twice. In its judgement, the taxation of Navitours’ services by Luxembourg prevented Germany from imposing VAT.

From the weekly Business Tax Briefing published by Deloitte

243. VAT recovery and outsourcing primary healthcare in prisons

NHS England (NHSE) engaged Spectrum Community Health CIC to deliver primary healthcare at various prisons in England. Spectrum agreed to provide a range of services including nurses, GPs, pharmacies, mental and sexual health services, optometry, dentistry and physiotherapy. Spectrum viewed these services as separate, which meant that (although the bulk of its services were exempt healthcare) supplies of drugs should be zero-rated and sexual health products should be reduced-rated, and it should be entitled to some input tax recovery.

The First-tier Tribunal (FTT) has ruled that the contract was between Spectrum and NHSE, and there was no need to look beyond the contract to some alternative economic reality. The tests on whether Spectrum was making multiple supplies therefore had to be applied from the perspective of NHSE as a ‘typical consumer’ rather than from the perspective of a prisoner.

The FTT found that NHSE wanted to engage with Spectrum to deliver an integrated primary healthcare service equivalent to that provided by the NHS in the general community. This was, in the FTT’s judgement, a single supply that it would be artificial to split. Spectrum’s entire service was exempt from VAT, and it was not entitled to any VAT recovery. Its appeal was dismissed.

From the weekly Business Tax Briefing published by Deloitte

244. Credit notes in insolvency

When London School of Accountancy and Management Limited (LSAM) went into administration in October 2012, any students who were in the middle of a course transferred to another college to complete their qualifications. LSAM’s administrators recognised that many students had not received all the education they were expecting, and concluded that this should result in an adjustment to the VAT that had been charged. LSAM issued credit notes claiming a VAT credit of £781,000, asserting that this gave the students a right to claim a refund of fees (as unsecured creditors in the administration).

However, the First-tier Tribunal (FTT) has ruled that the students had no contractual entitlement to any refund, as fees were payable in full at the start of the course. LSAM asserted that its entitlement to adjust output tax arose from a “total failure in consideration”, which the FTT classed as an argument based on the law of equity. However, it concluded that no equitable maxim would permit an output tax adjustment when LSAM had not, as a matter of economic and commercial reality, repaid any fees to students. The credit notes were purely theoretical, and did not represent a decrease in consideration in the real world. The FTT also raised concerns about how the credit notes had been calculated, and about which VAT return they should have been processed in, and dismissed LSAM’s appeal.

From the weekly Business Tax Briefing published by Deloitte

245. Deliberate conduct established by earlier VAT fraud appeal

HMRC assessed CF Booth Limited (CFB) for VAT on the basis that it either knew, or should have known, that its purchases and sales of scrap metal were connected with VAT fraud. In 2017, the First-tier Tribunal (FTT) upheld the assessments, and its decision that CFB actually knew of the fraud led HMRC to impose penalties of £1.45m on CFB for deliberately getting its VAT returns wrong. CFB appealed, arguing that the FTT’s findings in relation to VAT did not automatically mean that it had made a deliberate error.

However, the Upper Tribunal (UT) has endorsed a decision of the FTT (in 2020) to strike out most of CFB’s appeal against the penalties. In its judgement, the findings of fact made by the FTT in 2017 led inexorably to the conclusion that CFB had deliberately made errors in its returns. The UT also rejected arguments based on Article 6 of the European Convention on Human Rights, concluding that CFB had received a right to a fair trial before the tribunal.

The UT allowed CFB’s appeal to proceed on the limited basis that the penalty was disproportionate (as a penalty for a deliberate error) and struck out the rest of its appeal.

From the weekly Business Tax Briefing published by Deloitte

246.When is a tribunal appeal entertained?

In VAT (unlike direct tax), disputed amounts have to be paid to HMRC pending the outcome of any appeal, unless the taxpayer can demonstrate that it would cause them serious financial hardship to do so. The Value Added Tax Act 1994 requires payment to be made (or hardship to be claimed) before an appeal can be ‘entertained’. The courts have historically considered that an appeal is entertained when a hearing date is fixed (ie, after documentary evidence has been finalised and witness statements exchanged).

However, these judgements were made in the context of the old VAT Tribunal rules, and the new First-tier Tribunal rules introduced in 2009 use slightly different language. Under the current rules, an appeal “may not proceed” without payment, and a taxpayer must state whether they have paid the VAT in dispute or if they are claiming hardship “when starting proceedings”.

In SNM Pipelines Ltd, Judge Greg Sinfield has ruled that the traditional approach adopted by the courts still applies. An appeal submitted in 2017 in relation to a missing trader dispute was not automatically invalid because SNM Pipelines had neither paid the £312,000 at stake nor applied for hardship when it submitted an appeal (although it would not be able to take its case much further without addressing payment).

From the weekly Business Tax Briefing published by Deloitte

247. VAT margin scheme for horses: warning

The second-hand goods margin scheme is an optional VAT scheme that can be used in certain circumstances to benefit a VAT-registered business, where VAT was not charged on the initial purchase. There is therefore an opportunity for VAT-registered horse dealers and ‘pinhookers’ to benefit from this scheme by not having to account for VAT on the entire sales price, keeping prices lower, boosting demand and helping the profitability of struggling equine businesses. However, using the scheme post-Brexit requires extra caution.

The facts are that HMRC’s VAT Margin Schemes Manual states at VATMARG09000 that the margin scheme is available to a person who is chargeable to VAT (ie, in business and commercially trading) on the sale of a horse on whose original purchase they did not recover input tax, subject to the various conditions of that scheme as set out in Selling horses and ponies if you use a VAT margin scheme (VAT Notice 718). The advantage for traders is that if the transaction is within the scope of VAT, the VAT due will be one-sixth of the margin made on the animal in question, rather than output VAT being charged on the proceeds.

The second-hand goods VAT margin scheme is no longer applicable, with the exception of Northern Ireland, when considering buying horses from private individuals in the EU or where the purchase might have been within an EU margin scheme. The reasoning is that since Brexit, all second-hand goods from the EU have become imports on which VAT is levied on arrival in the UK, taking the margin scheme off the table for many more transactions. This means dealers who previously used the second-hand margin scheme and who source horses from EU nations could face higher VAT liabilities, as VAT now needs to be charged on the full sales price.

There has not been any specific announcement made to publicise this change and HMRC’s margin scheme guidance for buying and selling horses is silent on EU imports. Therefore, many international horse dealers in Britain may be unaware of the change in their VAT position and may have miscalculated their VAT liability since 1 January 2021. UK dealers of horses from EU nations have lost their right to account for VAT on a sale under the VAT margin scheme and many traders may have failed to realise the impact.

Further problems include that the sale of private horses and horses used in a business can be easily confused within the industry. The different VAT schemes available can make determining the correct treatment extremely complicated. In addition to identifying when VAT should be applied to an equine transaction, those in the industry should have an understanding of both the Registration scheme for racehorse owners (VAT Notice 700/67) and the margin scheme, as well as being aware of the complication involved with part-share sales of horses. These problems are further complicated by the VAT position on liveries, which can be a mix of exempt, zero- and standard-rated VAT on supplies all within the same business.

It is essential for equine businesses to confirm the VAT position on all transactions they are involved with. The treatment of liveries and horse sales (including overseas) can be complex and is often misunderstood. If in doubt, take specialist advice.

Contributed by Julie Butler FCA, founding director of Butler & Co Alresford Limited

248. Quantification of penalties

The case of William Aggrey [2022] UKFTT 200 (TC) raises an important point of wide interest, albeit one that was not mentioned by the appellant, HMRC or the Tribunal judge.

There were omissions from Mr Aggrey’s tax returns. HMRC had levied penalties and Mr Aggrey had appealed against them. The First-tier Tribunal (FTT) agreed with HMRC that penalties were in principle chargeable.

However, the FTT noted that HMRC’s computation of the penalties did not comply with the FTT’s reading of the law. Assuming that HMRC had made a mistake, the FTT reduced them.

But in point of fact, the FTT was itself mistaken: the variation from the law that the FTT identified was not down to a mistake on HMRC’s part; it was in accordance with HMRC’s published policy.

The law states the maximum penalty that may be charged (expressed as a percentage of the tax involved) in various specified circumstances. It then requires HMRC to reduce that percentage “to one that reflects the quality of the disclosure”. But it states a minimum figure (again, depending on the circumstances) below which the penalty may not be reduced.

For example, if HMRC discovers on enquiry that through your lack of reasonable care your self assessment return understates your tax liability, the maximum penalty is in most circumstances 30% and the minimum is 15%.

The “quality of the disclosure” means, as the judge in Aggrey paraphrased it, “the amount of help given to HMRC once the failure has been identified”. Until 2016 it was always possible, by dint of giving full cooperation to HMRC, to secure that the penalty charged did not exceed the statutory minimum.

In 2016 HMRC’s practice (but not the law) was changed: thenceforth, if the disclosure was “a significant period” after the event (normally three years or more), HMRC would treat the minimum penalty as 10 percentage points higher than the statutory minimum.

Thus, alleging that Mr Aggrey had been careless in failing to declare a capital gain dating back more than three years, HMRC treated the maximum penalty as 30% and the minimum as 25% (rather than the 15% specified by the law). Determining that the ‘quality’ of the disclosure warranted reducing the penalty by 85% of the maximum permissible reduction, HMRC had assessed a penalty of 25.75% (being 25% + 15% x 5%).

The FTT, believing HMRC’s use of a 25% minimum to be a mistake, ‘corrected’ the penalty to 17.25% (being 15% + 15% x 15%).

It is relevant to speculate what the FTT’s decision might have been had the judge realised that HMRC had not made a mistake, but had deliberately substituted its own minimum penalty for that provided under the law: would the apparent departure from the law have been accepted had it been recognised to be deliberate?

Contributed by David Whiscombe writing for BrassTax, published by BKL

249. ATED daily penalties

The Upper Tribunal (UT) has allowed an appeal from HMRC and dismissed a taxpayer’s appeal in a decision on the joint cases of HMRC v Jocoguma Properties Limited and Priory London Limited v HMRC. Both cases relate to daily penalties for the late filing of returns under the annual tax on enveloped dwellings (ATED) rules.

Differently constituted First-tier Tribunals came to opposite conclusions in these cases on the same issue of statutory interpretation: whether the date specified in HMRC’s statutory notices, setting the date from when the £10 daily late filing penalties started to accrue, could be a date prior to the date on which the penalty notice was issued by HMRC.

The UT preferred the decision in Priory London, holding that permitting notices to be given retrospectively was permissible under the law, and the ability to do so was intended by Parliament to cater for cases, such as ATED, where HMRC cannot know in advance of filing that a return is due or that it is late. Jocoguma’s daily penalties totalling £900 were thus reinstated.

From the weekly Business Tax Briefing published by Deloitte

250. Supreme Court – permission to appeal refusals

The Supreme Court has published its latest update of cases where it has granted or refused parties its permission to appeal judgements. In all three of the tax-related cases listed, the Supreme Court has refused permission to taxpayers to appeal against their respective Court of Appeal judgements, all from 2021:

• In Bostan Khan v HMRC, a taxpayer agreed to buy all the shares in a company from its owners for cash, and then immediately sold all but one share back to the company for the same amount. HMRC assessed Mr Khan to income tax on a distribution received as part of these steps. The taxpayer maintained that the purchase and connected resale of the shares should be viewed as a single composite transaction, but the Court of Appeal held that the transactions could not be re-characterised in this way.
• In Chalcot Training Ltd, the Court of Appeal held that legal steps involved in the implementation of a marketed employment tax avoidance scheme for the benefit of the company’s shareholder-directors did not contravene provisions within the Companies Act 2006 on the allotment of shares. Chalcot was seeking, against HMRC’s objection, to have the legal effects of the transactions set aside by the courts on the ground of mistake. An appeal before the tax tribunal against PAYE assessments made by HMRC in relation to the scheme had been stayed pending the resolution of the company law proceedings.
• In Saqib Munir v HMRC, an individual who had pleaded guilty in earlier criminal proceedings to being knowingly concerned in a fraudulent attempt to evade duty on tobacco, was unable to demonstrate grounds for an appeal against HMRC’s subsequent assessment of excise duty. The Court of Appeal agreed with HMRC that there was no reasonable prospect of success in light of Mr Munir’s conviction.

From the weekly Business Tax Briefing published by Deloitte

251. Participator loans: a rare GAAR success

HMRC has now made nearly two dozen referrals to the advisory panel (the Panel) established under the General Anti-Abuse Rule (the GAAR).

Until recently, the Panel had on every occasion agreed with HMRC that the entering into and carrying out of the arrangements in question was not “a reasonable course of action in relation to the relevant tax provisions”, with the result that the arrangements were susceptible to counteraction under the GAAR.

The case that has broken HMRC’s winning streak is about loans to participators. And, in contrast to many of the referrals considered by the Panel, the facts are readily comprehensible.

The parent company of a group had made a loan to the main shareholder. The company was bound to pay tax under the ‘loan to participator’ rules unless the loan was repaid within nine months of the end of the accounting year.

Shortly before the crucial date, the shareholder repaid the loan. What irked HMRC was that he did so only by dint of borrowing from another company within the same group as the lender.

The shareholder’s advisers conceded that the purpose of the second loan was to avoid the charge to tax that would otherwise have arisen. But they pointed out that if the second loan had been taken from a bank, that would have been inoffensive enough. If borrowing to repay a loan in order to avoid a tax charge is legitimate, how can the source of the new loan make a difference?

Three factors seem to have tipped the Panel’s view in favour of the taxpayer:

1. The new loan was itself potentially within the ‘loan to participator’ charge unless repaid within the permitted nine months after the year end: so although one charge to tax was eliminated, a later one was (potentially) substituted for it.
2. There were no “contrived or abnormal steps” involved: simply, a second loan had been taken in order to repay the first.
3. The failure of the anti-avoidance legislation to cover ‘group loans’ of this kind was “a big and obvious matter and it does not seem to [the Panel] that the GAAR can be used to cover such a gap”.

There are some caveats. The Panel found no evidence that the use of a second loan to repay the first formed “part of wider arrangements” (despite that the fact that the second loan was itself subsequently repaid using a fresh loan from the parent). If there had been evidence of repeated “teeming and lading” of loans the outcome is likely to have been different. That might perhaps have been the case if it had been clear from the outset that the parent company loan was to be repaid only by a loan from the subsidiary.

The Panel’s opinion will be regarded by HMRC as pointing to a loophole – for the closing of which we suspect legislation is even now being drafted.

Nonetheless, it is undoubtedly refreshing to know that the Panel can on occasion flex its muscles and will not always find in HMRC’s favour.

Contributed by David Whiscombe writing for BrassTax, published by BKL

252. Tax avoidance scheme fails

A taxpayer who was the intermediary step in a transfer of loan notes from a company to a trust was found not to have made a loss. The main transaction was one step, and inserting transfers to him in the middle for no commercial reason was ineffective.

A taxpayer bought loan notes from a company, then transferred them into a settlement, claiming a loss on the fall in value. HMRC argued that there was no real commercial loss. He had acquired relevant discounted securities at an overvalue. The recipient settlement was for the benefit of him and his family. Essentially, he had never acquired the loan notes, but simply been a conduit because he had not taken on any of the risks or rewards of ownership.

The First-tier Tribunal agreed that this was a pre-planned scheme, where the single composite transaction was the transfer of the loan notes to the settlement. No loss had arisen. A penalty for failure to amend the return after a follower notice was issued was also upheld.

Pitt v HMRC [2022] UKFTT 222 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

253. Capital allowances tax avoidance scheme

The Upper Tribunal (UT) has found for two taxpayers that had been denied by the First-tier Tribunal (FTT) a second capital allowances claim on assets on which capital allowances had already been received. The UT found that the FTT had erred in law in interpreting what constituted a cessation of ownership purposively.

The taxpayers were companies that had incurred expenditure on assets that qualified for capital allowances. They then entered into long-funding lease arrangements involving options with the intention of making a second claim for capital allowances on those same assets. The scheme was designed to create a second opportunity to claim capital allowances without any real economic consequences. The argument put forward by HMRC was that the taxpayers did not cease to own the assets for capital allowances purposes and therefore the taxpayers’ tax analysis did not apply.

The FTT applied a purposive approach to interpreting the capital allowances legislation. It viewed the arrangement as a composite whole and concluded that a disposal for capital allowances purposes had not occurred because the taxpayers did not in reality cease to own the assets and then reacquire them.

The UT disagreed with the FTT’s conclusions, which had focused on ‘real’ disposal values and the composite nature of subsequent transactions rather than whether or not the taxpayers lost legal and beneficial ownership of the assets at a particular point. The UT therefore remade the decision to award the capital allowances. It did however point out that it had only considered the Ramsay argument that HMRC had advanced, and that if it had advanced its argument in other ways the conclusion reached might have been different.

The FTT had erred in law in not rejecting the Ramsay argument that HMRC put forward.

Altrad Services Limited (1) Robert Wiseman and Sons LTD (2) v HMRC [2022] UKUT 185 (TCC) 

From the weekly Tax Update published by Evelyn Partners LLP