207. Electronic signatures and emails

HMRC continues to operate some of the measures introduced to ease administration during the COVID-19 pandemic.

Electronic signatures can be used on the following forms:

• P87 claims for tax relief on employment expenses;
• marriage allowance claims made in writing (no form available);
• 64-8 forms to authorise an agent; and
• CGT holdover relief claims.

HMRC accepts signatures signed on the screen of a digital device or displayed in a keyboard-typed font. There is no indication that HMRC intends to withdraw the electronic signature facility for these forms.

All other claims and paper tax returns still require an original ‘wet’ signature.

HMRC currently accepts IHT 100 forms that are not physically signed from unrepresented trustees and from professional agents. IHT 400 forms that are not physically signed are still accepted from both professional agents and unrepresented taxpayers. The forms must include specific statements as explained on the IHT100 and IHT400 pages. The IHT measures are noted as being related to COVID-19.

HMRC continues to accept the following communications by email:

• service of legal proceedings and pre-action letters;
• statutory clearances;
• non-statutory clearances; and
• corporate interest restriction elections.

A fuller list of the limited options for contacting HMRC by email is available.

Contributed by Caroline Miskin

208. Buy-to-study: housing your student offspring

It’s not long now before the next cohort of young people will be leaving home to attend university. A tuition-fee loan will usually be available to cover 100% of tuition fees. But the size of any maintenance loan will depend on household income: very often it won’t cover a student’s full living costs.

Some students will be expecting to live in a traditional hall of residence or university college; some will be renting privately. Another option for a few might be purchasing property. Where resources are available (typically, parental or grandparental resources), this may be attractive.

If the prospective student buying the property is a ‘first-time buyer’ paying less than £300,000, no stamp duty land tax (SDLT) will be payable. Otherwise, duty will usually be 0% on the first £125,000; 2% on the next £125,000; 5% on the excess. And students don’t pay council tax.

Rent received from sharing the property with fellow students will be tax-free up to £7,500. Anything in excess of that will, in principle, be taxable (although may be covered by the student’s personal tax allowance of £12,570 if there is no other income).

Thus, a parent who is in the fortunate position of being able to lend the student the full purchase price may achieve the result that the student is not only free of the burden of paying rent, but also has a source of funds to supplement, or even replace, whatever loans are available. Even if some or all of the price has to be borrowed, the numbers may work out favourably, especially if the course is longer than the usual three years.

This isn’t without risk, of course – financial and other.

In a rising market, one might expect on selling the property at the end of the spell in higher education a gain sufficient to cover transaction costs and to come out ahead. But the present property market is uncertain.

And SDLT first-time buyer relief is, by definition, available to a buyer only once: if it’s used by the student on the student property, it won’t be available on a subsequent longer-term purchase.

More generally, while some students may dislike life in halls, many others love it: for them, being a live-in  landlord may compromise the ‘student experience’. And some may simply be too irresponsible for it to be contemplated.

None of this is investment advice, of course, and the education landscape is different in Scotland.

Contributed by David Whiscombe writing for BrassTax, published by BKL

209. Tax-avoidance partnership was not trading

The Upper Tribunal (UT) has upheld a First-tier Tribunal (FTT) judgement that a partnership established for tax- avoidance purposes was not trading.

The partnership was established, ostensibly, to build a hotel and apartment complex in Montenegro. The arrangements were found by the FTT to be entirely uncommercial and artificial.

The UT dismissed the partnership’s appeal, agreeing with the FTT that the partnership could only have entered into the agreements that it did for the purpose of generating tax losses for its partners. In addition, the contract agreements were accelerated to ensure the losses would be available for the 2008/09 tax year and not delayed until the following year. The partners also undertook contrived ‘make-work’, artificial activities intended to avoid limits on tax relief for partners who did not spend at least 10 hours per week working in the business. Even if the partnership had been trading, other FTT findings upheld by the UT would also have denied the loss relief.

Foundation Partners (GP) v HMRC [2022] UKUT 167 (TCC) 

From the weekly Tax Update published by Evelyn Partners LLP

210. Land remediation relief

The taxpayer, a gas network company, asked for a purposive interpretation of the legislation to permit it to claim relief where it supplied gas through leaky pipes. On a strict interpretation it failed and it also unsuccessfully argued against an over-literal interpretation of the legislation.

The case was under the old, less stringent, 2001 legislation. The taxpayer operated a gas network through iron pipes, which were not installed by anyone connected to the taxpayer. The pipes were leaky, so the taxpayer was required to replace them with plastic ones. The taxpayer sought land remediation relief.

The issue on which the case turned was whether or not the polluted state of the land was as a result of any action or omission on the part of the company. Was the company responsible, not least because it was the leaky pipes that were at the heart of the problem, although the taxpayer was responsible for the gas?

The taxpayer appealed to the principle of ‘the polluter pays’, arguing that it was the laying of the pipes that was the pollution. If that were not the case, companies such as the taxpayer’s could never enjoy relief.

The appeal failed. The wording of the legislation was clear and covered a company, as here, at least partially responsible for the contamination.

Northern Gas Networks Ltd v Commissioners for HMRC [2022] EWCA Civ 910 

From the weekly Tax Update published by Evelyn Partners LLP

211. Gift aid carry back

Section 426, Income Tax Act 2007 (ITA 2007) permits a donor to treat a gift aid donation made in the current tax year as if it had been made in the previous tax year (year P), if there is sufficient income and gains in year P to cover the grossed-up value of all donations treated as made in year P.

The election must be made:

• on or before the tax return is delivered for year P; and
• no later than the normal self assessment filing deadline for year P (s426(6), ITA 2007).

In practice, the election is made in Box 8 of the charitable-giving section of the self assessment return.

In Cameron v HMRC [2010] UKFTT 104 (TC), it was decided that the reference to the date of delivery of the tax return is to the date of delivery of the original return and not an amended return. Therefore, a claim for carry back relief cannot be made in an amendment to a return. This was also confirmed in Re Webster [2020] EWHC 2275 (Ch).

212. Share valuation for income tax relief reduced

The First-tier Tribunal (FTT) has found that AIM-listed shares given to charity had a much lower market value than claimed. The income tax relief available was reduced.

Three taxpayers gave shares in an AIM-listed company, R, to charity and claimed income tax relief. HMRC disagreed with the market value the taxpayers claimed the shares had on the date of donation, 53.25p a share, and issued assessments on the basis that this was 14.66p a share. HMRC then contended at the hearing that it was actually 8.05p.

Closure notices were not issued until 12 years after the enquiries were opened. In a separate judgement, the FTT found that there was no prejudice to a fair hearing from the delay, so it had no jurisdiction to provide any remedy or amend the grounds of appeal. It did, however, criticise HMRC’s conduct.

The FTT considered the merits of the competing valuations submitted, given the state of the company and the valuations in other transactions, and arrived at a final figure of 12.2p a share.

Close & Ors v HMRC [2022] UKFTT 193 (TC) 

Nuttall v HMRC [2022] UKFTT 192 (TC)

From the weekly Tax Update published by Evelyn Partners LLP

213. First case on LLP salaried member rules

BlueCrest Capital Management is a very large international hedge fund. In 2020, it succeeded before the First-tier Tribunal (FTT) in a case concerning the tax treatment of its profit-sharing arrangements in the years up to 2013/14.

From 6 April 2014, the law on the taxation of LLPs changed significantly with the introduction of the legislation on salaried members of LLPs. And BlueCrest has been back before the FTT in [2022] UKFTT 204 (TC), arguing with HMRC about the application of the new rules. Again, it has been (mostly) victorious – so far.

A member of an LLP is caught by the new rules (and so treated for tax purposes as an employee of the LLP) if, and only if, three specified conditions (styled Conditions A, B and C) are all met. Before the FTT, it was agreed that Condition C was met; but Conditions A and B were both in dispute. The FTT succinctly summarised them as follows:

“Condition A is met if at the relevant time it is reasonable to expect that at least 80% of the amount paid by an LLP to an individual member is disguised salary. That includes amounts which are variable but vary without reference to the overall amount of the profits or losses of the LLP, or are not, in practice, affected by the overall amount of those profits and losses. Condition B is met if the mutual rights and duties of the members of the LLP do not give a member significant influence over the affairs of the LLP.”

Remuneration of members included:

• a ‘priority distribution’ of a fixed amount (agreed to be ‘disguised salary’);
• a discretionary allocation of profit (accounting in every case for the bulk of the profit share); and
• a share, allocated by reference to ‘income points’, of what was left after distributing the above (agreed not to be ‘disguised salary’).

The battleground was therefore the treatment of the discretionary allocation. If it wasn’t ‘disguised salary’, Condition A wasn’t met and BlueCrest was home and dry.

Some members were directly responsible for managing investment portfolios (‘portfolio managers’); others contributed to the success of the LLP in other ways (‘non-portfolio managers’).

For portfolio managers, the discretionary allocation of profit was based on the performance of the portfolio they managed, by reference to a formula agreed with the manager on joining the LLP (although there was debate as to whether the agreement conferred a legal entitlement). Of course, if the overall profit of the LLP was insufficient to cover all the proposed discretionary allocations, they would need to be reduced. But that did not, in the FTT’s view, mean “that the allocations are, essentially, variable and are computed by reference to, that overall profit”. Rather, the allocations varied not by reference to the LLP profit, but by reference to each manager’s individual performance: they were ‘disguised salary’.

For non-portfolio managers, discretionary allocation of profit was “less formulaic and more nebulous than that for the portfolio managers”, but there was “no evidence that either during the iterative process of establishing the preliminary discretionary allocation, nor during the process of the Board approving it and thus making it final, that the profits of the appellant were taken into account, other than to the extent that the Board was fettered by the accounting profits which had been reported for the relevant financial year.” So, again, this was ‘disguised salary’.

However, that wasn’t an end to it. What about Condition B? Here it gets even more interesting.

In line with its published guidance, HMRC took the view that ‘significant influence’ means significant managerial influence – and furthermore, significant managerial influence over the affairs of the LLP as a whole rather than some aspects. HMRC considered that a member who generated a lot of income for the LLP would have ‘significance influence’ only if the financial contribution was reflected in what HMRC called “managerial clout”.

Not so, said the FTT. What the legislation as a whole is getting at is “to distinguish between members whose position is like that of a partner in a traditional partnership with those who are playing the role of employees”. And in the context of Condition B, that requires examination of “the ongoing contribution, from an operational perspective, which a partner would make to that traditional partnership’s business”. That, said the FTT, “extends well beyond solely managerial influence, and into the other aspects of a partner’s activities in a traditional partnership.”

On that basis, the FTT accepted that portfolio managers with a ‘capital allocation’ (roughly, funds under management) of $100m or more (which, in practice, meant most members who were portfolio managers) would have the necessary ‘significant influence’. Non-portfolio managers, on the other hand, may have “assisted the portfolio managers to exercise their significant influence both collectively and individually” but did not do so directly. Such ‘influence’ at second hand was not enough.

Thus, while both portfolio managers and non-portfolio managers met Condition A as being remunerated as to at least 80% with ‘disguised remuneration’, most of the portfolio managers did not meet Condition B and were therefore not caught by the ‘salaried members’ rules.

The amounts involved were substantial (national insurance contributions in dispute exceeded £55m) and the principles are novel. This case will surely go further.

Contributed by David Whiscombe writing for BrassTax, published by BKL

214. Early RTI returns

We all know the real-time information (RTI) mantra: “file on or before making the payment to the employee”. If the full payment submission (FPS) is submitted late, HMRC may issue a penalty, subject to the three-day grace period and after first sending an education letter to the employer.

But what happens if an employer tries to get on top of their admin and file the RTI returns well ahead of the payment dates? The case of Quayviews Ltd v HMRC shows that the HMRC computer may issue penalties when it can’t find the return in the period it relates to.

Quayviews Ltd had previously received penalties for late filing, so, to avoid getting caught out again, it decided to submit its RTI returns in advance.

On 4 September 2020, it submitted the FPS for each of the six tax months from November 2020 to April 2021. It used HMRC’s Basic PAYE Tools to file these RTI returns, which confirmed the status of each submission as a ‘success’. The company officers thus understood that the returns were correctly received by HMRC and they had nothing to worry about.

The FPS returns were received by HMRC, but the PAYE computer could not match them to the correct tax periods because they didn’t arrive within the appropriate tax months, so it issued late filing penalties for the first three submissions in that batch for months seven, eight and nine. It is unclear why penalties were not issued for the remaining months.

Although the FPS includes a date field for the tax period the return applies to, the HMRC software apparently can’t read that date and process the return correctly. It looks for RTI returns based on expected payroll frequency. For example, if the payroll is quarterly, it will look for four RTI returns in the year, submitted within the appropriate quarter.

HMRC’s education letters and all of its guidance state that RTI returns must be sent on or before the payment date – nowhere in that gov.uk guidance does it say that the returns must be submitted within the tax month. What is more, the HMRC software permits the employer to submit RTI returns early.

For these reasons, the First-tier Tribunal accepted that the employer had a reasonable excuse and removed the penalties.

There is guidance on submitting RTI returns within the tax month, but it’s hidden away in HMRC’s PAYE Manual at para PAYE5065 under the heading: Non-filing failure.

Quayviews Ltd v HMRC [2022] UKFTT 190 (TC)  

PAYE Manual on filing failures PAYE5065

From the weekly Tax Tips published by the Tax Advice Network

215. PAYE assessments on agency

The first case on the agency workers legislation has been decided in favour of HMRC. Payments by the company to the personal service companies of workers it placed were subject to PAYE and national insurance contributions (NIC).

The company was an employment agency in the care sector and part of a franchise. It had a roster of agency workers that it placed into temporary positions as nurses and healthcare workers at a handful of end clients. HMRC issued assessments on the basis that the workers should have been taxed as employees.

The First-tier Tribunal examined the documentation, which was largely a template provided by the franchise, and the operation of the business. It found that the assessments were valid, and that the agency workers legislation applied to the arrangements. The work was not independent, but under the direction of others. PAYE and NIC applied to the payments to workers with and without service companies.

K5K Limited v HMRC [2022] UKFTT  217 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

216. Business property relief on serviced apartments

The First-tier Tribunal (FTT) has found that serviced apartments were more akin to self-catering accommodation than a hotel, on analysis of the business activities. As this was an investment business, no business property relief (BPR) was available.

The trustees of a settlement claimed BPR on the 10-year inheritance tax trust charge, on the grounds that the business, a share of which was in the trust, qualified. HMRC argued that the business was holding investments, not trading, so was ineligible.

The business’s principal activity when established had been investing cash reserves. With some of these, it later purchased residential properties around a town and let them as serviced apartments. The FTT considered the characteristics of these. Each apartment had a welcome pack and guests could ask for room cleaning, although this was only generally done during a stay if it exceeded a week. Guests could request extra services, such as food packs. Most guests stayed for under four nights; a reception was run at set times in one of the buildings with an out-of-hours number at most other times.

The FTT found that the actual operation of the business, where guests rarely spoke to staff, with little evidence on how many requests guests made, was more akin to a self-catering apartment with a complaints line. The principal business was investment, so no BPR was available.

Firth & Firth as trustees of the L Batley 1984 Settlement [2022] UKFTT 219 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

217. Valuation of trade-related properties

The name of Denning is not unfamiliar to the Court of Appeal. This time, however, the Denning concerned was Dr Zyrieda Denning, who appeared as the appellant in [2022] EWCA Civ 909.

Dr Denning had for some years operated care homes as a sole trader. In 2011, she sold the businesses as going concerns – one to each of two companies she controlled. She granted leases over the properties at what was agreed to be market rents and purported to assign the goodwill in the two businesses for a total of £1.8m.

HMRC challenged the figures for goodwill and asserted that part of what had been described as consideration for goodwill was, in reality, part of the open market value of the leases. The appeal therefore concerned the open market value of the leasehold interests granted by Dr Denning to the companies. This appears to have affected both the stamp duty land tax (SDLT) payable by the companies and the capital gains tax (CGT) payable by Dr Denning.

The Royal Institution of Chartered Surveyors publishes guidance (styled ‘VPGA4’) for the valuation of ‘trade-related property’ – that is, properties that are normally bought and sold on the basis of their trading potential. The guidance mentions “hotels, pubs and bars, restaurants, nightclubs, fuel stations, care homes, casinos, cinemas and theatres, and various other forms of leisure property”. So this case is potentially of wide importance.

The guidance indicates that, broadly, such property is to be valued by reference to its ‘trading potential’ – that is, by applying a suitable multiple to the profit that a reasonably efficient operator would expect to derive from running the business.

The parties agreed that VPGA4 was the right approach to take and the parties’ respective experts agreed that the value of the two leasehold interests under VPGA4 totalled just under £1.3m.

You might have thought that was an end to it: if the valuation experts agreed, what was there to argue about? Plenty.

The Upper Tribunal (UT) had been persuaded that if the leases provided, as they did, for a market rent to be paid, then it must follow that the capital value of the leasehold interest was zero, and thus that the £1.3m must represent the value of goodwill.

The Court of Appeal disagreed. It was clear that VPGA4 was all about valuing property. The fact that trade-related properties “are valued by reference to trading potential does not mean that two separate assets are being valued”. The UT had erred in law by ascribing value to ‘transferable goodwill’, separate from the leases. The aggregate open market value of the leases for both CGT and SDLT purposes was therefore just under £1.3m.

Finally, some further thoughts on the case:

First, if the business had been transferred from a partnership of which Dr Denning was a partner to a company under her control, the special SDLT rules applying to partnerships would have had the result that neither the value nor the consideration given for the leases would have been relevant: there would simply have been no SDLT payable.

Second, if instead of retaining the freeholds and granting leases, Dr Denning had transferred all the assets of the businesses in exchange for shares in the transferee companies, no CGT would have been payable.

Third, since it appears that the companies paid £1.8m for property which had a market value of just under £1.3m, it is likely (in the apparent absence of any adjuster clause in the contract) that there will be some tax consequences for Dr Denning as regards the excess.

Contributed by David Whiscombe writing for BrassTax, published by BKL

218. Attribution of input tax for partial exemption

The First-tier Tribunal (FTT) considered the VAT recovery position for two well-known sofa retailers and ruled that the online advertising costs had a direct and immediate link to their sales and not to the insurance intermediary services offered in addition to the sofas or to their overall business. As a result, the retailers could fully recover VAT incurred on the advertising costs.

Typically, retailers agree to pay Google each time a customer looking to buy a sofa clicks on a result and is redirected to their website. Additionally, when customers buy a sofa, insurance can also be purchased to provide cover against both accidental stains and scratches. Both retailers earn exempt insurance commission for arranging these policies. Here, in HMRC’s view, the input tax incurred related either to both the taxable and exempt supplies, with recovery split accordingly, or to neither, in which case it fell into the non-attributable ‘pot’ to be split as part of the partial exemption calculation.

The FTT’s key focus was whether or not there was a ‘direct and immediate link’ between the expenses and a particular supply. The tribunal noted that determining a supply would not have been made ‘but for’ a particular cost did not necessarily create a direct and immediate link. The FTT concluded that the taxpayers incurred the Google costs in order to promote the sales of sofas, which in turn may also lead on to sales of associated insurance. The fact that there was an economic link, or a close link, between the sofas and the insurance did not mean that a direct and immediate link existed. The FTT concluded that the Google costs did not have a direct and immediate link either to the insurance, or to the taxpayers’ overall business, meaning that the taxpayers were entitled to recover input tax on the Google costs in full.

Sofology Limited and DFS Furniture Company Limited v HMRC [2022] UKFTT 153 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

219. Sports league organiser’s supplies represented an exempt composite supply

If the character of the supply is predominantly the hire of land, and the ancillary services are viewed as additional, the hire or lease of the land may not be removed from the exemption of VAT.

The taxpayer organised competitive five-a-side football and netball leagues. It made block bookings of pitches from third parties, then hired them out to teams in the league, to enable them to play their league fixtures. It also managed all aspects of league administration.

The taxpayer considered the supply to be a single exempt supply as a grant or right over land, whereas HMRC took the view that the supply was subject to VAT as the company was supplying competitive league sports management services.

The First-tier Tribunal (FTT) originally found in the taxpayer’s favour.

The tribunals needed to establish whether or not the supply fell within the VAT exemption as ‘the grant of any interest in or right over land or of any licence to occupy land’. HMRC argued that the FTT had failed to consider the ‘passivity principle’ of the letting of land or the objective character or economic reality of the taxpayer’s supplies. HMRC considered it to be not the grant of a licence to occupy land nor the hiring out of pitches, but rather the supply of league administration services.

The Upper Tribunal dismissed HMRC’s appeal and found that the FTT had applied the correct tests in law. Based on the facts available, it was entitled to reach the conclusion that the supplies were exempt.

HMRC v Netbusters (UK) Limited [2022] UKUT 175 (TCC) 

From the weekly Tax Update published by Evelyn Partners LLP

220. Valid VAT invoice required for input tax recovery

In 2010, a domestic VAT reverse charge was introduced for carbon emissions trading in response to a surge in suspected fraudulent activity. In some cases, however, the damage had already been done. The fraudsters vanished, leaving a question about whether their customers should be entitled to input tax recovery. In Tower Bridge GP Limited, the Court of Appeal has ruled that defects in some invoices (which did not show a VAT registration number because the supplier had never registered) could not be overlooked.

The court reviewed a long line of Court of Justice of the European Union (CJEU) judgements on the importance of invoices. The more recent of them have considered whether certain invoice requirements set out in Article 226 of the Principal VAT Directive are formal or substantive. However, with one exception, the CJEU has only permitted input tax recovery, even for formal errors, if a fully compliant invoice was subsequently produced. The one exception (Kemwater ProChemie) was a post-Brexit judgement that the Court of Appeal declined to apply. The Court concluded that, as Tower Bridge had never received valid VAT invoices, it had no right to recover input tax. The Court further ruled that HMRC was entitled not to exercise its discretion to accept alternative evidence. Even though the invoices were issued before Tower Bridge should have known about the supplier’s fraud, Tower Bridge was not entitled to recover input tax and its appeal was dismissed.

From the weekly Business Tax Briefing published by Deloitte

221. Upper Tribunal remits VAT treatment of roof solution to First-tier Tribunal

How can you stop old conservatories getting too hot in summer and too cold in winter? The solution developed by Conservatory Roofing UK Limited (CRUK) involved sandwiching an existing conservatory roof between a waterproof membrane and slates on top, and a timber frame (filled with insulating material) covered by plasterboard below.

The First-tier Tribunal (FTT) concluded (in 2020) that this was a standard-rated replacement roof, rather than a supply of energy-saving materials at the reduced rate of 5%. In doing so, however, it simply adopted all of HMRC’s submissions and failed to explain why it had disregarded some of CRUK’s evidence. This was an error of law and the Upper Tribunal (UT) has therefore remitted the case back to the FTT for another hearing.

The UT also commented on how the FTT had determined the predominant element of a composite supply. It decided that the FTT had been entitled to take into account that most of the materials used by CRUK were not energy-saving materials. Tribunals should not just apply a quantitative test, but counting the number of standard-rated elements could form part of an overall assessment of what the typical customer thought they were buying. It remains to be seen what importance the FTT will attach to the proportion of standard-rated elements in CRUK’s solution at the rehearing.

From the weekly Business Tax Briefing published by Deloitte

222. VAT invoice’s critical role in triangulation

In 2014, Luxury Trust Automobil GmbH (LTA) in Austria bought luxury cars from a UK supplier, which delivered them direct to LTA’s customer M sro, a company in the Czech Republic. In such situations, triangulation would normally allow LTA to avoid registering for VAT in the Czech Republic. The supplier would treat the sales as an intra-Community dispatch, and any obligation on LTA to account for Austrian VAT (because it had provided its Austrian VAT registration number) would be replaced by an obligation on the customer to account for acquisition VAT (in the Czech Republic). In the opinion of Court of Justice of the European Union (CJEU) Advocate General (AG) Juliane Kokott, the invoice issued by LTA plays a critical role in this treatment.

LTA’s invoices were marked as “exempt intra-Community triangular transactions” but did not expressly refer to the need for M sro to apply a reverse charge. In AG Kokott’s opinion, this wording did not satisfy the triangulation rules. The failure could not be disregarded as a mere formality, as it meant that M sro had not been put on notice that LTA had opted to apply triangulation (which is optional) and that it therefore needed to account for acquisition VAT.

AG Kokott acknowledged that LTA could issue compliant invoices at a later date, but they would not be effective unless communicated to the customer. Unfortunately for LTA, M sro had disappeared without accounting for any VAT. A valid triangulation invoice could not be issued, meaning that LTA was liable for VAT in Austria.

From the weekly Business Tax Briefing published by Deloitte

223. More than just a façade

Unless an existing house is completely demolished to ground level, its redevelopment will not normally qualify for zero-rating, as a new building is not being constructed. An exception exists if planning permission requires a façade to be retained. In Northchurch Homes Ltd, the First-tier Tribunal (FTT) has ruled that ‘façade’ in this context refers only to the front wall of a property, and does not include the roof.

Northchurch secured planning permission to redevelop a Tudorbethan property in a conservation area in Bromley, but had to retain the part of the roof facing the street, as well as the front wall. In the FTT’s judgement, the roof was a distinct structure from the wall and should not be treated as part of the façade just because it could be seen by approaching visitors.

Consequently, Northchurch’s suppliers were not entitled to zero-rate their construction services. The Tribunal went on, however, to find that the supplies qualified for the reduced VAT rate, as the property had been empty for two years. The Tribunal concluded that it should rule on the applicability of the reduced rate even though HMRC had not considered it in its decision, as HMRC’s decision had been that the standard rate applied (and it did not). Northchurch’s builder should have charged VAT at 5%.

From the weekly Business Tax Briefing published by Deloitte

224. Property sale exempt, as purchaser not VAT registered

UAB Arvi built a gym, which it opted to tax and sell to UAB Fondas. In Lithuania, the option to tax only applies to sales of property to VAT-registered businesses, and the seller has to obtain the buyer’s VAT registration number before the sale. In this case, Fondas had applied to register for VAT, but was only issued with its VAT registration number a month after the sale had completed. Accordingly, the sale was VAT exempt, and Arvi had to repay input tax of €65,000.

In the Court of Justice of the European Union’s (CJEU’s) judgement, Lithuania’s approach merely laid down detailed rules around the option to tax, and did not adversely affect a right to input tax deduction.

As in VB, the CJEU decided that it would not be appropriate to apply case law on the formal requirements for valid VAT invoices in the context of input tax recovery (which does not always insist on a registration number). The CJEU also ruled that Lithuania’s rules did not contravene the principles of fiscal neutrality, effectiveness or proportionality.

Finally, the court observed that it was not appropriate to take into account the fact that Fondas would be using the building for taxable purposes (and would therefore have been able to recover any VAT charged). Lithuania was entitled to treat Arvi’s supply as exempt, because Fondas had been unable to provide it with a VAT registration number in advance of completion.

From the weekly Business Tax Briefing published by Deloitte

225. VAT on sales of Romanian timber

Between 2011 and 2017, VB sold timber from forests that she owned in Romania. The tax authorities assessed her for VAT of €41,000 on the basis that she had exceeded the VAT registration threshold. VB accepted that she had made the supplies, but considered that they should have been subject to a domestic reverse charge (DRC). Therefore, she argued, VAT should have been accounted for by her customers and not by her.

Unfortunately for VB, the Romanian DRC on timber applies when supplier and customer are registered for VAT, and does not simply depend on whether they are taxable persons.

The Court of Justice of the European Union (CJEU) has ruled that restricting the DRC to registered traders was an appropriate limitation of the scope of the reverse charge. The CJEU did not consider that case law concerning input tax recovery (which in some cases is agnostic about the existence of VAT registration numbers) was relevant in the context of a DRC.

Finally, the requirement for a supplier’s registration number made it clear to customers when to apply a reverse charge (ie, excluding purchases from businesses trading below the registration threshold), which was a proportionate measure that did not breach the principle of fiscal neutrality. The CJEU therefore concluded that Romania was entitled to insist that VB account for VAT, and could not invoke the DRC to transfer that obligation to her customers.

From the weekly Business Tax Briefing published by Deloitte

226. Information notices varied on appeal

The First-tier Tribunal (FTT) has significantly narrowed the scope of two information notices, finding that HMRC did not reasonably require full details of the taxpayer’s personal and household expenditure, nor information not in his possession.

In the course of an enquiry, HMRC issued the taxpayer with information notices, as it believed his lifestyle did not match reported income. These required, among other things, full details of his household and personal expenditure, holiday dates and costs, analyses of director’s loan accounts, and his personal accounts, including bank statements. He appealed on the grounds that the information was not reasonably required to check his tax position, and argued that it was so broad neither party would be able to tell if it had been complied with and it was a clear “fishing expedition”.

At the hearing, it emerged that HMRC had not considered non-taxable monies available to the taxpayer, which he could live on, and the FTT also stated its concerns over inaccuracies in HMRC’s evidence. The information notices were varied to restrict them to relevant information, which the taxpayer would be able to access. Information about his personal and household expenditure was not required.

Jenner v HMRC [2022] UKFTT 203 (TC)

From the weekly Tax Update published by Evelyn Partners LLP

227. Director personally liable for unpaid NIC

The First-tier Tribunal (FTT) has upheld a personal liability notice issued to the sole director after a company was dissolved owing PAYE and national insurance contributions (NIC). His lack of experience was not a reasonable excuse, as he could have sought advice.

Over two years, the taxpayer became director of a number of companies that were rapidly wound up, generally with unpaid debts to HMRC. In this case, HMRC sought to recover unpaid NIC owed by one of these companies from him. To succeed, it needed to prove that the underpayment was due to the taxpayer’s negligence, and that he was an officer of the company at the relevant time, as well as proving that the NIC were underpaid.

The taxpayer argued that he was not negligent, but had a lack of experience and commercial acumen, demonstrated by his recent bankruptcy, and that commercial life, and the failure of the company, was unpredictable.

The FTT found that his conduct had not been in line with something a reasonable and prudent man would do, so was negligent. He had been aware that NIC were not being paid each month and could have sought training or advice, if needed. Other debtors had been being paid during the period of default. As the only other company officer had resigned before the defaults, it was the taxpayer’s responsibility, and the personal liability notice was upheld.

Howick v HMRC [2022] UKFTT 208 (TC)

From the weekly Tax Update published by Evelyn Partners LLP

228. Former director liable for PAYE debt

The First-tier Tribunal (FTT) has upheld a debt transfer notice (DTN) issued to a former director of a managed service company (MSC). Although he was not a particularly involved director, and had not been seeking a tax benefit, as a director, he was responsible.

The taxpayer was formerly the director of his own MSC that had since been voluntarily struck off. HMRC had issued the company with determinations and notices, which the company appealed but did not pay. These related to PAYE and national insurance contributions. Following the dissolution, HMRC issued a DTN asking for payment from the taxpayer.

The fact that the MSC had underpaid tax was not disputed. The taxpayer did, however, appeal the DTN on the grounds that he was not a ‘real’ director. He asserted that he had been appointed without his knowledge and had not been allowed to manage the company.

On analysis of the legislation covering DTNs, the FTT found that the fact he had resigned as a director before the dissolution was irrelevant. It also found that he had not been prevented from acting as a director, but had not tried to exercise control until issues arose, at which point he was able to act. The DTN was upheld.

Gradidge v HMRC [2022] UKFTT 189 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

229. Statutory residence test

It’s all go with the statutory residence test (SRT). This month we have a First-tier Tribunal (FTT) decision relating to the operation of the arriver and leaver rules.

The case of Ernest Batten v HMRC [2022] UKFTT 199 (TC) concerned the application of the new test. (The SRT is hardly a new test having come into force in 2013, but unfortunately the old rules are not going away.) I would recommend that you sit down, preferably somewhere padded.

Mr Batten’s tax residence for 2014/15 needed to be determined under the SRT and depended on the number of days he spent in the UK and the number of his UK ties. He had two UK ties and spent 116 days in the UK.

The number of days he was allowed in the UK with two ties depended on whether he was an arriver or a leaver. These are shorthand terms for a person who was resident in any of the previous three years (a leaver) or who was not resident in any of the previous three years (an arriver).

If he was a leaver with two ties, he was resident if he spent more than 90 days in the UK in the year; if he was an arriver, he was allowed 120 days.

HMRC said he was a leaver – and as he was in the UK for more than 90 days, he was resident for 2014/15. Mr Batten said he was an arriver and therefore not resident because he was in the UK for less than 120 days.

The question was therefore whether he was resident for any of the previous three years. It was agreed that he was not resident for the years 2011/12 and 2013/14 – so what mattered was whether he was resident for the year 2012/13.

Everybody agreed that under the SRT he would not have been resident for 2012/13. Sounds good.

Not so fast. The year 2012/13 was before the introduction of the SRT so the new rules were not relevant; his residence for that year had to be determined by reference to the old rules. So we have to go back to all the old stuff that caused so much difficulty like IR20 (of blessed memory), and the cases of Grace, Glyn, Gaines-Cooper, Combe, Levene, Reed v Clark and so on, needed to be examined to determine Mr Batten’s residence for 2012/13.

Anybody familiar with IR20 will remember that it was overtaken by the interminable litigation – each case, of course, being specific to its own facts so that nobody, however knowledgeable, could come to a confident conclusion about a person’s tax residence. To that extent, the SRT brought some welcome clarity to the situation. But unfortunately, not for Mr Batten.

The FTT analysed Mr Batten’s circumstances for the year 2012/13 and concluded that he was resident for that year (don’t ask). That made him a leaver and entitled to only 90 days in the UK for 2014/15. He was therefore resident under the SRT rules for 2014/15.

The Court recognised the unsatisfactory nature of this decision particularly because the application of the SRT to 2012/13 would have produced a different result. The judge said: “We recognise that the result is untidy. Mr Batten was non-resident in 2010/11 and 2011/12, UK resident in 2012/13, non-resident in 2013/14 and resident in 2014/15.”

Untidy it certainly is. There are other words that could be used. Can you imagine what a client is going to say when this is explained to them? It just brings the subject (and by necessary implication, HMRC) into disrepute. That is really undesirable. The judgement may be entirely correct on the law, but actually that makes it worse. You mean they really intended it to be like this?

Nobody wants unnecessary tinkering, but it would not be a bad idea if HMRC took notice of the two recent decisions relating to the SRT and made some early and sensible revisions to correct the obvious and justified criticisms.

Contributed by Peter Vaines, Field Court Tax Chambers

230. Changes for EU shell holding companies

From 1 January 2024, EU holding entities that lack substance (shell companies) will no longer benefit from EU directives or double tax treaty benefits.

Companies classified as shell companies under these proposals will have to report information on their activities and economic substance within their tax return. This information will also be shared with other EU member states. If the company fails to demonstrate sufficient substance, the Member State of residence of the company will either deny the shell company a tax residence certificate or the certificate will specify that the company is a shell. Shell companies will not be able to benefit from the tax treaty network or be able to apply the Parent-Subsidiary Directive and the Royalties Directive.

A company will be subject to these additional reporting requirements to determine whether it is a shell company if:

• more than 75% of an entity’s overall revenue in the previous two tax years does not derive from the entity’s trading activity, or if more than 75% of its assets are real estate property or other private property of particularly high value;
• the company receives at least 60% of its relevant income through transactions linked to another jurisdiction or passes this relevant income on to other companies situated abroad, or more than 60% of the book value of real estate or high-value assets were located outside the jurisdiction in the preceding two tax years; and
• corporate management and administration services are outsourced.

Exemptions apply to:

• companies listed on a regulated stock exchange;
• regulated financial undertakings;
• holding companies with no/limited cross-border elements (eg, managing local operational businesses, if beneficial owners are tax resident in same state; or shareholder/ultimate parent entity is resident in same state); and
• companies with at least five full-time employees engaged exclusively in activity generating income.

Companies wishing to contest that they are a shell company can do so by presenting additional evidence.