Practical points: March 2021

057. The high income child benefit charge: restarting child benefit payments

Child benefit claimants may elect to stop receiving child benefit payments where they or their partner are subject to the high income child benefit charge (HICBC). However, if their income has fallen, for example, as a result of the coronavirus pandemic, their liability to the HICBC may change or be eliminated completely.

The election may be revoked. Normally, the revocation only applies to future child benefit payments. However, if the income of each of the claimant and their partner is below £60,000 (ie, the HICBC would not be payable in full if the child benefit payment had been received), the time limit for revoking the election is two years following the end of the tax year (s13A, Social Security Administration Act 1992).

058. Fixing FHL failure

Commercial letting of furnished holiday accommodation (referred to as a furnished holiday letting or FHL) attracts some valuable tax benefits. These include the ability to claim full tax relief for interest, to base pension contributions on FHL profits, and to claim capital allowances.

There are capital gains tax (CGT) advantages too: in particular, you can claim business asset disposal relief (previously entrepreneurs’ relief), rollover relief or gift holdover relief on a disposal of an FHL property where the other conditions of those reliefs are satisfied.

But whether property counts as FHL for a tax year depends on the meeting of tests for its availability, the actual letting and the pattern of occupation. Broadly, the property must:

• be available for commercial letting as holiday accommodation to the public generally for at least 210 days in the year;
• actually be let for at least 105 days in the year; and
• not be in ‘longer-term occupation’ (as defined) for more than 155 days in the year.

All three tests must be met.

The pandemic has hit many FHL businesses hard and in many cases the result is that the 105-day test will not be met for 2020/21. Although some of the coronavirus support measures may have helped FHL businesses, there is no relaxation of that basic 105-day rule (or either of the other rules) to reflect this year’s extraordinary circumstances, so many FHL businesses will fail to qualify for the year.

At first blush, this means that an FHL investor who now decides to call it a day and sell up will, as well as losing the income tax advantages for 2020/21, also forgo any beneficial CGT treatment on disposal.

But that may not be the end of the story. If the property qualified as an FHL in 2019/20 and fails to qualify for 2020/21 only because of the 105-day rule, it is possible to make a ‘period of grace’ election, provided there was a ‘genuine intention’ to meet the rule for 2020/21. The effect of this would be to treat the property as an FHL for 2020/21 (and for 2021/22 if the ‘genuine intention’ continues to be fulfilled), thus preserving the tax benefits.

However, note that the election cannot be made if:

• the property has not been let at any time in the year in question (though in practice it appears that HMRC may not always apply that condition strictly); or
• FHL treatment is denied because the 210-day test or the ‘longer-term occupation’ test is failed.

Contributed by David Whiscombe writing for BrassTax, published by BKL

059. Repaying business rates relief claimed due to COVID-19

Earlier in 2020, many organisations claimed business rates relief, anticipating their business would suffer severe adverse consequences from the impact of the coronavirus pandemic. As time passed, some were not as badly affected as they expected and so decided to repay the relief.

The existing law would have left the full relief in charge to tax even though it had been returned to the relevant administration.

In guidance published on 22 December 2020, HM Treasury confirmed that: “The government intends to legislate to provide clarity that the repayments of business rates relief should be treated as if they were business rates payments and so should be deductible for tax purposes. The government also intends to specify the timing of the deduction as the same period the original payment of business rates would have related to.” 

Contributed by Anita Monteith

060. Taxation of SEISS grants

Finance Act 2020 (FA 2020) contains specific rules concerning the taxation of grants received under the self-employment income support scheme (SEISS).

Paragraph 3(3), Sch 16, FA 2020 states that the whole of the grant is to be treated as a receipt of a revenue nature of the tax year 2020/21, irrespective of its treatment for accounting purposes.

061. Coronavirus (COVID-19) tests

No income tax or Class 1A NIC will be due where:

• employers provide antigen testing kits to employees, outside of the government’s national testing scheme, either directly or by purchasing tests that are carried out by a third party; or
• an employee is reimbursed by their employer for obtaining an antigen test.

Coronavirus tests provided by the government as part of its national testing scheme, which is aimed at key workers such as healthcare workers and other front-line staff, are not treated as a benefit in kind for tax purposes.

The exemption covers only antigen tests (ie, those that can “detect the presence of a viral antigen or viral ribonucleic acid (RNA) specific to severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2)”), leaving antibody tests, which check if someone previously had the virus, chargeable to income tax and NIC if funded by the employer.

062. Car benefits – availability of car

During periods when an employee is furloughed or is working from home, HMRC still considers that a car is available for private use, even if the employee is:

• instructed to not use the car;
• asked to take and keep a photographic image of the mileage both before and after a period of furlough; or
• unable to physically return the car or the car cannot be collected from the employee.

HMRC will only accept that a car is unavailable:

• where the contract has terminated – from the date that the car keys (including tabs or fobs) are returned to the employer or to a third party as instructed by the employer; or
• where the contract has not been terminated – after 30 consecutive days from the date that the car keys (including tabs or fobs) are returned to the employer or to a third party as instructed by the employer.

The reason for this is that the return of keys means that the car cannot be driven in any circumstances.

063. Clarity on social security contributions of mobile workers

HMRC has published guidance to help workers and employers understand where social security contributions need to be paid for those moving between the UK and the EEA or Switzerland.

Under the Free Trade Agreement negotiated between the EU and the UK, such workers only have to pay into one country’s social security scheme at a time. Those moving for more than a period of two years will be paying contributions to the country in which they are working.

For those working for periods of less than two years, whether this is the country in which the work is taking place or where they have moved from will depend on whether the country has adopted detached worker rules. These rules allow for temporary workers to continue to pay social security contributions to the country in which they are normally resident.

The UK has adopted detached worker rules, which means that UK workers sent to an EU country and Switzerland to work for up to 24 months can apply for an HMRC certificate and only pay National Insurance contributions (NIC) and won’t be liable to pay social security contributions where they are working. This also applies to work of up to 12 months in Iceland and 36 months in Norway.

The same applies for workers that come to the UK from Norway, Switzerland, Iceland and EU countries that have agreed detached worker rules. (It is understood that all EU member states have confirmed their intention to adopt the rules). These temporary workers can apply for certificates and pay social security contributions to the country from which they have moved rather than pay UK NIC.

For those workers that do not qualify for a certificate and those that are moving permanently for work, social security contributions will be due in the country in which the work is undertaken. In such cases, the relevant EU social security institution has to be contacted for information on how these payments should be made.

HMRC highlights in particular the case of Liechtenstein, where UK workers not eligible for a certificate from HMRC will have to pay UK NIC for the first 52 weeks and may be liable to pay social security contributions in Liechtenstein.

HMRC’s guidance details the eligibility criteria to apply for certificates under the detached worker rules and outlines how to apply for certificates.

Guidance for workers from the UK working in the EEA or Switzerland

Guidance for workers from the EEA or Switzerland working in the UK

Contributed by Peter Bickley

064. Preference shares: definition of ‘ordinary share capital’

The Upper Tribunal (UT) has dismissed HMRC’s appeal against the decision of the First-tier Tribunal (FTT) in Stephen Warshaw v HMRC in which the FTT held that the taxpayer, Mr Warshaw, was entitled to entrepreneurs’ relief (since renamed business asset disposal relief) on a disposal of shares.

The issue was whether certain preference shares held by the taxpayer were ‘ordinary share capital’ as defined by s989, Income Tax Act 2007. If so, the company concerned would have been his ‘personal company’, and the taxpayer would be entitled to relief on the disposal of his shares. Preference shares with a right to dividends at a fixed rate are excluded from the statutory definition of ‘ordinary share capital’. However, as the cumulative preference shares held by Mr Warshaw carried a compounding right for unpaid dividends, the UT agreed with the FTT that the rate was not fixed and that the shares therefore counted as ‘ordinary share capital’. 

From the weekly Business Tax Briefing published by Deloitte

065. UT supports FTT choice of time apportionment of gain over valuation

The UT has agreed with the FTT that in a case where CGT taper relief (now repealed) only applied for part of the ownership period, the gain had to be time apportioned over the whole period. Valuations at the end of one period could not be used as
an alternative method of calculation.

Two taxpayers made large gains on a share sale in 2003. The shares had been held as non-business assets but became business assets on 6 April 2000. Taper relief was only available for gains on business assets. The time periods were not in dispute, just the method of apportionment. The FTT found for HMRC that only a time apportionment was permitted under the former legislation, though the taxpayers had obtained fair valuations showing that the market value on 5 April 2000 was much lower than under a time apportionment method.

The taxpayers appealed, arguing that time apportioning the gain did not meet the test of a ‘just and reasonable’ apportionment in the legislation, and that although the legislation specified time apportionment, that did not mean it had to be on a ‘straight line’ basis. The UT agreed with HMRC that the paragraph containing the just and reasonable provision did not override the time apportionment rule, and that there was no basis for an apportionment other than straight line. If an asset was used seasonally for business purposes, and not otherwise, then a just and reasonable apportionment would not exclude time periods when it was not in use. Other than in such limited cases a straightforward time apportionment must be used.

Lee & Anor v HMRC [2020] UKUT 0363 (TCC). 

From the weekly Tax Update published by Smith & Williamson LLP

066. UT refers UK group gains rules to the CJEU

The UT has requested a preliminary ruling from the Court of Justice of the European Union (CJEU) in respect of two cross-border group gains transactions. The CJEU’s decision may affect the interpretation of the recently introduced instalment regime for exit charges.

The taxpayer, a UK company, made two disposals to non-resident group companies. Neither disposal qualified for nil gain/nil loss treatment, which would have operated had the transferees been UK tax resident. The taxpayer argued that the tax charges violated the EU principle of freedom of establishment. In a long and complex judgement, the FTT found that the freedom of establishment was infringed in relation to only one of the two transactions. Both the taxpayer and HMRC appealed this decision.

The UT found that it could not resolve the issues with complete confidence. Furthermore, the outcome of the case was likely to be widely applicable to other transactions. It therefore decided that a preliminary ruling should be requested from the CJEU before the transition of the UK out of the EU is completed. In addition, after the FTT’s decision HMRC had introduced an instalment method for paying the tax arising on transactions such as the ones in this case. The UT noted that the CJEU’s decision may inform the interpretation of that regime.

Gallaher Limited v HMRC [2020] UKUT 354 (TCC). 

From the weekly Tax Update published by Smith & Williamson LLP

067. Excepted estates

Form IHT205 is used to report estates that do not pay inheritance tax (IHT) and meet other conditions to fall within the excepted estates rules.

Although personal representatives can complete and submit IHT205 forms online, professional agents still have to send a paper copy of this form to the probate office, together with the original will.

As a temporary measure during the coronavirus pandemic, HMRC will accept IHT205 forms that are not physically signed from professional agents, if:

• the names and personal details of the legal personal representatives are shown on the declaration page;
• the account has been seen by all the legal personal representatives and they all agree to be bound by the declaration; and
• the agent includes the following statement:

“As the agent acting on their behalf, I confirm that all the people whose names appear on the declaration page of this Inheritance Tax Return have both seen the Inheritance Tax Return and agreed to be bound by the declaration on page 8 of the form IHT205.”

068. The farmhouse and care provided by family members

Farming is very ‘intergenerational’ and in the headlines with the Agriculture Act 2020 achieving Royal Assent on 11 November. Agricultural property relief (APR) on the farmhouse is a driver and possibly considered a ‘bonus’ for tax planning.

While the Office of Tax Simplification’s review of IHT published in July 2019 suggests that the farmer should be allowed to retreat to a nursing home without negative impact on the IHT relief, this consultation has not become tax legislation. In addition, many farmers wish to die on the farm — not in a nursing home. In farming, the succession planning is that the overall farm operation is often left to the farming children. However, it is often the non-farming child (possibly the daughter with husband) that comes to live in the house to look after their parents, with the ‘farming’ child living elsewhere. Obviously, this has tax and legal implications for all the family to consider.

It may be possible to establish equitable rights over the farmhouse and a right of occupation, which would give the ‘carer’ a share of the economic value of the property that would be outside the parents’ estate. Consideration of this approach would seem the best potential way forward and the precise facts should be investigated.

If the daughter’s and husband’s names are not on the property’s deeds and they have no formal legal right to occupy the farmhouse, then they will have no legal interest in the property. However, it is likely that they have acquired a beneficial interest in the property by virtue of the money they have spent on the farmhouse; if so, this will reduce the valuation of the farmhouse for IHT purposes.

There is a possibility that the value can be reduced but as IHT relief is allowed at agricultural value (s115(3), Inheritance Act 1984 (IHTA 1984)) this can be less of an issue than with a normal property, as there will be APR on the agricultural value. Again, case by case, would occupation of the farmer and daughter in the role of carer have an impact on occupation and s117, IHTA 1984? The answer is that this would depend on the parents’ involvement in the farm operation together with the daughter’s involvement.

It could be that there is a lasting power of attorney in favour of the daughter to help run the farm in her parents’ absence and she is therefore occupying the farmhouse for APR purposes. Children occupying the parents’ home is a developing area as children (often in their fifties and sixties) are coming to look after one or both of the parents. It is often that the farmhouse can be left to the daughter/carer in the will as the farming child inherits the farm and cottages.

This is a complex area. If an IHT liability potentially arises after taking account of any unused allowances from the surviving spouse and APR, it needs to be considered as part of full succession planning. It is essential that specialist legal and tax advice be taken prior to death. Any time that any children take up occupation of a house to look after parents, full advice should be taken with regard to the valuation impact, ownership and IHT impact.

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

069. Horse-grazing agreements in lockdown

With COVID-19 lockdowns increasing the demand for puppies to walk and horses to hack, there is greater demand for horse grazing throughout the UK. The winter always sees a demand for horse grazing for polo ponies who only compete in the summer and this is boosted by horses who cannot compete because of the lockdown. Riding and horse care is something that can be COVID-19 safety compliant because it involves fresh air and social distancing, and meets lockdown considerations regarding animal welfare. The price of the ‘pony paddock’ has also increased since the pandemic.

The tax point to consider involves the recent case of Gill (Charnley & Anor (Estate of Gill) [2019] UKFTT 0650 (TC) on cattle grazing. The case of Wheatley (Wheatley’s Executors v IR Commrs (1998) SpC 149 argues that APR for IHT cannot be claimed on horse grazing because horses are not ‘agriculture’ for tax purposes.

However, provided the horses are ‘looked after, they receive services, or they are part of a ‘trade’ of equine activity then they qualify for business property relief (BPR). Tax direction can be taken from the Vigne case (HMRC v The Personal Representative of Maureen Vigne (Deceased) [2018] UKUT 0357) with regard to the level of service for horse care.

Where COVID-19 has caused a change to lifestyle and arrangements, the IHT position must be considered as part of estate planning.

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

070. Cross-border professional services and VAT from 2021

The end of the ‘transitional period’ following the UK’s departure from the EU on 31 December 2020 has given rise to quite a number of consequences to say the least. But the only one we are addressing in this note is the treatment of a cross-border supply of ‘professional services’.

By ‘cross-border’ we mean services made by a UK supplier to a non-UK customer. And we use ‘professional services’ to mean the services of a professional, technical or intangible nature that are listed in VAT Notice 741A (section 12). This includes in particular the services of consultants, engineers, lawyers and accountants – but also includes a number of other kinds of service.

Until 31 December, the rules were different according to whether your customer is or is not a business customer and whether your customer ‘belongs’ in another EU member state. Broadly, a business customer ‘belongs’ wherever the business establishment consuming the supply is located; a non-business customer ‘belongs’ in the country in which he or she usually lives. Tax nomads present an interesting rabbit-hole down which we are not venturing on this occasion.

From 1 January, things became simpler. A single rule applies in every case: if your customer ‘belongs’ outside the UK, the supply is treated as having been made outside the UK and you therefore don’t charge VAT. But nothing changes as regards recovery of ‘input’ VAT related to the supply: if the supply would have been chargeable to VAT but for the place of belonging of the customer, you can still recover ‘input’ VAT despite the fact that you aren’t charging ‘output’ VAT.

You no longer need to obtain evidence that the customer is in business (because it no longer matters): you do, however, need to retain reasonable evidence to show where the person to whom or to which you have supplied the services ‘belongs’ outside the UK.

There are a couple of quirks.

The first is that if you are making ‘continuous supplies’, the VAT point is not (as in other cases) the time at which the supply is actually made; it is instead the earlier of the time at which you issue a VAT invoice and the time you receive payment. So if you are paid after 31 December 2020 for a ‘continuous supply’ for which you have not issued a VAT invoice before 1 January 2021, no VAT is due.

Second, if your retail customer ‘belongs’ in the EU, there is a theoretical obligation to register for the local equivalent of VAT in the customer’s country. In practice, such an obligation is difficult or impossible to enforce, especially where the supplies of services are small and infrequent. For certain ‘digital services’ the EU’s solution has been to introduce a ‘Mini One Stop Shop’ (MOSS); we understand that the EU may be contemplating the possibility of extending MOSS to cover professional and other services. Meanwhile, neither UK nor EU VAT will in practice be chargeable.

Contributed by David Whiscombe writing for BrassTax, published by BKL

071. VAT on imported goods to private individuals

It has been widely reported in the media that changes to the UK VAT rules from 1 January have resulted in some overseas suppliers suspending sales of goods direct to UK consumers. Suppliers are now required to register for UK VAT if they supply goods directly to UK consumers in consignments worth up to £135. This measure does not directly relate to the end of the Brexit transition period, and similar rules will be introduced by the EU from 1 July 2021. Instead, it forms one of the measures intended to prevent overseas businesses that take orders online from selling goods to UK consumers without charging UK VAT.

Until 31 December 2020, EU suppliers selling goods to UK consumers would have had to register for UK VAT once their annual UK turnover reached £70,000 under the distance sales rules, so the change, from an EU supplier perspective, is likely to only affect smaller EU businesses. Further complications can, however, arise in relation to online marketplace sales (which can involve deemed supplies by the marketplace) and when goods are supplied to consumers in Northern Ireland.

From the weekly Business Tax Briefing published by Deloitte

072. VAT on sales of second-hand cars to Northern Ireland

The VAT treatment of goods moving to Northern Ireland (NI) under the NI Protocol is not straightforward, and this complexity has produced some unexpected results. Initially, HMRC considered that sales of second-hand vehicles in NI that had been sourced from GB could not qualify for the margin scheme. This meant that a UK dealer with sites in both NI and GB would have to charge more VAT when selling a car from its Belfast site to a NI customer, if that car had been sourced from GB, than it would if they sold the same car from its Merseyside site to a customer in Liverpool. In an update to Notice 718/1 and new guidance on the sale of second-hand motor vehicles in NI, HMRC has found a way around this problem, and has confirmed that the margin scheme should now apply to all sales within the UK. 

From the weekly Business Tax Briefing published by Deloitte

073. VAT on royalty payment

UCMR-ADA is a collective management organisation that granted a licence to the Romanian Soul cultural organisation to perform music at a show. UCMR had to pursue Romanian Soul through the courts for payment of royalties, and at the conclusion of the case there was disagreement over whether VAT should be added to the amount awarded by the court. This is an example of a situation when the amount awarded might be referred to as compensation or damages, but in VAT terms it simply represents consideration for a supply. The CJEU has established that the copyright owner, through UCMR, granted a non-exclusive licence for the music to be performed in return for payment of the royalties, and this supply was subject to VAT. UCMR, which did not own the copyright itself, was acting as an undisclosed agent on behalf of the copyright holders. It should therefore be deemed to have received the licence and supplied it to Romanian Soul, which should pay VAT. 

From the weekly Business Tax Briefing published by Deloitte

074. Discovery found not to be stale

A taxpayer’s claim to offset Mansworth v Jelley losses has been refused. The FTT found that although the claim to the losses was made in 2003, HMRC made a valid discovery in the course of correspondence with the agent in 2013 and issued an assessment before it was stale.

In 2003, the taxpayer wrote to HMRC to claim losses for two previous tax years, following new guidance that they were allowable. HMRC denied later offset of the losses, in line with new guidance, and issued closure notices for the offset years and a discovery assessment. The taxpayer appealed on two issues.

The first was against HMRC’s view that his 2003 letter was an amendment to his tax returns, rather than a standalone claim, on which HMRC would have been out of time to issue a closure notice. The FTT found on review of the letter that the intention was clearly to amend the returns and dismissed this part of the appeal.

The second issue was ‘staleness’. The taxpayer began using the losses to offset gains on his 2009/10 tax return. His agent then wrote to HMRC in 2012 to advise that these losses were potentially not allowable, depending on the outcome of a related court case. HMRC replied to explain that guidance on these losses had previously changed, so they were not allowable. After a long two years of correspondence, the discovery assessment was issued. The FTT also dismissed this ground of appeal, as HMRC had engaged in active consideration of the issues throughout this period. The discovery was only made in 2013, when the officer received a subsequent letter from the agent with more details.

Cumming-Bruce v HMRC [2020] UKFTT 490 (TC). 

From the weekly Tax Update published by Smith & Williamson LLP

075. Partial closure notices

The UT has allowed HMRC’s appeal in HMRC v Epaminondas Embiricos. The case concerns self assessment provisions introduced in 2017 that allow for a partial closure notice (PCN) to be issued by HMRC. A PCN allows for discrete matters to be settled, or to be determined by the Tribunal, while allowing others to remain under enquiry.

HMRC opened enquiries into claims by the taxpayer in his self assessment tax returns for the years ended 5 April 2015 and 5 April 2016 that he was domiciled outside the UK and entitled to the remittance basis of taxation. HMRC concluded as a result of its enquiries that he was domiciled in the UK. The taxpayer sought a closure notice from HMRC for those years so that he would be able to appeal against HMRC’s decision. HMRC considered that it could not issue a closure notice until it had also quantified the amount of tax that would be due if the remittance basis was denied. HMRC therefore issued the taxpayer with an information notice request.

The FTT agreed with the taxpayer that a PCN could and should be issued in these circumstances. The UT has now reversed that decision, holding that it was necessary for the amount of tax to be ascertained. The UT’s decision in this case is in line with Levy, a FTT decision concerning PCNs. 

From the weekly Business Tax Briefing published by Deloitte

076. Transfer of assets abroad

In HMRC v Andreas Rialas [2020] UKUT 367 (TCC) the UT gives helpful guidance on the scope of the transfer of assets abroad (TOAA) legislation.

Mr Rialas wanted to buy out his co-shareholder’s interest in a UK company (Argo) that they owned 50-50, apparently with a view to selling on the whole company to a third party (although that sale, if it ever happened, did not form any part of the proceedings before the Tribunal).

Rather than buy the shares himself, he established an offshore trust of which he was a potential beneficiary. The trustees formed a non-resident company (Farkland) which bought the shares in Argo, borrowing (from someone not connected with Mr Rialas) 100% of the purchase price. Argo subsequently paid dividends to its shareholders including Farkland.

HMRC sought to assess Mr Rialas, under the TOAA legislation, on the dividends paid by Argo to Farkland. To do so, HMRC needed to show that Mr Rialas was the ‘transferor’ for the purposes of the legislation.

The Tribunal summarised the conditions required for the legislation to apply as follows:

• there must be a ‘transfer of assets’;
• by virtue of or in consequence of that transfer of assets, either alone or in conjunction with ‘associated operations’, income must arise to a person resident or domiciled outside the UK;
• also by virtue of or in consequence of the transfer of assets, either alone or together with associated operations, ‘such an individual’ must have ‘power to enjoy’ income of a non-UK resident or domiciled person that would have been subject to income tax if it had been received by that individual.

Unquestionably, there had been a transfer of assets resulting in income arising to a non-resident inasmuch as the shares in Argo had been transferred to Farkland (notwithstanding that the vendor had been paid full market price for the shares) and dividends had been paid. Also, Mr Rialas certainly had ‘power to enjoy’ that income. But was Mr Rialas to be treated as the ‘transferor’ despite the fact that the actual transfer had been made not by him but by the vendor?

HMRC pointed to the fact that Mr Rialas had been influential in procuring that Farkland was able to borrow the funds necessary to buy the shares: it appears that he ‘called in a favour’ and used his personal contacts to persuade an unconnected company to make the loan. HMRC asserted that his ‘close involvement with the structuring and financing of the transaction’ was sufficient to render him a ‘transferor’ for the purposes of the TOAA code.

The Tribunal agreed that earlier case law had shown that ‘a person who is not a transferor may nevertheless be liable as if he were a transferor’. But, as was held in Fisher [2020] UKUT 62 (TCC): “There must be some proper basis for ascribing the acts of the person transferring the assets to the individual concerned and treating him as being responsible for the transfer as if he had carried it out himself. If the individual has no influence over what the actual transferor does with the assets, there is no good reason why he should be treated as the ‘real’ Transferor.”

In the Tribunal’s view, the crucial point was that, however closely Mr Rialas might have been involved with the structuring, the fact was that he did not have any influence over the vendor’s decision to sell the shares. He was, therefore, not a ‘transferor’ in respect of the transfer of the shares in Argo to Farkland.

But HMRC had a second string to its bow.

Mr Rialas had settled a few pounds on the trustees. That was unequivocally a ‘transfer of assets’ made by him. HMRC sought to argue that it was that that resulted in the offshore trust owning the shares in Farkland and Farkland receiving the dividend. That was thus a further basis on which Mr Rialas was caught by the TOAA code.

The Tribunal’s response was: “That argument can be dismissed briefly.” (Tribunals are far too polite to use phrases like ‘You must be joking’, even when that’s what they are clearly thinking). Establishing the trust and acquiring the subscriber shares in Farkland were no more than preconditions to the acquisitions of the shares in Argo. That was a quite different thing to saying that the receipt of dividends was ‘by virtue or in consequence of’ the establishment of the trust.

It is more than possible that the decision (at least on HMRC’s first argument – less likely on the second, we think) will go further, perhaps in conjunction with an appeal against the decision in Fisher. TOAA-watchers will be following progress with interest.

Contributed by David Whiscombe writing for BrassTax, published by BKL

077. HMRC warns against tax avoidance schemes involving revenue service trusts 

Spotlight 57 highlights arrangements whereby businesses attempt to avoid tax by transferring rights to future revenue to an offshore trust.

Under these arrangements, a business will not include revenue in its tax return because it purports to have sold the rights to that income to an offshore trust. HMRC is not notified of the transfer of rights to the trust, which is not subject to UK tax. The trust then transfers the revenue back to the business owner, either directly or through a personal management company. In HMRC’s view, such schemes do not work. It will challenge promoters of these schemes and investigate the tax affairs of those who use them. 

From the weekly Tax Update published by Smith & Williamson LLP

078. Moving goods across borders

Life is now very much more complicated for businesses that need to import or export goods to or from the EU, or transfer goods into NI.

Although there are few tariffs to pay on goods moving across borders there is import VAT and possibly customs duties to pay. To keep track of the goods through the border control computer system, each business that sends or receives goods across the border needs an Economic Operator Registration and Identification (EORI) number.

It is easy to apply for an EORI number: it takes about 10 minutes and businesses do not have to pay for it, or pay someone else to do the EORI registration for them.

A complication for UK businesses is that if they move goods into or out of NI, they must already have an EORI number that starts with GB, and then apply for a second EORI number that starts with XI. That is, two different EORI numbers, not the same number with the prefix changed.

Where the trader is moving goods between Great Britain and NI they should sign up for the Trader Support Service, which is designed to help businesses cope with the Customs and VAT border which now exists in the Irish Sea.

Businesses that import goods would normally have to pay import VAT on arrival before those goods can be released from the port. However, HMRC has agreed that this import VAT can be paid as part of the normal quarterly VAT return under the postponed VAT accounting (PVA) system.

The importer doesn’t have to use PVA, but it helps with cash flow if they do. To receive statements from HMRC on the amount of import VAT that has been postponed, and which needs to be reported on the VAT return, the trader also needs to register for the Customs Declaration Service.

Brexit was supposed to remove red tape.

Get an EORI number

Customs Declaration Service

Apply for Trader Support Service

From the weekly Tax Tips published by the Tax Advice Network

079. DAC 6 replaced by OECD rules for UK intermediaries from 2021

HMRC has confirmed that the UK will no longer be applying DAC 6 in its entirety following conclusion of the Free Trade Agreement with the EU. Only arrangements that would have fallen within Category D of DAC 6 will now need to be reported, in line with the Organisation for Economic Cooperation and Development’s (OECD) mandatory disclosure rules (MDR).

HMRC has confirmed to the Tax Faculty that this change applies retrospectively.

DAC 6 is a system of mandatory reporting of cross-border tax arrangements affecting at least one EU member state where the arrangements fall within one of a number of ‘hallmarks’.

Despite the fact the UK was leaving the EU, it implemented DAC 6 into domestic law, requiring intermediaries with a connection to the UK to disclose arrangements to HMRC in relation to which they acted as ‘promoters’ or ‘service providers’. The first disclosures were due to be made by 30 January 2021.

As provided for in the Free Trade Agreement between the UK and the EU, it has been agreed that the UK will now apply the OECD MDR instead.

The main difference between the OECD MDR and DAC 6 is that only arrangements that would have fallen within Category D of Part II of DAC 6 need to be reported.

As a stop-gap measure, the UK regulations are being amended so that they only apply to arrangements falling under the category D hallmarks. These are arrangements designed to undermine tax reporting under common reporting standard and transparency rules and are split into two types:

• arrangements that have the effect of undermining reporting requirements under agreements for the automatic exchange of information; and
• arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.

HMRC has confirmed to ICAEW’s Tax Faculty that this change applies retrospectively so no disclosures will need to be made for any arrangements that fall into one of the other hallmarks set out in DAC 6. Reporting obligations apply to arrangements where the first step was entered into on or after 25 June 2018.

There may, therefore, be a number of historic arrangements that intermediaries were expecting to report to HMRC where the UK reporting obligation has now fallen away. However, it is possible that other parties based in an EU member state and involved in the transaction may need to report the arrangements to their respective tax authorities.

Although this change significantly reduces the number of situations and arrangements which will need to be reported to HMRC under international reporting standards, the UK’s own disclosure of tax avoidance schemes (DOTAS) rules continue to apply.

During 2021, the government will repeal the legislation implementing DAC 6 in the UK and implement the OECD’s MDR as soon as practicable, to transition to international, rather than EU standards on tax transparency.

Contributed by Richard Jones

080. Withholding taxes on payments to and from EU territories from 1 January 2021 

When the Brexit transition period ended on 31 December, so did the application to the UK of the EU parent-subsidiary and interest and royalties directives. This means that certain payments to and from UK companies are now subject to withholding taxes.

The EU parent-subsidiary directive removes withholding taxes on any payments of dividends or profit distributions between associated companies within different EU member states. Companies are defined as associated where one holds 10% of the capital of the other for a minimum period of two years.

Similarly, the EU interest and royalties directive removes withholding taxes from payments of interest and royalties between associated companies. The definition of ‘associated’ is different in this case. One of the companies must directly hold:

• 25% or more of the capital in the other; or
• 25% or more of the voting rights in the other.

Or a third company also resident in the UK or EU must hold directly:

• 25% or more of the capital in each of them; or
• 25% or more of the voting rights in each of them.

The directives continued to apply to the UK during the Brexit transition period but this came to an end on 31 December. The impact is that some payments between UK and EU resident associated companies will be subject to withholding taxes.

It is possible that the UK will be able to renegotiate some existing double taxation treaties so that they replicate the position under the EU directives. Alternatively, some EU countries may amend their domestic tax rules to achieve the same outcome. In the meantime, many companies will need to take action to manage their cashflow position.

If they wish to take advantage of treaty rates of withholding tax (which in some cases exempt the relevant payment from withholding tax altogether), some UK companies will need to make new or amended withholding tax applications. The relevant forms usually need to be submitted by the UK companies concerned to the taxing authority of the paying company to enable the payer to make payments of dividends, interest, or royalties at the applicable treaty rate. The forms are usually completed and stamped by the EU tax authority concerned to provide evidence that the company is entitled to the treaty benefits concerned.

In the case of dividends paid to the UK, some EU member states (eg, Portugal) only allow the treaty rate to apply where the dividends are subject to tax in the UK. A decision will therefore need to be made in those cases whether to elect to tax the dividend in the UK to secure the treaty rate of withholding tax.

EU resident companies may also wish to take similar action in relation to payments from UK resident associated companies. However, it is worth noting that:

• the UK does not withhold tax on dividends made by UK companies; and
• royalty payments can be made gross or at the treaty rate of withholding as applicable by UK companies where the payer reasonably believes that the receipt is entitled to the benefits under the relevant treaty.

Companies and groups may also wish to consider taking alternative action in response to the removal of the directives. For example, they may wish to restructure and migrate operations where other circumstances allow and the withholding taxes arising are an unacceptable cost of doing business in the territories concerned.

Contributed by Richard Jones

081. OECD releases guidance on transfer pricing during the pandemic 

The report provides guidance on the practical application of the OECD transfer pricing guidelines (TPG) in light of the COVID-19 pandemic.

The recent economic disruption has presented new challenges for businesses and tax authorities implementing the OECD TPG. The TPG informs many domestic transfer pricing regimes around the world. The new report explains how the TPG should be applied in view of the current economic environment. It addresses issues such as comparability analysis, losses, COVID-19-specific costs, government assistance and advance pricing arrangements.

From the weekly Tax Update published by Smith & Williamson LLP

082. OECD guidance on the tax treaty implications of the COVID-19 pandemic

On 21 January 2021, the OECD Secretariat released Updated guidance on tax treaties and the impact of the COVID-19 crisis (the Guidance). The Guidance considers the interpretation of tax treaty articles on the creation of permanent establishments, tax residence of companies and individuals, and taxation of income from employment. The Guidance revisits and updates earlier guidance published by the OECD Secretariat in April 2020.

From the weekly Business Tax Briefing published by Deloitte