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Practical points 2019 - Business tax

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in policy, practice and legislation related to business taxes and reliefs, including: capital allowances; cash basis; corporation tax; entrepreneurs relief; and self-employed taxation. These brief practical points are published each month in the faculty's magazine TAXline.

  Practical points
093 Company buyback of shares found to be a distribution
  In Khan v Revenue & Customs (2019) TC07052, the taxpayer took over a company with a view to winding it up over two years, by way of purchasing shares then selling almost all of the shares back to the company. The FTT rejected his contention that the sale was a disposal of trading stock.

The taxpayer, who acted as management accountant to the company for many years, agreed to take it over with a view to then winding it up after attempts at a sale failed. The original deal was that the company would purchase the vendors’ shares and sell a proportion to the taxpayer. The vendors were concerned however about a potential loss of entrepreneurs’ relief, and so the taxpayer instead purchased the vendors’ shares directly and sold back all but one share to the company at the same price.

The taxpayer took the view that the share buyback was a trading transaction, but after consideration of the badges of trade the FTT found that it did not meet the criteria. HMRC was therefore correct to tax the share buyback as a company distribution to the taxpayer.

From the weekly Tax update published by Smith & Williamson LLP
092 Defining a van
  The recent case of HMRC v Coca-Cola European Partners Great Britain Ltd & others [2019] UKUT 90 (TCC) explains everything you want to know about the distinction between cars and vans. 

This may be of some interest because the distinction between a car and a van is relevant not only to whether the employee is subject to income tax on a benefit-in-kind; it is also important to the employer because of the possible liability to class 1A NIC – and you can just imagine that for a large employer with loads of vans, that could be a serious liability.

The distinction is also relevant to VAT and the entitlement to reclaim input tax on the cost of the vehicle. Unfortunately, the definition of a van for the purposes of VAT is not the same as that for income tax (no, I don’t know either) but the principles explained in this case may still have a wide application.

Coca-Cola European Partners Great Britain Ltd (I think we can assume that it is a substantial organisation) provided its technicians with vehicles for the purposes of doing their work. Coca-Cola clearly thought that these vehicles were vans and not subject to a benefit-in-kind charge on their employees, or indeed to a class 1A NIC charge on the company. However, HMRC disagreed and said that the vehicles were actually cars and therefore subject to tax and NIC.

Section 115, Income Tax (Earnings and Pensions) Act 2003 defines a van for this purpose. The relevant part of the definition is that the vehicle is “a vehicle of a construction primarily suited for the conveyance of goods or burden of any description”.

The company supplied three types of vehicle: a Vivaro, a VW Kombi 1 and a VW Kombi 2.

The FTT said that the key question was not whether a vehicle would be regarded as a van in ordinary parlance, nor by reference to the commonly understood meaning of ‘van’. It said that if parliament had wished to rely on commonly understood meanings it could simply have left the terms undefined. Instead, parliament enacted prescriptive definitions of ‘car’ and ‘van’, and it was therefore necessary to consider whether the primary suitability of the vehicle was for the conveyance of goods or burdens. The FTT concluded that if the vehicle is of a construction marginally more suitable for the conveyance of goods than it is for any other use, its primary suitability is for conveying goods.

The FTT acknowledged that vehicles that are primarily suited for the conveyance of goods will share features with vehicles primarily suited to the conveyance of passengers. However, after an exhaustive analysis of all its characteristics, the FTT decided that on balance, the Vivaro should properly be described as a van within the meaning of s115. The Upper Tribunal (UT) upheld this conclusion.

The finely-balanced nature of the test was demonstrated by a similar analysis of the Kombi vehicles. The slightly different configuration of these vehicles, including the fact that they had seats in the front for the driver and a passenger, caused the FTT to conclude that they were not vans.

The UT said that the FTT had decided as a question of fact that the Kombi vehicles were equally suitable for the conveyance of goods and passengers, and it declined to interfere with the FTT decision.

This may not be entirely satisfactory for a number of reasons, not least that the Kombi range of vehicles definitely look like vans and anybody buying one would almost certainly think that they were buying a van – even though it had a seat for the driver. However, we know from the tribunal that the way in which an ordinary person might view the position is irrelevant. Maybe the vans (sorry, cars) should have a health warning stuck on the side, or something to warn taxpayers of the tax implications.

Contributed by Peter Vaines, Field Court Tax Chambers
076 Quarterly CT instalments due dates
The largest companies will start to notice earlier due dates for paying their corporation tax by quarterly instalments from 1 April 2019.

For accounting periods beginning on or after 1 April 2019, very large companies will have to make payments four months earlier than currently. For example, for a 12-month accounting period to 31 March 2020, payments relating to the liability for the year to 31 March 2020 will be due in months 3, 6, 9 and 12 of the period – so in June, September, and December 2019 and March 2020 for that year’s corporation tax liability.

It is now some time since the rules were changed in November 2017 by the Corporation Tax (Instalment Payments) (Amendment) Regulations 2017, SI 2017/1072, following the announcement in the 2016 Budget, but the practical effect will begin to be noticed from this April.

The rules apply to companies and groups with taxable profits in excess of £20m.

Contributed by Anita Monteith
075 HMRC policy on partnership expenses
  HMRC updated its Business Income Manual wording at the beginning of 2019 to reflect a change in policy over the deductibility of expenses incurred by partners. This was updated a second time in March following complaints from ICAEW and other tax professionals.

The previous view taken by HMRC was to accept that some partnership expenses were deductible if incurred by a partner rather than by the partnership. Provided the expenses were incurred wholly and exclusively for the partnership business, they were deductible for tax purposes.

The first change in the wording at BIM 82080 reversed this position, stating that only expenses incurred by the partnership and brought into the partnership accounts were deductible for tax purposes. HMRC said this followed the decision in the case of Vaines v HMRC [2018] EWCA Civ 45.

The latest update clarifies that expenses incurred by partners may not be reflected in the partnership accounts. It states that such expenses may be deductible for tax purposes, provided that the expense is incurred wholly and exclusively for the purposes of the partnership business.
051 Group relief unavailable after appointment of receiver
  The Court of Appeal (CA) has upheld FTT and Upper Tribunal (UT) rulings that the appointment of a receiver results in a change of control over the company. It is therefore ‘de-grouped’ and does not qualify for group relief in respect of companies not under the control of the receivers. 

In Farnborough Airport Properties Company and another v HMRC [2019] EWCA Civ 118, the two taxpayer companies had claimed group relief in respect of substantial losses incurred by another company, Piccadilly Hotels 2 Ltd (PH2L). All three companies were 75% subsidiaries of a common parent; however, PH2L had gone into receivership before the claims were made. HMRC argued that the conditions for group relief were not met because the receivership constituted an arrangement that deprived the parent company of its control. The taxpayers contended that the shareholders of the parent company retained control and that the receivers lacked the required shareholding or constitutional power to control PH2L. The FTT and UT both agreed with HMRC and denied the claims for group relief. 

The CA also found for HMRC. It held that although there remained a 75% shareholder relationship between the companies, the parent could no longer conduct the affairs of PH2L in accordance with its wishes. This final limb to the test of control was found to be of crucial importance when interpreting the provisions for group relief. 

The CA concluded that PH2L was being run for the primary benefit of the creditors, and the shareholders had no power to prevent this. It also held that, although the receivership itself had been implemented at the wishes of the shareholders, this did not mean the shareholders still retained control. The test of control must be answered on a continuing basis in light of the circumstances in a given accounting period. 

From the weekly Tax update published by Smith & Williamson LLP
050 The indemnity minefield
  To make a deal happen, one party may agree to indemnify the other against unexpected tax consequences – or sometimes even against known and expected ones. Some care needs to be taken on both sides: by the indemnifier that the full extent of the potential liability is known, and by the indemnitee (yes – the word does exist – we checked) that the indemnity covers the right things and is enforceable.

For example, we recall a case involving an acrimonious marriage breakdown and a jointly-owned company. As part of the financial settlement, the company bought back shares held by the wife, who had agreed to the arrangement only conditionally on the husband’s indemnifying her in respect of capital gains tax (CGT) payable on the buyback. Unfortunately for the wife (and even more so for her professional advisers and their insurers) the circumstances were such that the tax charge on the buyback turned out to be not CGT but income tax, for which no indemnity had been given.

In another case, an indemnity was given by one party to a transaction in respect of tax payable by the other. There was a dispute with HMRC as to what tax (if any) was payable, which led to a negotiated settlement. Payment under the indemnity was resisted on the grounds that it had not been established that tax was actually payable: if the matter had been pursued to appeal, it was argued, the tax would not have been due.

Both the indemnifier and the indemnitee need to consider a number of questions, including: Does the indemnity extend to interest or penalties on any tax? To what extent is the indemnifier entitled to take control of any tax dispute? Is the indemnity capped?

The secret, as always, is to think ahead and take best advice.

By David Whiscombe, writing in Brass Tax published by Berg Kaprow Lewis LLP
049 Business profits recalculated by the FTT: case two
  The FTT has rejected calculations by HMRC that increased business profits based on movements in bank accounts and supplier accounts. It accepted several explanations by the taxpayers, which HMRC had argued were unreliable. 

In Mohammed Choudhry and others v HMRC TC06934, the taxpayers were partners in a grocery business. They appealed to the FTT against several amendments and discovery assessments made by HMRC on the partnership and their own tax affairs. HMRC had examined the taxpayers’ bank accounts and the business’s account with a wholesaler and argued that these did not reconcile with the partnership tax return. HMRC did not accept the taxpayers’ explanations for these differences and increased the taxable income by amending the tax returns. 

The FTT recalculated the partnership profits based on evidence from the taxpayers and HMRC. It found that a majority of the unreconciled amount was satisfactorily explained by the taxpayers. These reasons included several receipts of physical cash in lump sums from relatives in respect of an inheritance in Pakistan and personal expenditure related to the sponsorship of a local boxing club. The FTT noted that HMRC’s recalculation of income was supported by an admission that its amended calculations were unrealistic. However, HMRC justified these calculations by saying that no adequate explanation for income figures had been put forward.

The FTT also accepted that the taxpayers relied on an accountant and therefore did not act fraudulently. Multiple appeals against penalties and discovery assessments were allowed, although some tax ultimately remained due. As in the first case, this emphasises the need for records that support tax calculations to prevent excessive assessments. 

From the weekly Tax update published by Smith & Williamson LLP
048 Business profits recalculated by the FTT: case one
  In two interesting recent cases, the First-tier Tribunal (FTT) has recalculated a business’s profits in the taxpayer’s favour and rejected figures and arguments put forward by HMRC.

In Stirling Jewellers (Dudley) Ltd v HMRC TC06940, the FTT found that the value of missing funds was significantly lower than the value calculated by HMRC. It ruled that the unreconciled amount was due to inadequate records, not appropriation by the owner. 

The taxpayer was a gold-buying business that had expanded rapidly when the price of gold rose sharply during the global financial crisis. This was a very cash-heavy business and the company records were entirely inadequate and did not provide a reasonable basis for calculating the tax due. The turnover was estimated to be up to £250m in the most productive year. HMRC issued assessments for corporation tax for eight years, including approximately £9m of charges for loans to participators. 

The FTT examined the different profit calculations put forward and heard expert witnesses on the context of the wholesale scrap gold business at that time. It made various rulings on the most reliable basis for calculating the turnover in different periods. A daily average based on a six-month period was held to be the most accurate basis for the majority of the tax at stake. 

This recalculation resolved most of an unreconciled amount of approximately £38m, which HMRC had treated as loans to the company’s owner. The FTT held that it was unreasonable to conclude that the amount had been appropriated by him. It was unrealistic to steal or borrow such a large sum without evidence, and the alleged theft was inconsistent with his other actions. 

This case highlights the importance of record-keeping and responding promptly to HMRC to avoid sizeable assessments being raised. Challenging assessments through the UK courts will ultimately be costly to the taxpayer. 

From the weekly Tax update published by Smith & Williamson LLP
031 Entrepreneurs’ relief: alphabet shares and personal company definition resolved

Owners of alphabet shares will have been concerned by wording in Finance Bill 2018-19 which had threatened their entitlement to entrepreneurs’ relief (ER). Further to considerable input from ICAEW and other professional bodies, a government amendment has protected this relief.

Generally, to qualify for ER on the sale of a company, the requirements are that: 

  • at least 5% of the business and voting rights were owned by the vendor;
  • the vendor was an employee or officer of the company; and 
  • these conditions had to be met for at least a year before sale.

The changes announced in the Autumn Budget and included in the Finance Bill increase the minimum holding period to two years for sales on or after 6 April 2019. Also, from 29 October 2018, shareholders must be entitled to at least 5% of the distributable profits and 5% of the net assets available for distribution to equity holders in a winding-up, in addition to the existing requirements on share capital and voting rights. 

Prior to the change, a company qualified as a personal company for ER purposes if at least 5% of the ordinary share capital was held by the individual and at least 5% of the voting rights were exercisable by the individual by virtue of that holding, s169S Taxation of Chargeable Gains Act 1992.

This change has caused a considerable level of anxiety as it excludes owners of alphabet shares where dividends have not been paid equally to the shareholders. The papers released at the time of the Autumn Budget indicated that about 1,000 companies would be affected by the change, but we estimated it would be considerably more than that. It seemed therefore that the way the clauses had been drafted had unintentionally cast the net considerably wider than the policy had intended.

The amendment to the Bill is in relation to the personal company definition. The original ownership and voting conditions remain, as do the proposed Budget amendments, but with an alternative to the new test:

“either or both of the following conditions are met—

(i) by virtue of that holding, the individual is beneficially entitled to at least 5% of the profits available for distribution to equity holders and, on a winding up, would be beneficially entitled to at least 5% of assets so available; or
(ii) in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.”

This second part to the new test means that where a company with alphabet shares is disposed of, then provided the shareholder receives at least 5% of the proceeds they can qualify for ER, even if they have not received equal dividends.

HMRC will be publishing revised guidance in due course, but in the meantime this amendment will help remove anxiety from those in the process of disposing of their company.

029 Profit Diversion Compliance Facility  

HMRC has launched a disclosure facility for multinational companies that feel they may come within the diverted profits tax (DPT) regime but have not yet regularised the position with HMRC. Guidance on the Profit Diversion Compliance Facility (PDCF).

DPT is charged on qualifying profits arising after 1 April 2015. The PDCF enables taxpayers to come forward voluntarily and prepare a report disclosing any outstanding DPT liabilities before HMRC raises a compliance check. In exchange, HMRC is offering lower penalties if registration takes place before 31 December 2019, assuming a review into the DPT position has not already begun, and an opportunity to conclude on DPT matters in a more time-efficient manner. Companies will have six months to file the report after registering.

The structure of the PDCF seems to be appropriate for a multinational company which has concluded it has an actual DPT liability that is not capable of being eliminated by a transfer pricing adjustment, subject to the following:

  1. The statutory threshold for DPT notification is wider than the threshold for an actual DPT liability. A multinational company which has concluded that it has not complied with a statutory DPT notification, but considers it has an arguable case that there is no actual DPT liability, may see the PDCF as unsuitable. 
  2. A multinational company which has concluded that it may have a DPT liability but would expect the DPT liability to be reduced to nil by a transfer pricing adjustment, may take steps in relation to transfer pricing rather than enter into the PDCF.

We are not sure there are enough benefits in the PDCF to create sufficient incentive for a multinational company to consider using it. 

We expect HMRC to issue so-called ‘nudge’ letters to businesses it considers should either use the facility or which need to review their affairs and potentially make a voluntary disclosure.

If any readers are considering using the PDCF, or use it in the future, please get in touch with me at the Tax Faculty with relevant details, so that we can understand how the new facility is working in practice. I would also be interested in information about DPT more generally, as well as about this new disclosure facility in particular.

Contributed by Ian Young

028 Carried-forward corporation tax losses: new guidance 
  HMRC has published new guidance in relation to the changes made to carried forward corporation tax losses in Finance (No 2) Act 2017. This follows concerns raised by ICAEW in ICAEW rep 110/18.

The guidance, CT loss restriction: administrative requirements for the deductions allowance, explains the administrative requirements that many companies will have to comply with, even if their profits fall below the £5m de minimis – something that was not made clear at the time the new rules were first consulted on. In particular, s269ZZ, Corporation Tax Act 2010 requires a company to specify the amount of its deduction allowance. This can be included within the accompanying corporation tax computation. Failure to state the allowance on the corporation tax return will result in the company only being able to carry forward losses against 50% of its future profits.

The Company Losses Toolkit has also been updated to include the new requirements.

Following feedback from ICAEW and other professional bodies, HMRC has also published a group allocation statement that may be submitted as an attachment to the CT600. In its response to ICAEW rep 110/18, HMRC said: 

“The legislation does not specify the precise format in which this statement should be made. Therefore, providing the statement made by the nominated company includes all the information required by s269ZV, CTA 2010, it will be accepted. The guidance referred to above also covers the submission of the group allowance allocation statement, and suggests that this may be done by the nominated company submitting a statement with its return in a pdf format. It makes it clear that the requirement is relevant to all groups regardless of the level of overall profits.”
027 Interim dividends and what is lawful
  The distinction between interim and final dividends, and the different technical requirements which apply to each, can be important in tax terms because if you do not satisfy the rules for the payment or declaration of a dividend, the dividend might be unlawful (and void) and will not achieve its intended tax purpose.

Interim dividends are those which are paid by the directors on their own authority – usually under the Articles of Association. No shareholder approval is required. However, an interim dividend has to be actually paid – it cannot just be declared by the directors – although the payment must of course be supported by an authorising directors’ resolution.

Final dividends are declared by the shareholders in general meeting. Such dividends must be recommended by the directors; the shareholders may then decide (if they wish) to follow that recommendation and declare the dividend. They cannot declare a dividend of more than that recommended by the directors – but they can declare a lower dividend. A final dividend is treated as paid for company law and tax purposes once it has been declared by the shareholders: s1168, Corporation Tax Act 2010.

A crucial point in all this is that all dividends must be lawful. For example, there must be sufficient distributable profits at the time of payment, and the correct procedures must be undertaken. You cannot pay a divided and recategorise it later as something else if you find that there were insufficient distributable profits after all.

This point arose in the recent case of Global Corporate Limited v Dirk Stefan Hale [2018] EWCA Civ 2618 where the company paid dividends and later sought to treat them as earnings when it was discovered that there were insufficient profits. Sorry, you cannot do that. If the dividend was unlawful at the time it was paid (or declared), it cannot be ‘corrected’ by calling it something else. An unlawful dividend must be repaid. Unfortunately, by the time this is all discovered, it is likely to be too late to make alternative arrangements.

Contributed by Peter Vaines, Field Court Tax Chambers
025  What constitutes a silo for capital allowances purposes? 
  In the recent case of Stephen May and another v HMRC TC06925, the FTT found in favour of the taxpayers, who had built a facility for the storage, drying and conditioning of grain. It also found that it was for the purpose of temporary storage because the maximum length of time for storage was known when the facility was constructed. 

The taxpayers operated a farming and agricultural business, for which they purchased a large facility designed to store, condition and dry grain in preparation for sale. HMRC contended that the facility was a building for the purposes of capital allowances, and denied the claim for deductions on the roof, floor, walls and doors. Under the Capital Allowances Act 2001, a building will not be eligible for capital allowances unless it falls under a specific exemption. “Silos provided for temporary storage” is one such exemption. The taxpayer appealed on the grounds that the facility was in fact a silo for temporary storage and qualified as plant and machinery. 

The FTT carried out an on-site visit to examine the structure and heard expert witnesses from the agricultural industry. It found that the facility was a silo under the ordinary meaning of the word, on the basis that the purpose and design features made it suitable for this purpose. It was also held that the storage of grain for up to 10 months qualified as temporary storage because at the time of construction the maximum duration for storage was known. 

Furthermore, the FTT found that the silo qualified as plant and machinery because the structure itself was designed to perform business functions. It did not merely house machines; the structure was integral to the overall process. 

We note in passing the following extract summarising the evidence of the ex-HMRC employee who initially denied the claim: “… internally within HMRC he expressed the view that there was merit to the appellant’s claim, but he produced a report stating that the expenditure did not qualify because he was told that it was HMRC policy to ‘hold the line’ that such structures did not qualify.” 

From the weekly Tax update published by Smith & Williamson LLP 
009 Tribunal allows exchange losses on change in functional currency
  Following a company reorganisation, three UK tax resident companies changed their functional currency from sterling to US dollars, resulting in foreign exchange losses of £445,868,096, £138,188,096 and £90,652,234. HMRC challenged the nature and accounting of these losses. 

The taxpayer companies claimed that the losses arose as a result of the fall in the value of sterling against the US dollar. HMRC did not accept that the losses arose for corporation tax purposes and issued closure notices that disallowed the losses. The companies appealed to the FTT against the closure notices and the appeals were allowed on the basis that the accounts were drawn up in accordance with generally accepted accounting practice (GAAP), the claimed exchange differences gave rise to ‘exchange losses’ within the meaning of the legislation and those exchange differences did ‘fairly represent’ losses within the meaning of the legislation. The FTT found in favour of the taxpayer and HMRC appealed to the Upper Tribunal (UT). 

The UT dismissed the appeal on the basis that the evidence the FTT used to support GAAP compliance was correct, that the relevant regulations required there only to be a ‘gain or loss arising at different times’ without the need for an economic loss and finally, as there was no tax avoidance motive, no material asymmetry and no absurd result, the exchange losses did fairly represent losses as required by the legislation. (Smith & Nephew Overseas Ltd & others v HMRC [2018] UKUT 0393 (TCC)).

From the weekly Tax update published by Smith & Williamson LLP
008  Tax relief for EMI options
  HMRC has confirmed that enterprise management incentive (EMI) share options granted between 6 April 2018 and 15 May 2018, before state aid approval was renewed, will continue to benefit from tax advantages. The October 2018 Employment related securities bulletin confirms the position as understood by tax lawyers and addresses a remaining uncertainty relating to the temporary lapse in EMI state aid approval.

The bulletin also confirms that HMRC will disapply the usual three-year EMI option statutory individual limit where it would prevent companies from reissuing EMI options to replace any EMI options granted between 6 April and 15 May and subsequently cancelled. The three-year rule prevents companies from granting employees options over shares with an unrestricted market value of more than £250,000 in any three-year period.

Note, however, that the expected extension of the qualifying share ownership period for entrepreneurs’ relief from 6 April 2019, from one year to two years, might be something that companies want to factor into any decision about whether to cancel and re-grant EMI options because of state aid-related concerns, particularly if a transaction is in contemplation and/or is a shorter term ambition for the business.

EMI options were introduced by the Finance Act 2000. They are intended to help smaller companies with growth potential to recruit and retain the best employees and offer generous tax advantages to employees of those companies which qualify.

Unlike the other three UK tax-advantaged employee share scheme (TASS) types, EMI options involve the provision of state aid by the UK to companies granting them. This is because the benefits of EMI options are restricted to companies with certain business activities. The European Commission granted state aid approval to EMI options on 9 July 2009, but that approval expired at 23:00 UK time on 6 April 2018. A renewed state aid approval application by the UK was not granted until 15 May 2018. 

The renewed state aid approval decision came with additional disclosure requirements in connection with EMI options, to the effect that where more than €500,000 was provided in ‘aid’ the relevant company must be named and certain other details disclosed. 

Though HMRC’s latest communication clarifies the tax-advantaged status of EMI options issued while state aid approval had lapsed, it is not yet clear how many companies granting EMI options after 6 April 2018 might be required to make new state aid transparency disclosures about those options. The deadline for any such disclosure related to tax relief will fall one year after receipt of a qualifying value of (aggregated) state aid by the relevant business. In the case of EMI options, therefore, the deadline for a particular company could not fall earlier than 7 April 2019. Few companies are expected to exceed the state aid value threshold and be required to make disclosures related to EMI options, and any that do may not do so for some time. But it is difficult to be certain of this in the absence of detailed guidance from HMRC or HM Treasury as to how to compute the value of EMI option-related state aid, treated as being given at the time of grant of EMI options.

From PM-Tax, published by Pinsent Masons LLP
007  2018 UK GAAP accounts: are you ready?
  With the annual financial reporting season nearly upon us, here are some key considerations for annual accounts prepared in accordance with Financial Reporting Standard (FRS) 102.

Triennial review 2017 amendments

In December 2017 the Financial Reporting Council issued amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland following the Triennial review 2017. These amendments are generally effective for accounting periods beginning on or after 1 January 2019 but, for some, early adoption may be beneficial. The transitional requirements are that early application is permitted provided that all of the amendments (with some limited, but important, exceptions) are applied at the same time.

Three areas where early adoption may be particularly attractive are considered further below. This is not an exhaustive list, as the significance of the amendments will depend on the facts and circumstances of the business. Care should be exercised to ensure that the transitional requirements are correctly applied.

Directors’ loans

For small entities, loans from a director or from a director’s group of close family members may be measured at transaction price, provided that group contains at least one shareholder in the entity. This simplification is wider than the interim relief issued in May 2017, after representations from ICAEW, which only permitted the simpler treatment if the director was a shareholder. As an exception to the general transitional requirements, this amendment is available for early adoption separately from the other Triennial review 2017 amendments. The exemption, when adopted, is applied retrospectively.

Intangible assets acquired in business combinations

New criteria have been introduced for recognising intangible assets separately from goodwill. This means fewer intangibles are required to be recognised separately. However, recognition is permitted if it is felt to be providing useful information and provided it is done consistently for that class of intangible and for all business combinations.

Any change in accounting policy arising from this aspect of the Triennial review 2017 amendments will be applied prospectively, ie, any intangibles separately identified in earlier accounting periods are not subsumed within goodwill. This amendment is available for early adoption only if all the amendments are adopted at the same time.

Investment properties

The ‘undue cost or effort’ exemption has been removed, meaning investment properties must now be measured at fair value. However, for investment properties rented to other group entities, an accounting policy choice is introduced between measurement at cost or fair value.

Again, this amendment is available for early adoption only if all the amendments are adopted at the same time.


ICAEW has produced a wide range of resources to help you understand the implications of the Triennial review 2017 amendments and point you in the direction of further guidance. The Financial Reporting Faculty’s FAQs FRS 102 Triennial review 2017 amendments – What are the changes? provides a general overview of the changes. There are also two podcasts, the first outlining key changes and the second dealing more specifically with the changes in respect of investment properties.

Contributed by Marianne Mau, Financial Reporting Faculty
006 CIS: who is a contractor?
  Since the modern construction industry scheme (CIS) was introduced in 2007, HMRC has tried to pull property investors into the CIS reporting system where they refurbish buildings. If monthly CIS returns are not submitted on time, automatic penalties apply.

This makes no sense where a property investor engages a building firm to carry out the building work required. The building firm should be the lead contractor for CIS, not the customer who owns the building. If the building work amounts to more than £1m, then the building owner may be deemed to be a CIS contractor under s59(1), Finance Act 2004.

The point was examined in Thornton Heath LLP v HMRC TC06831. Thornton Heath regarded itself as a property investor rather than a property developer. It engaged a building company (ARJ Construction Ltd) to convert the upper floors of one of its commercial buildings into residential flats. ARJ Construction was registered as a CIS contractor to receive income gross.

The tribunal referred to the lead case, Mundial Invest SA Ltd v Moore (Inspector of Taxes) [2005] EWCH 1735 (Ch), and decided that Thornton Heath was not a CIS contractor and none of the late filing penalties it had received were due.

From the weekly newsletter of the Tax Advice Network