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Published: 03 Feb 2022 Update History

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In each issue of TAXline the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work. Here is a complete digest of these tips.

Savings and investment

028. Deadline for submitting Form 17

The default position for property held jointly by individuals who are married or civil partners who are living together is that they are treated for income tax purposes as beneficially entitled to the income in equal shares (s836, Income Tax Act 2007 (ITA 2007)).

This is subject to a number of exceptions such as:

  • income to which neither of the individuals is beneficially entitled;
  • income that is partnership income;
  • income from the commercial letting of furnished holiday accommodation;
  • income from shares in a close company; and
  • income that for tax purposes is treated as income of a third party.

Form 17 can be used for any other property held jointly in unequal shares where the income entitlement arises in proportion to those shares and the owners want to be taxed on that basis. Agents may only become aware of the possibility of taxing the income based on unequal shares when preparing the taxpayers’ self assessment return, but this may be too late, as the completed Form 17 must be sent with evidence of the declaration of beneficial interest within 60 days of the date on which the declaration was made (see s837, Income Tax Act 2007). This is a strict deadline (see HMRC’s Trusts, Settlements and Estates Manual at TSEM9862).

Other points to note include:

  • it is not possible to make a declaration in respect of property held as beneficial joint tenants (the property must be held as tenants in common);
  • the declaration continues to have effect until death, permanent separation, divorce or the beneficial interest in either the property or the income changes; and
  • the other tax and non-tax implications of transferring beneficial interests should be considered.

029. Dividend is a taxable distribution on the person to whom it belongs

The Upper Tribunal (UT) has found that a dividend, paid on shares that had been settled into trust, was in fact a distribution to the taxpayer.

The taxpayer had entered into an avoidance scheme in 2012/13, designed to allow extraction of profits from a trading company free of income tax. It was notified to HMRC under the disclosure of tax avoidance schemes rules, and HMRC sought to tax the extracted profits as a dividend.

The scheme was complex, but in summary it involved the creation of a new class of share in the company. Those shares were transferred to a non-resident individual (N), who transferred them to a non-resident trust. N retained an interest in the trust, but the original shareholder could benefit and received most of the proceeds when a dividend was subsequently declared on the shares.

The First-tier Tribunal found that, although a dividend paid on the shares held in the trust was not a distribution to the taxpayer, the settlements provisions applied such that he was liable to tax on it.

The UT agreed that he was a settlor of the trust and that he was taxable on the income of the trust. It found, however, that this did not matter because, viewed realistically, there was no doubt that the taxpayer was the ‘person to whom the distribution truly belongs’. It should not matter precisely how the flow of funds was implemented, so as to put the dividend in the hands of the taxpayer. He therefore received a distribution and is chargeable to tax on that basis.

Dunsby v HMRC [2021] UKUT 289 (TCC)

From the weekly Tax Update published by Smith & Williamson LLP

Company tax

030. Taxpayer wins research and development case on subsidised costs

The First-tier Tribunal (FTT) has allowed a claim for research and development (R&D) relief under the small and medium-sized enterprise (SME) scheme. It accepted that although the taxpayer’s R&D activities were factored into the price paid by clients as part of its commercial contracts to provide construction services, there was no clear link between the price paid and the R&D expenditure claimed.

The taxpayer was a building contractor that carried out R&D projects as part of the construction services provided to its clients for an agreed price. HMRC argued that the taxpayer was not entitled to R&D relief under the SME scheme, as it received payments from its clients that were sufficient to cover the R&D expenditure claimed.

Expenditure that is otherwise met directly or indirectly by a person other than the company is subsidised and not eligible for relief under the SME scheme. The taxpayer appealed HMRC’s decision on the basis that its clients paid for the finished construction work and so the R&D itself was not being subsidised.

The FTT ruled that the legislation regarding subsidised costs was not intended to apply to cases where there is no clear link between the price paid by the customer and the R&D expenditure. It considered that an SME should not be denied R&D relief solely because it seeks to recover some or all of the relevant costs under its commercial contracts with clients. This would be wholly out of kilter with the overall SME scheme. If HMRC’s approach were to be adopted, enhanced R&D relief would only be available where an SME has no prospect of exploiting the R&D for commercial gain. The taxpayer’s appeal was upheld.

Quinn (London) Limited v HMRC [2021] UKFTT 0437 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

031. HMRC flags common errors in applying intangible fixed asset rules

In Agent Update 91, HMRC has set out the most common errors made and areas of difficulty that advisers face in applying the intangible fixed asset (IFA) rules.

The rules permitting tax relief for the amortisation of IFAs have changed many times since they were introduced into the UK corporation tax regime in 2002. ICAEW members are reminded to check the latest rules when finalising computations for their clients.

That’s one of the common errors highlighted by HMRC in Agent Update 91.

ICAEW’s TAXguide 19/20: Intangible fixed assets and corporation tax deductibility sets out the different ways that a revenue deduction can be claimed for IFAs used by a company in a taxable business. The guide covers the restrictive changes relating to deductions for goodwill in 2014 and 2015, fixed-rate relief from 2019, and the changes to assets acquired from related parties on or after 1 July 2020. The date that the asset was acquired will, among other factors, determine which incarnation of the rules needs to be applied.

Other difficulties that HMRC highlights in its update include:

  • correctly identifying assets eligible for relief, including obtaining legal advice to properly identify legal and intellectual property rights;
  • remembering that goodwill cannot be recognised for IFA purposes if the company concerned has not acquired a business with it;
  • applying an appropriate valuation to assets acquired from related parties or apportioned between goodwill and other assets where there has been a business acquisition. HMRC recommends that companies obtain at least one professional independent valuation of all assets; and
  • keeping sufficient documentary evidence of asset and business transfers in case of an enquiry. HMRC expects related parties to document transactions and agreements as if they were with an unrelated third party. Records should be kept for at least six years from the end of the financial year to which they relate.

Contributed by Richard Jones

Payroll and employers

032. Date right to acquire shares arose

The Court of Appeal (CA) has upheld an Upper Tribunal (UT) finding that an employment-related share option conferred the right to acquire securities at the date of grant, before the taxpayer became non-resident. It also agreed that some restricted shares he had also been granted were acquired by reason of his employment, as a share for share exchange before the restrictions were lifted, did not break the link.

The taxpayer was employed by a company in Bermuda and was granted share options by reason of his employment. These vested in three tranches and he exercised them later. The First-tier Tribunal (FTT) found that he became non-UK resident before the third tranche vested, which was not challenged further. HMRC disputed the date on which he acquired the right to acquire shares. Any rights acquired when resident would be subject to UK tax.

The UT found, on an analysis of the scheme documentation, that the grant of the option was the date on which the right was acquired, so all three tranches were subject to UK tax. This overturned the FTT finding that the right was acquired on the vesting date, which it had justified by finding that the vesting of the options was conditional on the taxpayer’s continued employment. The CA agreed with the UT, considering the case law, and finding that HMRC was right in stating that a right to acquire securities does not have to be immediately exercisable to fall within the statute, but that the employee just has “a contractual or other legal right, upon whatever terms, to acquire securities”.

The taxpayer was also granted restricted shares in 2002. These were subject to a share for share exchange before restrictions were lifted in 2005. He contended that he acquired them as a shareholder, as when they were exchanged all shareholders were granted shares in the new company, whether or not they were employees. Both the UT and FTT found that he acquired these as a director or employee, so they were subject to income tax, as the share for share exchange did not break the link between the acquisition of the shares and his employment. The CA also dismissed his appeal.

Charman v HMRC [2021] EWCA Civ 1804 

From the weekly Tax Update published by Smith & Williamson LLP

033. Statutory Sick Pay Rebate Scheme reintroduced for small businesses

Employers with fewer than 250 employees will be able to claim up to two weeks’ statutory sick pay (SSP) per employee for COVID-19-related sickness absences occurring from 21 December 2021.

The reintroduction of the Statutory Sick Pay Rebate Scheme was announced as part of a £1bn support package for businesses impacted by the Omicron variant of COVID-19.

Employers are eligible for this support if they:

  • are UK-based;
  • employed fewer than 250 employees on 30 November 2021;
  • had a PAYE scheme at 30 November 2021; and
  • they have paid their employees’ COVID-19-related statutory sick pay (SSP).

The scheme will cover COVID-19-related sickness absences occurring from 21 December 2021. There are no details indicating when the scheme will end other than that the government will keep the scheme under review. This follows the same pattern as the previous scheme, which ran for periods up to 30 September 2021, when it was ended by legislation.

If an employer has made a claim for an employee under the previous scheme, they will be able to make a fresh claim for a new COVID-19-related absence for the same employee of up to two weeks.

As a reminder, employers must keep records of SSP that they have paid and want to claim back from HMRC. The following records supporting the claim must be kept for three years after the date the employer receives the payment:

  • the dates the employee was off sick;
  • which of those dates were qualifying days (ie, the days that the employee would normally work);
  • the reason they said they were off work was due to COVID-19; and
  • the employee’s national insurance number.

NIC

034. Class 4 NIC losses 

Losses in 2020/21 can be used against the taxpayer’s other income for that year or 2019/20, with no cap on the level of losses.

If the offset is against employment income, the PAYE deducted can be refunded. But the employment income does not carry class 4 national insurance contributions (NIC), so the losses for NIC purposes are not used at all with this set-off. In this case, the losses remain available to carry forward for NIC purposes, to set against future profits, but only for the class 4 NIC calculation. 

Check whether your tax software has a facility to record this carry forward of NIC-only losses. It may be labelled ‘adjustments for NIC’ or something similar. If the software does not allow you to record this carried-forward loss, you need to make a separate note on your files.

When the losses are set-off for NIC purposes in a future year, this amount needs to be declared on the full self-employment pages in box 102: Adjustment to profits chargeable to Class 4 NICs. If the individual is a partner, the losses for NIC purposes must be claimed in box 27 on the short or full partnership pages.

Remember losses from 2020/21 can be carried back to set against the same trade in the three previous years. Only the unused losses after those set-offs are carried forward.

Losses and class 4 NIC examples: NIM24615 

From the weekly Tax Tips published by the Tax Advice Network 

CGT

035. Payment to a sitting tenant for vacating a rental property

When computing the gain on disposal of a rental property, in addition to the acquisition costs and the incidental costs of acquisition and disposal, a deduction may also be allowed for expenditure wholly and exclusively incurred on the asset for the purpose of enhancing the value of the asset. Enhancement expenditure is expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred in establishing, preserving or defending title to, or to a right over, the asset (s38(1)(b), Taxation of Chargeable Gains Act 1992).

If a landlord makes a payment to a tenant to procure the surrender of a lease, that payment will qualify as allowable enhancement expenditure if it is reflected in the state or nature of the property at the date of its disposal by the landlord and the amount is not chargeable on the tenant (see HMRC’s Capital Gains Manual at CG71262). 

036. UT upholds FTT judgement on entrepreneurs’ relief

The Upper Tribunal (UT) upheld the First-tier Tribunal (FTT) findings that when the taxpayer sold shares in a company, entrepreneurs’ relief (ER) was not available, but there was no ‘transaction in securities’, so the gain was subject to capital gains tax. Payments made to the taxpayer by a company resulted in a remittance.

The taxpayer sold shares in a family-owned company to another company. He claimed ER, as it was then known, on the disposal, which HMRC denied on the basis that the company had substantial non-trading activities. 

The UT agreed with HMRC and the FTT, finding that the FTT was entitled to take into account the turnover and use of capital in the company when judging its trading activity, and that its view on the meaning of ‘substantial’ did not take into account irrelevant factors.

The taxpayer was a non-UK domiciled individual taxed on the remittance basis. He made loans to a group company on which he claimed business investment relief. The company later paid him dividends that he left in the company pending subsequent withdrawal, crediting them to his loan account. The amounts were later paid out and HMRC held that these were then taxable remittances. 

The FTT agreed and at the UT he appealed only in relation to one of the loans, claiming that the FTT had not taken into account evidence that that dividend was not added to the loan account. The UT refused to interfere with the FTT’s judgement on this point.

HMRC appealed against the FTT finding that there was no transaction in securities. The UT rejected this, stating that there was no error of law in the FTT finding that obtaining an income tax advantage was not one of the taxpayer’s main purposes.

Allam v HMRC [2021] UKUT 291 (TCC)

From the weekly Tax Update published by Smith & Williamson LLP

VAT

037. Determining usual residence

Mandarin Consulting Ltd provided soft skills coaching to students of Chinese origin looking for job opportunities in major international companies. Following a decision of the First-tier Tribunal, Mandarin accepted that it had provided consultancy services (rather than education) to the students (rather than to their parents).

However, the correct VAT treatment still depended on where the students were usually resident. Regulation 282/2011 specifies that a supplier should establish residence based on factual information provided by the customer and verify that information by normal commercial security measures.

However, the Upper Tribunal (UT) has ruled that the Regulation overlaid but did not replace the place of supply rules in the Principal VAT Directive.

A supplier might be well advised to check that it satisfied the Regulation’s requirements, but if it could not do so (like Mandarin) then it was still entitled to demonstrate its customer’s usual residence by reference to a multi-factorial test.

Unfortunately for Mandarin, the evidence that it had collected was too general and did not establish that the students were usually resident in China at the time of supply.

The UT therefore found in favour of Mandarin on a point of principle, but it remade the decision in favour of HMRC based on the particular facts of the case. 

From the weekly Business Tax Briefing published by Deloitte

038. VAT recovery on motor racing advertising

Amper Metal Kft paid €133,000 plus VAT to have a small logo displayed on cars at a Hungarian motor racing championship. Amper could recover the VAT if it ‘used’ the advertising for business purposes.

However, the Hungarian tax authorities considered that Amper Metal did not have a proper business reason for advertising through motor racing, as its clients were paper factories, which were unlikely to be influenced by such channels. Furthermore, the authorities did not see the advertising as useful, as it did not help increase Amper’s turnover, and it had been significantly overpriced.

The Court of Justice of the European Union (CJEU) has ruled that input tax recovery was possible if the advertising could be objectively linked to Amper’s business activities. The mere fact that the advertising did not work, or was too expensive, could not justify an input tax restriction. However, the CJEU indicated that the referring court should consider whether the advertising represented a luxury, amusement or entertainment. If so, then Amper would be unable to recover the VAT, even if a direct link could be established. 

From the weekly Business Tax Briefing published by Deloitte

039. VAT on international matchmaking consultancy

Gray & Farrar International LLP (GFI) runs an exclusive matchmaking business. For an entry-level fee of £15,000, GFI interviews prospective clients, establishes a dating profile and connects them (at least eight times a year) with possible matches. Matchmaking at this level is for an international clientele and if it was consultancy then UK VAT would not be chargeable to overseas clients.

The First-tier Tribunal (FTT) decided in 2019 that GFI’s liaison team provided a level of support and advice (acting as confidante), which was more than just expert advice and which meant that GFI’s service could no longer simply be categorised as consultancy. According to the Upper Tribunal, the FTT had failed to identify the ‘predominant element’ of GFI’s services.

The predominant element of GFI’s supply was making the introductions, which involved the provision of expert advice (interviewing clients and establishing who might be their ideal match) and information (putting clients in touch with prospective dates). This service, judged from the point of view of the ‘typical’ consumer by reference to objective factors, should be categorised as consultancy for VAT purposes. GFI had correctly treated its services as outside the scope of UK VAT and its appeal was allowed. 

From the weekly Business Tax Briefing published by Deloitte

040. Rules is rules: VAT input tax requirements

Mpala Mufwankolo ran a pub in Tottenham, London, renting the property from a landlord who had opted to tax it. HMRC declined to allow the recovery of the relevant input tax and, in [2021] UKFTT 388 (TC), the First-tier Tribunal agreed with HMRC. Why so?

Unfortunately, the lease was in the name of Mr Mufwankolo’s wife. It is not completely clear why that was: the report of the case records only that “the lease for the property was originally established in the names of his wife and himself, but the lease as signed was in his wife’s sole name”.

Worse than that, it appears that it was also she who actually paid the rent, from her own bank account. One assumes that her husband reimbursed her, though the case report is not explicit on the point.

If the business had been run as a partnership between them, there would have been no problem: HMRC accepts that a partnership can recover input tax in respect of a lease granted in the name of a partner provided that:

  • the partner is not VAT registered in his or her own right;
    the partner gives the rent invoice to the business for payment;
    the business shows the expenditure in full in its accounts; and
    the whole of the premises is used by the business for the purposes of its business.

The same principle applies, by the way, to companies where the lease is granted in the name of an individual instead of the company.

Input tax would also have been recoverable if Mr Mufwankolo’s wife had sublet the property to her husband (as, according to him, she was permitted to do), opted to tax the property, registered for VAT and provided a VAT invoice. Sadly, she did not, so it was not.

It is hard not to feel some sympathy for Mr Mufwankolo. VAT had plainly been paid on supplies that had been consumed for the purposes of a taxable business. To deny relief on the basis that technically the supply had been made to the wrong person comes close to pedantry.

Still, rules is rules: the taxpayer will have to chalk it up to experience and do better next time. Readers should take care not to be caught out in the same way.

Contributed by David Whiscombe writing for BrassTax, published by BKL

041. Upper Tribunal issues ruling in respect of roof insulation

The taxpayer lost its appeal regarding the reduced rate of VAT applied to insulated roof panels.

The taxpayer supplied and fitted insulated roof panels on to customers’ pre-existing conservatories to assist with temperature regulation across the seasons. The issue was whether these panels were subject to a reduced rate of VAT on the basis that it is a supply of qualifying insulation materials for roofs or insulated roofing materials subject to the standard rate of VAT.

The First-tier Tribunal (FTT) ruled that it was a supply of a standard-rated roof. The taxpayer appealed to the Upper Tribunal (UT) on the grounds that the relevant legislation was not applied correctly.

A reduced 5% rate of VAT is available for energy-saving materials installed in residential accommodation. Energy-saving materials are defined as insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings. Greenspace submitted that its supplies were the application or addition of insulation to an existing roof and not the provision of a new roof. The UT upheld the FTT decision that although the panels had insulating properties, ultimately the taxpayer was supplying standard-rated roof panels.

Greenspace Ltd v HMRC [2021] UKUT 290 (TCC) 

From the weekly Tax Update published by Smith & Williamson LLP

Environmental taxes

042. New statutory instruments relating to plastic packaging tax

From 1 April 2022, plastic packaging tax (PPT) will encourage the use of recycled plastic instead of new plastic material within plastic packaging. 

To ensure the tax is properly targeted, the Plastic Packaging Tax (Descriptions of Products) Regulations 2021, SI 2021/1417 specifies that ‘packaging components’ will not include plastic cases used by customers for keeping tools, first aid kits, glasses, etc; nor packaging that is integral to a product (eg, printer cartridges, inhalers and tea bags); nor re-usable sales display shelves and poster display stands. PPT will, however, be levied on products that are single-use and become packaging only when the customer uses them (eg, rolls of bin bags, carrier bags or disposable plates). The statutory instrument therefore highlights some of the decisions that businesses will need to consider in relation to PPT and gives legislative effect to guidance published by HMRC in November. 

The Finance Act 2021, Part 2 etc (Plastic Packaging Tax) (Appointed Day) Regulations 2021, SI 2021/1409 is an appointed day order for PPT, which confirms that the tax will come into effect on 1 April 2022 and allows further regulations developing the rules set out in Finance Act 2021 to be made by statutory instrument.

From the weekly Business Tax Briefing published by Deloitte 

Compliance and HMRC powers

043. Discovering discoveries: alleged underpayment of tax

Once the time limit for enquiring into a return has expired (generally a year after the relevant filing date), HMRC is able to make an assessment so as to collect an alleged underpayment of tax (a ‘discovery assessment’) only if one of two circumstances exist.

The first is where the underpayment arises from the taxpayer’s fraudulent or negligent conduct (different words are used for different taxes, but they all mean the same thing). We do not discuss that circumstance further in this note.

The other is where, at the time at which the ‘enquiry window’ closed, HMRC could not reasonably have been expected to have been aware of the underpayment. That question has been before the Upper Tribunal in Carter & Kennedy v HMRC [2021] UKUT 300 (TC). The case was to do with stamp duty land tax (SDLT), but the principles apply equally across all taxes.

The law in this area is fairly well established. HMRC is not precluded from making a discovery assessment merely because, before the enquiry window closed, it had enough information to prompt a (hypothetical) competent officer to raise an enquiry. But it will be shut out from making an assessment if, when the window closed, it had information “sufficient as to make the hypothetical officer aware of the actual insufficiency to a level that would justify the making of an assessment”. That is, information sufficient to support a positive belief that the return does understate tax rather than that it might understate tax. And the burden of proof is on HMRC to show that it did not have the requisite information, rather than on the taxpayer to show that it did.

The First-tier Tribunal (FTT) had agreed with HMRC that it did not come to be possessed of the necessary information until after the closure of the enquiry window. There were two grounds on which, in Carter & Kennedy, the taxpayers sought to challenge that decision.

The ‘calculation’ ground

It was said that it should have been apparent to HMRC from the SDLT return and the explanation given with it that the consideration payable for the property in question was much larger than the amount on which SDLT had been accounted for. The Upper Tribunal (UT) agreed that, even if that were the case, ‘[the hypothetical] officer would not necessarily have concluded that the taxpayer had implemented an avoidance scheme, let alone one which had produced an actual insufficiency of tax’.

The ‘state of the law’ ground

HMRC had asserted, and the FTT had accepted, that it was not until after HMRC had taken advice from Counsel that it concluded that there was an ‘insufficiency of tax’ in the SDLT return. Before the UT, it was contended that that was not a view that was open to the FTT: it was, said the taxpayers, “clear that there was a loss of tax based on the wording of section 75A of FA 2003 and HMRC’s published technical guidance”. The UT disagreed. The FTT had accepted the evidence of the HMRC officer as to what he was aware of at the relevant time and was entitled to make its decision based on that. 

As a side point, however, the argument put forward by the taxpayer may perhaps have been a dangerous one: for if it should have been clear to HMRC that the SDLT return was wrong, would its incorrectness not also have been apparent to the taxpayers or their advisers? In which case…

Contributed by David Whiscombe writing for BrassTax, published by BKL

Appeals and taxpayer rights

044. Metropolitan International Schools: record decision

The First-tier Tribunal case of Metropolitan International Schools Ltd [2021] UKFTT 438 (TC) was to do with the issue by HMRC of statutory notices seeking information to facilitate an enquiry into the company’s affairs. The decision contains some interesting observations of general application, although some do seem to be mutually contradictory.

Take the burden of proof, for example. Except (possibly) in the case of ‘statutory records’, to which we return below, a notice may require production of information and documents that are ‘reasonably required by the officer for the purpose of checking the taxpayer’s tax position’. The Tribunal expresses the view (surely correctly) that it is for HMRC to demonstrate that the conditions for issuing the notice are satisfied; and that the test is an objective, not a subjective, one. In other words, the burden lies upon HMRC to show that the information is ‘reasonably required’. So far, so good.

Yet the Tribunal then goes on to say that “once HMRC has explained to the Tribunal why the information and documents are required, it is for the taxpayer to indicate why any particular information request or document, or category of document is not reasonably required” – which looks rather like shifting the burden of proof back on to the taxpayer.

Even more interesting is the treatment of statutory records. Happily, that is a defined term, although the precise definition need not detain us here: ‘accounting records’ is close enough for our purposes. As we have said, a notice may be issued only if the information or documents are ‘reasonably required’, etc. In Metropolitan International Schools, the Tribunal plainly implies that that requirement applies as much to statutory records as to any other category of document or information: “It seems to us that the legislation is clear – HMRC may only obtain documents requested in a taxpayer notice if the notice satisfies the requirements of Para 1 and they are reasonably required. To be reasonably required, the Statutory Records requested must be relevant to the issues that have prompted the enquiry and be capable of enabling the officer to check the tax position.”

In fact, however, the legislation expressly excludes any right of appeal against a notice requiring production of any information or document that forms part of the taxpayer’s statutory records. In particular, there is no power to object to such a notice on the grounds that the production of the statutory records is not ‘reasonably required’, etc; to the extent that the decision in Metropolitan International Schools implies the contrary, it is wrong. There is, in effect, a presumption that it will always be reasonable for HMRC to demand production of a taxpayer’s statutory records: if, exceptionally, a taxpayer considers that the demand is unreasonable, the only recourse will be to seek judicial review.

All that is not to say, of course, that a taxpayer may not appeal against  a notice on the grounds that the information or documents sought do not fall within the definition of statutory records (and are not ‘reasonably required’, etc, either). But (unless you are lucky in your choice of Tribunal) it will be a waste of everyone’s time to seek to deny access to documents that are unequivocally part of your statutory records.

Contributed by David Whiscombe writing for BrassTax, published by BKL

Tax payments and debt

045. Time to Pay self-serve limit remains at £30,000

HMRC has reminded taxpayers of the option to set up a self-serve Time to Pay Arrangement (TPA) if they are unable to pay their self assessment bill.

The limit for a self-serve time to pay arrangement, which was increased during the pandemic, remains at £30,000 tax due.

If taxpayers can’t pay their 2020/21 self assessment (SA) tax liability in full by the due date (generally 31 January 2022), they can set up their own TPA online if they:

  • have filed their tax return for 2020/21;
  • owe less than £30,000;
  • are within 60 days of the payment deadline; and,
  • plan to pay their debt off within the next 12 months or less.

If taxpayers owe more than £30,000, or need longer to pay, they should phone the self assessment payment helpline on 0300 200 3822 to make an arrangement.

To avoid a 5% late payment penalty, a TPA for 2020/21 must be set up by 1 April 2022.

Unfortunately, the self-serve Time to Pay facility is not available to agents, as HMRC can only accept direct debit mandates set up by taxpayers themselves.

SA taxpayers making payments on account who know that their 2021/22 tax bill is going to be lower than 2020/21 bill may wish to take action to reduce their payments on account.

Contributed by Caroline Miskin

Tax avoidance

046. Taxpayer loses film scheme appeal at UT

The Upper Tribunal (UT) has upheld a First-tier Tribunal (FTT) decision that a taxpayer was taxable on monies from a film scheme. Although they were not paid directly to him but used to offset interest costs, he was entitled to them and benefited from them. He was not permitted to offset the interest costs, as they were not for the sole purpose of generating income.

The taxpayer entered into a tax avoidance scheme under which he purchased and sold film distribution rights. As part of the proceeds, he was paid a share in the film profits annually, which had a fixed minimum level. The scheme generated a loss, which he claimed to set against his other income. Before the UT, the taxpayer appealed against the FTT’s decision that he was taxable on the annual payments.

The UT agreed with the FTT finding that the taxpayer was not trading, and that he was entitled to the income. The income was not paid directly to the taxpayer, but was used to offset his interest costs. This was found to be an ‘enduring and real benefit’ to him and it was found that he had rights to these payments under the terms of the contracts. Although he did not control the payment, he was entitled to it, so was taxable on it. The interest costs were found not to be allowable deductions, as they were not for the sole purpose of generating income – the taxpayer also needed them for the main purpose of the scheme, generating losses.

Good v HMRC [2021] UKUT 281 (TCC)

From the weekly Tax Update published by Smith & Williamson LLP 

047. Avoiding penalties

If a tax avoidance scheme that you have implemented fails to achieve its objective, you will, in the normal way of things, have to pay the tax, together with interest on late payment.

What about penalties?

Penalties are exigible if there is an inaccuracy in your return (or other document) that leads to a loss of tax, and which is attributable to your carelessness or your deliberate failure to render an accurate return (or other document).

Historically, if you have taken advice that a scheme works when properly implemented and you have followed that advice to the letter, it is unlikely that you will be considered to have been guilty of careless or deliberate failure. 

But that ‘to the letter’ is important. In parallel with technical analysis of the scheme, HMRC will routinely examine its detailed implementation; if it considers that there are deficiencies, penalties may beckon.

Such was the issue in the case of  Portview Fit-Out Ltd v HMRC [2021] UKFTT 447 (TC). For the scheme to have had any chance of working as intended, it was crucial that the extent to which individual employees benefited under the arrangements was determined not by the employer, but by an independent company established as part of the scheme.  

HMRC accepted that that had been the case for the first four iterations of the scheme and that no penalty was due on respect of those iterations: but it thought the evidence showed that for a fifth iteration, the employer had itself made the determination.

Happily for Portview Fit-Out Ltd, the Tribunal disagreed. The employer had indeed indicated what it would like the outcome of the independent report to be, but there was no evidence that it had gone so far as to determine it. There was no evidence that the independent company had not independently formed its own view on the matter.

Two further points

First, the ‘escape route’ from penalties that hitherto existed if you could show that you relied upon professional advice was severely cut back in 2017. Nowadays, if you file a return or other document on the basis that avoidance arrangements work and it subsequently turns out that they do not, you will be treated as having been (at least) careless unless, very broadly, you can show that you relied on advice given to you personally by a genuinely independent and competent adviser, who took account of your personal circumstances. Relying on an assurance in a QC’s favourable opinion purchased by the scheme promoters will not cut the mustard.

Second, and most interestingly, the Portview case cites comment from the Upper Tribunal (UT) decision in Tooth on the meaning of ‘inaccuracy’ in a tax return: comment which has, perhaps, been overshadowed by the more widely reported aspect of Tooth as being all about whether a discovery can become ‘stale’. 

In Tooth the UT had this to say: “In our judgment, where a taxpayer adopts a position in his return which, albeit controversial, cannot (at the time of the return) be said to be wrong and takes the trouble to identify the position he has taken (and the fact that it is controversial) in that return, [he] cannot be guilty of an inaccuracy when, subsequently, it is established that the position taken by the taxpayer is wrong.”

The relevance of this is, of course, that if a return is not ‘inaccurate’ at the time at which it is filed, there can be no penalty: whether you have been (or are deemed to have been) careless is irrelevant.
Given that this rather undermines the effect of the first point noted above, we would expect HMRC to push back with some enthusiasm against the UT’s observations (or at least to seek to limit their application to the context of ‘discovery’ in which they were made). Meanwhile, however, they are there to be cited when occasion arises.

Contributed by David Whiscombe writing for BrassTax, published by BKL

International

048. Validity of corporation tax double tax relief 

The Supreme Court judgement in July 2021 in the FII GLO clarified principles in applying EU law to, and conforming interpretations of, the UK double tax relief rules to certain dividends received by UK companies prior to July 2009. 

The First-tier Tribunal (FTT) has now given a new decision that deals inter alia with questions of what procedure must be followed by affected taxpayers, in particular what constituted a valid claim. A wide range of questions was posed to the FTT, reflecting the variety of circumstances of the test claimants. In brief, the taxpayers have won on all the major points in the litigation. The decision may be of particular interest to companies with, or considering, claims in connection with the various cases (including FII GLO, CFC/Dividend GLO, BAT or Prudential) and s79, Taxation (International and Other Provisions) Act 2010 or s806(2), Income and Corporation Taxes Act 1988 claims for overseas dividends pre-July 2009. 

It may also be of interest to UK companies in receipt of overseas dividends between 2001 and July 2009 from group companies in non-EU/EEA third countries.

From the weekly Business Tax Briefing published by Deloitte