ICAEW.com works better with JavaScript enabled.
Exclusive

Practical points

Helpsheets and support

Published: 04 May 2022 Update History

Exclusive content
Access to our exclusive resources is for specific groups of subscribers.
Contents

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.

Agents and HMRC

097. New 64-8 form

The new version of the 64-8 agent authorisation form has been available on gov.uk since 31 March 2022. It is designed to ensure that the form is compliant with the General Data Protection Regulation and data protection legislation. The changes are fairly subtle, but they do make it clearer to the client what they are agreeing to in terms of data sharing with their agent.

There is one functional change to the form. In the Construction Industry Scheme and Employers’ PAYE sections, it asks for the Agent Government Gateway identifier and PAYE Agent ID code. These boxes were previously only on the form Authorise a tax agent to use PAYE and CIS online services (FBI2). This change means that the new version of the 64-8 gives the additional access to online services that previously required an FBI2. The current version of the FBI2 will remain available for now.

Existing clients do not need to complete a new 64-8. The new form does state: “HMRC may contact you in the future to reauthorise your agent relationship to comply with the UK General Data Protection Regulation (UK GDPR).”

At some point in the future, HMRC may require new authorisation forms for existing clients. HMRC is very conscious of the scale of such a requirement and there are no specific plans for when such a requirement might be imposed. However, it does mean that firms should switch to the new version of the form as soon as possible. It just might avoid the need to complete a new form in the future.

HMRC will continue to accept the old version of the form until autumn 2022. The specific date on which HMRC will start to reject old versions of the form has yet to be announced.

Contributed by Caroline Miskin

098. Complaints

You may sometimes find yourself in the position of having to make a complaint to or about HMRC. ICAEW guidance explains the process.

Members are sometimes concerned that complaining to HMRC might upset HMRC and it will discriminate against them. In TAXguide 05/14, HMRC provides reassurance that a taxpayer who in good faith takes legal action against or makes a complaint to the department will not be prejudiced.

Personal taxes

099. Caims for income tax relief on employment expenses

From 7 May 2022, claims for income tax relief on employment expenses must be made on the standard P87 form (which can be found on gov.uk). Claims for income tax relief on employment expenses can also be made using one of the following options:

a self assessment tax return;

  • online service available to taxpayers (but not agents); or
  • by phone (subject to limits) if a claim has been made for a previous tax year.

From 7 May, HMRC is mandating the use of the standard P87 form for claiming income tax relief on employment expenses on gov.uk and will reject claims that are made on substitute claim forms.

Some changes have also been made to the P87 form. For example, it now has the functionality for multi-year claims and up to five employments.

HMRC will be using Hyperscience – a sophisticated form of optical character recognition/robotics – to process the forms without human intervention. It will mean that the applications must be fully compliant to be processed automatically (eg, have no attachments).

Any forms with attachments will not go through the automated process, but will be put to one side for manual processing. While the automated forms can be processed quickly, the manual ones will take much longer.

Digitally excluded taxpayers will still be able to request a hard copy of the new P87 form. 

Contributed by Caroline Miskin

Savings and investment

100. Automation of PPI taxed interest repayment applications

HMRC has seen a significant increase in payment protection insurance (PPI) taxed interest repayment requests from agents. A new automated solution is being developed to speed up the processing time.

To facilitate the automated process:

  • individual applications should be submitted for each tax year on the existing standard Claim a refund of Income Tax deducted from savings and investments (R40) form;
  • do not include any other tax reclaim types within that R40 form;
  • only include the agent details on the spaces provided on the R40 form;
  • do not include a covering letter; and
  • post the claims to the new dedicated PPI tax interest reclaims address:
    PPI tax interest claims
    HM Revenue and Customs
    BX9 1ZR

Automation of these forms is expected to begin in late spring. Applications that do not comply with the guidance will not go through the automated process and will take longer. 

Contributed by Caroline Miskin

101. Top slicing relief win for taxpayer

The First-tier Tribunal (FTT) has found for a taxpayer who sought to use a more beneficial method of calculation for top slicing relief. Legislation introduced in the March 2020 Budget prevents this method from being used currently, but questions have remained around claims for earlier years.

When the taxpayer died in the 2017/18 tax year, chargeable event gains arose on his life insurance policies. The return was submitted by his executor using the calculation method that HMRC deemed correct, but a note was included in it to appeal for a more beneficial method of calculation. This was that he should be entitled to use his personal allowance in a way to give a lower tax liability and to claim the personal savings allowance.

Historically, this part of the legislation has been thought to be unclear. In the March 2020 Budget, the government introduced provisions that the less beneficial method of calculation was the only one that could be used from then on. HMRC’s view was that this applied retrospectively.

The FTT rejected that argument, finding for the taxpayer that the more beneficial method of calculation was permissible. It considered the case that led to the change in the law, and ultimately agreed with its findings.

Sally Judges (as representative for the late R Young) v HMRC [2022] UKFTT 77 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

Pensions

102. Loss of lifetime allowance protection

HMRC’s Pension schemes newsletter 137 includes a reminder that pension scheme members may need to inform HMRC if they lose their lifetime allowance protection.

Individuals who notified rights to enhanced protection to HMRC and who lose or give up this right should notify HMRC of this fact. If enhanced protection is lost because relevant benefit accrual has occurred, the individual must notify HMRC within 90 days of the occurrence (see HMRC’s Pensions Tax Manual at PTM092420).

Members are responsible for telling HMRC that their fixed protection (FP) no longer applies. The member must do this within 90 days of the loss of FP 2012 or FP 2014. For FP 2016, it is within 90 days of the day on which they could first reasonably be expected to have known they had lost their protection (see PTM093400).

Enhanced protection or any type of fixed protection can be lost if:

  • new savings are made into a pension scheme;
  • an individual is enrolled in a new workplace pension scheme;
  • money is transferred between pension schemes in a way that does not meet the transfer rules;
  • they have enhanced protection and, when they take their pension benefits, their value has increased more than the amount allowed in the enhanced protection tax rules – this is called ‘relevant benefit accrual’; and
  • they have fixed protection and the value of their pension pot in any tax year grows at a higher rate than is allowed by the tax rules – this is called ‘benefit accrual’.

There is only one situation where a member’s individual protection (IP) can be reduced or lost altogether. This is if, after 5 April 2014 for IP 2014 or 5 April 2016 for IP 2016, they become subject to a pension debit as a result of a pension sharing order following their divorce. The deadline for notifying HMRC is 60 days from the date of the pension debit (see PTM094400).

Members must tell HMRC in writing if they think they have lost their lifetime allowance protection and must provide:

  • their full name, address and national insurance number;
  • the exact date they lost protection;
  • the reason why they lost protection (for example benefit accrual, auto enrolment);
  • the type of pension arrangement (defined contribution or defined benefit); and
  • their original certificate (if they still have it).

Certificates were not issued for IP 2016 or FP 2016.

Contributed by Caroline Miskin

103. Scheme pays rule changes

Changes to scheme pays, the process that allows individuals to require their pension scheme to pay their annual allowance charge in relation to an earlier tax year, are included in Finance Act 2022.

Previously, the scheme pays rule did not extend to charges arising from an increase in pension savings for a previous tax year. The deadline for members to make a request to the scheme administrator to meet the liability from their pension scheme had to be made by 31 July following the tax return deadline.

The new measure requires the scheme to pay the charge if it arises because of a retrospective change of facts, the charge is £2,000 or more, and an individual asks the scheme to pay it by the new deadline.

The new deadline for an individual to ask their pension scheme is the earlier of:

  • three months from the pension scheme notifying them that they are liable to the annual allowance charge; and
  • six years from the end of the tax year in question.

The measure therefore applies to all individuals that receive a retrospective amendment for the 2016/17 tax year onwards.

Contributed by Caroline Miskin

Business taxes

104. Construction industry scheme: gross payment status

The Upper Tribunal (UT) has allowed HMRC’s appeal in RMF Construction Services Ltd v HMRC. The First-tier Tribunal (FTT) had allowed RMF’s appeal against HMRC’s decision to withdraw its gross payment status under the construction industry scheme eight years after compliance failures on the basis that such action by HMRC was disproportionate. RMF had been able to continue to operate without the benefit of gross payment status without any further compliance failures.

The UT reversed the FTT’s decision. It held that the relevant question for the FTT was whether HMRC’s decision to withdraw gross payment status was correct at the time it was made; it was not entitled to take subsequent events into account. This was sufficient to decide the appeal, but the UT went on to identify other errors of law in the FTT’s decision. 

From the weekly Business Tax Briefing published by Deloitte

105. Capital allowances: gas cavity not plant

The Court of Appeal has dismissed the taxpayers’ appeal in Cheshire Cavity Storage 1 Limited & Another v HMRC. The appeals concern the availability of plant and machinery allowances under the Capital Allowance Act 2001 on expenditure incurred in relation to underground cavities for gas storage in Cheshire.

The cavities are formed by injecting water into naturally occurring salt rock beneath the ground, which, when the salt rock dissolves, leaves a hole filled with saltwater. Gas is then pumped into the hole and the saltwater in it is expelled. The rock all around the hole creates a barrier so the gas cannot escape. The cavity is connected by pipes to the national transmission system for gas, which is owned by National Grid and which supplies gas to end users.

The Upper Tribunal (UT) held that the First-tier Tribunal had made no error of law when it concluded that the cavities were not ‘plant’ under common law, and the Court of Appeal has now agreed, holding that the UT’s reasoning to the question that they posed did not reveal any legal error. 

From the weekly Business Tax Briefing published by Deloitte

Company tax

106. NCL Investments Ltd: lapsed share options

The Supreme Court has unanimously dismissed HMRC’s appeal in HMRC v NCL Investments Limited on lapsed share options. The issue is the availability of a ‘general principles’ deduction for the accounting cost associated with employee equity awards in cases where a statutory deduction was not available.

These deductions were claimed prior to an amendment to Pt 12, Corporation Tax Act 2009 (CTA 2009) in March 2013, which was introduced to prevent any further deductions being claimed on this basis. The cases involved deductions claimed under a number of different share plans, as well as the use of an employee benefit trust to grant and settle the awards and recharge agreements for the subsidiaries to pay the IFRS2 cost to the parent.

HMRC argued that disregarding the debits is an ‘adjustment required or authorised by law’ within s46(1), CTA 2009; that the debits were not ‘incurred’ for the purpose of s54, CTA 2009 because the employing companies suffered no loss in relation to them, and/or that they were not for the purposes of trade; that the debits were capital in nature; and that s1290, CTA 2009, as it then operated, which sought to limit corporate tax deduction for ‘employee benefit contributions’ until the employee was taxed, operated to disallow a deduction.

The Supreme Court rejected all these arguments. It agreed with the Court of Appeal, the Upper Tribunal and the First-tier Tribunal that the accounting debits arising under IFRS2 were deductible as trading expenses of the employing companies, and that the debits were not capital. Section 1290, CTA 2009 did not apply: the definition of an employee benefit contribution required property to be ‘held… under an employee benefit scheme’ and in this case no property was so held. 

From the weekly Business Tax Briefing published by Deloitte

107. Freedom of establishment: group relief

The Upper Tribunal has allowed HMRC’s appeal in HMRC v Volkerrail Plant Limited. The taxpayers claimed group relief in relation to losses attributable to the UK permanent establishment of a Dutch-resident group company. It was common ground that, in the absence of EU law considerations, the restriction in s403D, Income and Corporation Taxes Act 1988 (relief for or in respect of UK losses of non-resident companies) would have prevented the losses from being surrenderable by virtue of them also being deductible against Dutch corporate income tax.

The First-tier Tribunal held that the restriction was incompatible with the freedom of establishment and that the provisions of s403D should be disapplied in their entirety. The Upper Tribunal held that s403D imposed a justified restriction on freedom of establishment, although that restriction operated disproportionately. Thus, it was incompatible with EU law, but could be ‘read down’ so as to comply with EU law. The restriction on UK group relief is to be construed as applying only to the extent that the loss is, in any period, deducted against non-UK profits. 

From the weekly Business Tax Briefing published by Deloitte

108. Derivatives used to hedge foreign exchange risks

Regulations have been made in relation to the tax treatment of hedging instruments relating to certain shareholdings in companies. The aim is to reduce tax volatility by extending the scope of the existing disregard regulations to cover certain hedging instruments that are intended to hedge foreign currency risk on an anticipated future acquisition or disposal of defined shareholdings. These new regulations were published in draft for consultation on 16 December 2021. The changes came into force from 1 April 2022. HMRC has published a tax information and impact note about the changes.

From the weekly Business Tax Briefing published by Deloitte

109. International royalties

The Upper Tribunal (UT) has upheld the First-tier Tribunal (FTT) decision that royalty income was found to arise from the right to exploit natural resources, even though it was acquired by a Canadian bank as satisfaction of a bad debt from an insolvent debtor.

The bank made a significant loan to enable the borrower to acquire the rights to an oil field in the North Sea. The borrower subsequently sold those rights, partly in exchange for an entitlement to ‘royalty’ payments from the oil field. The borrower went into receivership while it owed the bank CAD$185m. The Canadian courts assigned the bank the rights to the payments for nominal consideration. The bank declared that income in its Canadian tax return, but not in the UK. HMRC argued that the UK had primary taxing rights over the payments under the UK/Canadian Double Taxation Agreement (DTA).

The FTT had found that the payments amounted to income from immoveable property under Article 6 of the DTA, and that Article 6 covered both income from the grant of the right to exploit natural resources and income from subsequent dealings in that right – a decision upheld by the UT.

The UT also agreed that the payments were profits arising from exploration or exploitation rights as the bank had the rights to benefit from the oil field. It concluded that the payments were correctly chargeable to corporation tax under the special ring fence trade rules for profits relating to natural resources. Finally, the UT rejected the taxpayers’ argument that losses arising on the original loan could be deducted from the payments.

Royal Bank of Canada v HMRC [2022] UKUT 45 (TCC) 

From the weekly Tax Update published by Smith & Williamson LLP

Payroll and employers

110. In what circumstances do I need to register as an employer with HMRC?

Employers need to set up and register a PAYE scheme with HMRC if any of the following apply:

any employee is paid at or above the national insurance contributions (NIC) lower earnings limit, which is £123 per week in 2022/23, equivalent to £533 a month or £6,396 a year;

  • any employee already has another job;
  • any employee is receiving a state, company or occupational pension; or
  • benefits-in-kind are provided to any employees.

Employers who have just one employee necessitating registering a PAYE scheme with PAYE must include all employees in the PAYE scheme and make returns under real-time information (RTI) for all employees – even for those for whom there is no tax or NIC liability.

Employers who do not need to register nevertheless must keep some basic information about employees, including how much they are paid, provide all employees with payslips and comply with wider employer obligations.

Contributed by Peter Bickley

111. What is a spouse?

Generally, where spouses are afforded special treatment (whether favourable or unfavourable) by tax law, that same treatment is afforded to same-sex marriages and to civil partnerships.  

But what about references to spouses in other documents, such as deeds? A document may have been drawn up at a time when ‘spouse’ could only mean a person of the opposite sex with whom one had contracted marriage, but must references in such a document to a ‘spouse’ continue to be interpreted as having that meaning?

The point was among those considered by the High Court in Goodrich & Others v AB – MN [2022] EWHC 81 (Ch). It is not a tax case, but it did concern the interpretation of the provisions of an employee trust (the Walker Books Employee Trust (WBET)) and an employee share ownership plan.

The task of the court in such a case has been expressed as being to ascertain: “The objective meaning of the words used, and the objective intentions of the parties to it (or in the case of a unilateral document such as a settlement or a will, the settlor or testator) by interpreting the whole of the words used against their documentary and factual context.”

It was held that, in the context of the arrangements in Goodrich, ‘spouse’ was to be taken to include both civil partners and same-sex spouses.

However, that might not always be the case – the judge recognised that her construction is “fact sensitive to the background facts in this case including the fact that WBET is not a family trust, but a more flexible ‘living and breathing’ long-term employee trust; a key feature of which is to reward officers or employees for past contributions”. The same conclusion might not be reached in the case of a private family trust, which the judge recognised as “a far cry from the employee trust that I am grappling with”. Indeed, the same conclusion might not be reached in the case of another employee trust with different background facts.

So, the most that can be said is that ‘spouse’, where used in a trust deed, is capable of including same-sex spouse and civil partner – not that it will always do so.

Contributed by David Whiscombe writing for BrassTax, published by BKL

112. HMRC guidance for employers paying overseas tax on behalf of their employees

HMRC has updated its guidance on when employers can send a full payment submission (FPS) after paying an employee to include employers who pay overseas tax on behalf of their employees where they have difficulty with reporting the PAYE and national insurance contributions due on that tax by the usual deadlines of ‘on or before payment.

HMRC’s late reporting reason guidance has also been updated to reflect that late reporting reason code G should be used provided the FPS is submitted as soon as possible and no later than one month after the usual reporting date.

NIC

113. Directors’ emoluments in 2022/23

It is customary in owner-managed companies to pay the directors who own the shares the maximum amount possible without incurring a class 1 national insurance contributions (NIC) liability, with the balance of drawings paid by way of dividends (distributable reserves permitting). 

The Spring Statement announced an increase in the primary threshold to a figure that works out as £11,908 on an annualised basis for directors in 2022/23. The secondary threshold was left at the previously announced amount of £9,100pa. 

Therefore, directors need to be paid at the rate of £9,100 (£758 per month) to produce a £nil primary and secondary class 1 NIC liability.

Provided that on an annual basis the directors are paid more than the lower earnings limit of £6,396 per year (£533 per month), they will receive credit toward their state pension and other contributory state benefits in their national insurance contributions record.

Contributed by Peter Bickley

IHT

114. Getting to first base

When your client suffers a bereavement you naturally want to do what you can to help. One way is to assist with the inheritance tax (IHT) forms, but first you need a ballpark figure of what IHT will be due.

The following are a few simple questions to ask to get to that estimate.

Is the deceased’s estate worth no more than £325,000, including the deceased’s share of any property, but excluding charitable gifts? If yes, no IHT is due.

Was the deceased married, and was the entire estate left to their surviving UK domiciled spouse? If yes, the estate is covered by the spousal exemption, and no IHT is due.

Was the spouse a widow/widower and who can benefit from the transfer of the nil rate band from their deceased spouse? In this case, the nil rate band may be up to £650,000.

Has the deceased’s main home been left to their direct descendants in their will? If so, the residence nil rate band (RNRB) of up to £175,000 comes into play. Where the spouse pre-deceased, the RNRB may be doubled.

There is also a calculator to work out the RNRB on gov.uk, but it is very basic and it does not cover any more than the simplest situations.

For example, RNRB can apply to the value of the main home that is left to direct descendants, even if the deceased was not living in at the time of their death. This will often be the case where the individual had moved into a care home or hospice.

The main home does not have to be located in the UK to qualify for RNRB.

The RNRB can be utilised if the former main home was let out, or if it had already been sold or after 8 July 2015. In the latter case the RNRB can apply to the value of the qualifying former residential interest (QFRI).

There can only be one QFRI in the estate at death and where there have been several properties that could qualify as the QFRI, the executors need to nominate which home will relate to that relief.

Calculator for RNRB

Basic definitions for RNRB

Qualifying former residential interest for RNRB

From the weekly Tax Tips published by the Tax Advice Network

Stamp taxes

115. Mixed property

The Court of Appeal has decided that the stamp duty land tax (SDLT) definition of residential property in s116, Finance Act 2003 is clear and unambiguous and that a property does not cease to be residential property merely because the occupier of a dwelling house could do without it.

This was a joint appeal where both sets of appellants had claimed that their properties were not entirely residential and that the lower rates of SDLT applied. The Hymans claimed that a barn, meadow and bridleway were not residential property. The Goodfellows argued that office space above their garage and paddocks used by third parties for grazing horses were non-residential.

In each case, the First-tier Tribunal found that, based on the facts, the entirety of the land fell within s116(1)(b) (ie, land that is or forms part of the garden or grounds of a dwelling). The Upper Tribunal agreed. The issue before the Court of Appeal was whether there is an objective quantitative limit on the extent of the garden or grounds that falls within the definition.

The taxpayers sought to argue that in order for garden or grounds to count as residential property, they must be needed for the reasonable enjoyment of the dwelling having regard to its size and nature. This was based upon guidance produced by HMRC at the time the legislation was introduced. The Court of Appeal dismissed this argument, citing a recent Supreme Court judgement that ruled that guidance played a secondary role in the meaning of statutory provisions and could not displace the meaning conveyed by the statute where it is clear and unambiguous.

Hyman & Ors v HMRC [2022] EWCA Civ 185 

116. Multiple dwellings relief

The Upper Tribunal (UT) has dismissed the taxpayer’s appeal against HMRC’s denial of their claim for multiple dwellings relief (MDR) for stamp duty land tax (SDLT).

The appellants claimed that the First-tier Tribunal (FTT) erred in law in coming to the conclusion that their property, consisting of a main house and annexe, did not qualify for MDR because it was suitable for use as a single dwelling.

The UT concluded that the FTT was entitled to find that the property was not configured in such a way that it comprised two self-contained living units generally suitable for separate occupation, but was suitable for use as a single dwelling.

Andrew and Tiffany Doe v HMRC [2022] UKUT 2 (TCC)

VAT

117. Floorspace-based override appropriate for casino

The Hippodrome in Leicester Square has three uniquely themed casinos, various bars and restaurants, and a 326-seat theatre (currently showing Magic Mike Live). Hippodrome Casino Ltd (HCL) refurbished the property in 2009-2012 at a cost of £50m, with a view to providing a Las Vegas-style experience to customers. However, HCL found that there was little crossover between VAT-exempt gaming activity on one hand, and the bars, restaurants and theatre on the other. For example, less than 5% of theatregoers spent time in the casinos (even in Las Vegas, the proportion seldom exceeds 10%), and when HCL handed out free £50 win tokens to restaurant customers, around half of the tokens were never used. Nevertheless, HCL’s gaming activities proportionately generated far more turnover than the restaurants or theatre. For example, an electronic roulette machine might take up less space than a table at the Hippodrome’s steak house, but could generate annual turnover of £400,000 compared with the table’s £50,000.

In those circumstances, and given that three-quarters of HCL’s residual costs were property-related, the First-tier Tribunal has decided that HCL was entitled to apply a standard method override and recover input tax by reference to the floor space used for taxable and exempt activities. This represented increased VAT recovery averaging £548,000 annually, between 2012 and 2018, when compared with the standard method. 

From the weekly Business Tax Briefing published by Deloitte

118. Flat rate scheme on joint poultry farming

WG and her husband jointly owned a farm in Poland on which six poultry houses had been built. The husband operated a business using four of them and claimed exemption from VAT under the agricultural flat rate scheme (FRS). WG, who operated her business from the other two houses, opted out of the FRS and submitted a claim for repayment of excess input tax. The Polish tax authorities refused the claim on the basis that WG’s decision to opt out of the FRS should also apply to her husband (whose poultry houses were presumably operating profitably).

The Court of Justice of the European Union (CJEU) has determined that the mere fact that the farm was owned jointly did not mean that WG and her husband were not operating their own independent businesses. However, it recognised that the Polish tax authorities might deny the FRS to WG’s husband if it was necessary to prevent an abuse, which could not be countered by other means (eg, if a disproportionate amount of the expenditure was being allocated to WG’s business). Furthermore, the CJEU noted that the FRS was meant to be an administrative simplification. If it was no more complicated for both businesses to account for VAT conventionally than it was for one of them to apply the FRS exemption, then Poland was entitled to exclude WG’s husband from the FRS. 

From the weekly Business Tax Briefing published by Deloitte

119. VAT concession on supplies of nurses

The nursing agencies’ concession allows employment businesses that provide nursing staff as principal rather than as agent to exempt their services. Between 2013 and 2016, 1st Alternative Medical Staffing Ltd (FAMS), instead of relying on this concession, continued to rely on an HMRC ruling from 2004 that it was acting as agent (and should therefore charge VAT, but only on its commission).

In April 2021, the High Court decided that FAMS could not continue to rely on the 2004 ruling in light of a series of Information Sheets, Briefs, and updated Notices issued in 2009-2012 that showed that HMRC’s policy had changed. FAMS further argued, however, that it should be entitled to apply the concession after it became apparent that it had been acting as principal. The Court of Appeal has rejected this additional argument.

In order for FAMS to be able to apply the concession retroactively, the concession had to contain clear language permitting it to do so. In the Court of Appeal’s judgement, an ordinarily sophisticated taxpayer would have understood that the concession needed to be applied when invoices were issued. In particular, there was no statutory mechanism for adjusting VAT that was correctly charged, but which could have been exempted by concession, as there was no error that could be adjusted. The unfortunate position that FAMS found itself in, of having to account for VAT on its entire turnover while many competitors would have claimed exemption under the concession, resulted from its continued reliance on an obsolete ruling letter. 

From the weekly Business Tax Briefing published by Deloitte

120. VAT return filing while awaiting a decision on a VAT grouping application

In Revenue & Customs Brief 5 (2022), HMRC says that businesses waiting for a response to their VAT grouping application should:

  • treat the application as provisionally accepted on the date it was submitted online or the date it should be received by HMRC if submitted by post; and
  • account for VAT accordingly.

While waiting to receive a VAT grouping registration number, a business may receive:

  • an automated assessment letter;
  • letters asking for payment of any automated assessments; and
  • notification of a default surcharge because the business has not filed its tax return.

The business does not need to take any action in response to any of these notices. HMRC will automatically cancel them once the group application is fully processed.

HMRC will not take recovery action for any debts listed above that come about because a business follows this guidance. Other VAT debts may still be subject to recovery actions.

Any business that followed the interim guidance, provided by HMRC on 24 November 2021, to submit VAT returns using previous registration numbers, does not need to take any steps to change this.

In all instances, unless the application is refused, the date the group becomes registered will be the date that HMRC received the application, or another agreed date. HMRC has confirmed that a business will not be penalised as a result of actions taken in response to previous versions of this guidance.

Revenue and Customs Brief 5 (2022): revised guidance on dealing with VAT grouping registration 

Group and divisional registration (VAT Notice 700/2) 

Contributed by Neil Gaskell

121. Business that continued to use the Lennartz mechanism may have overpaid

The Lennartz mechanism allowed business to recover the full VAT incurred on the purchase of goods used for business and private purposes (subject to any partial exemption restrictions). The business can then account for output tax on the private use of the goods. This was restricted from 22 January 2010 in cases where the purchased goods are used for business and non-business purposes.

To ease the administrative and financial burden on businesses, HMRC allowed businesses the choice to continue using the Lennartz mechanism under the rules before 22 January 2010. When a business chose to do this, Finance (No. 3) Act 2010 provides that they continue to account for output tax on the non-business use for the economic life of the asset.

Revenue & Customs Brief 6 (2022) highlights that as the standard rate of VAT increased from 17.5% to 20% in 2011, the non-business use of some goods may have been excessively taxed.

HMRC’s VAT Input Tax Manual sets out how to calculate whether the fiscal balance point has been exceeded together with the procedure and time limits for making a claim.

122. Refunds of VAT wrongly charged

Under EU law, it was possible in limited circumstances for a customer to seek a refund through the courts of VAT overpaid to a supplier directly from HMRC. HMRC has issued Revenue & Customs Brief 4 (2022) to announce that this has no longer been possible since 1 January 2021. Claimants who brought claims in the High Court before 1 January 2021 are unaffected. 

Contributed by Neil Gaskell

Customs and other duties

123. Strict liability for excise duty on beer

In October 2013, Martyn Perfect drove a lorry loaded with 25,000 litres of beer into the UK at Dover, using an administrative reference code (ARC) number copied from a previous consignment. The reuse of the ARC number indicated an attempt to evade excise duty, so HMRC seized the beer, confiscated the lorry, and assessed Mr Perfect for duty and penalties of £27,000.

In June 2021, the Court of Justice of the European Union (CJEU) (following a reference from the Court of Appeal) ruled that strict liability could apply in such situations. Even though Mr Perfect was unaware of the fraud, he ‘held’ the goods by being in physical possession of them and was therefore liable to duty. The Court of Appeal has now applied the CJEU’s judgement.

The Court of Appeal concluded that s7A, EU (Withdrawal) Act 2018 means that the CJEU’s judgement is binding in the UK even though it was delivered post-Brexit, as it concerns a reference from a UK court. In any event, the CJEU’s judgement accorded with the provisional views expressed by the Court of Appeal when it referred the case in 2019. Although the details of how inward diversion fraud operated pre-Brexit no longer apply, the principle that holders of excise goods may be strictly liable for unpaid duty remains important, and the judgement illustrates the need for any business handling excise goods to ensure that it conducts appropriate supply chain due diligence.

From the weekly Business Tax Briefing published by Deloitte

Environmental taxes

124. EU agrees on Carbon Border Adjustment Mechanism regulation

The 27 EU Member States have reached agreement on the general approach to the Carbon Border Adjustment Mechanism (CBAM) regulation, an element of the EU’s ‘Fit for 55’ package. The CBAM will seek to prevent carbon emissions reduction efforts being undermined by increased emissions outside the EU due to the relocation of production, or increased imports of carbon-intensive products. Imports of products in the cement, aluminium, fertilisers, electric energy production, iron and steel sectors will initially be in scope of the CBAM. The Council anticipates a minimum threshold that exempts consignments with a value of less than €150. The Council has yet to make sufficient progress on a number of closely related issues, such as phasing-out of free allowances and World Trade Organization compatibility of the CBAM. It will then start negotiations with the European Parliament.

From the weekly Business Tax Briefing published by Deloitte 

Compliance and HMRC powers

125. Information notice taxpayer win in transfer of assets abroad investigation

In a case where a discovery assessment was already under appeal, the First-tier Tribunal (FTT) has upheld an appeal against an information notice. The taxpayers did not want to provide more information for a resolution before the hearing for that appeal, so no useful purpose would be served. The additional information was not reasonably required by HMRC to check their tax positions.

The taxpayers were a married couple who owned shares in a company whose management they were involved in. Shares were transferred by the wife to her non-UK resident father-in-law, who received dividends. He made loans to the couple and paid some school fees for their children.

HMRC opened an enquiry on the premise that either the transfer of assets abroad rules or the settlements legislation applied, and issued information notices. These requested a list of bank accounts for each couple, with bank statements, including for accounts of their minor children.

The taxpayers appealed these notices on the grounds that HMRC already had enough information to determine the tax liability. It had already issued discovery assessments that they had appealed, so requesting further information was unreasonable. They stated that they had already provided HMRC with full explanations of the payments made and received by the extended family. This included schedules of dividends, loan agreements, evidence of how the funds were used for the couple’s benefit, details of family wills, and how properties were owned.

HMRC stated that the information was needed to prove that the couple did not beneficially own the shares nor use the dividends. The FTT upheld the taxpayers’ appeal, finding that as the discovery assessment was under appeal, no useful purpose would be achieved by ordering compliance with the information notice before proceedings. The information was not reasonably required. The taxpayers did not want a resolution before that appeal, so their refusal to provide information was allowed.

Yerou & Anor v HMRC [2022] UKFTT 79 (TC)

From the weekly Tax Update published by Smith & Williamson LLP 

Appeals and taxpayer rights

126. Access by third parties to Tribunal pleadings

Cider of Sweden Ltd (t/a Kopparberg UK) has lodged an appeal with the First-tier Tribunal (FTT) in relation to duty on imported flavoured cider (in parallel with a High Court claim). The issue is potentially important to all importers of flavoured cider and Kopparberg’s competitors therefore sought disclosure of Kopparberg’s notice of appeal and HMRC’s statement of case, which would provide details of the parties’ arguments. 

The FTT has decided that it could order disclosure to third parties if it considered that it was in the interests of open justice to do so. However, no hearing had yet taken place and disclosing the proceedings would not therefore help public scrutiny of the Tribunal’s decision-making process, or the public’s understanding of how the Tribunal system works. Kopparberg’s competitors would certainly gain an understanding of the legal arguments being presented, but even if that did advance the principle of open justice then it would be outweighed by Kopparberg’s (and HMRC’s) preference for the matter to be kept confidential until the appeal was heard and a decision published. The disclosure application was refused.

From the weekly Business Tax Briefing published by Deloitte 

127. HMRC penalty guidance updated for follower notices

The guidance on follower notices and accelerated payments has been updated to cover penalty reductions for taxpayer co-operation, when it is reasonable for a taxpayer to appeal, and for multiple grounds of appeal.

The HMRC guidance now sets out specific percentages for the maximum reductions for each way in which a taxpayer can co-operate, for various circumstances. A worked example is included.

Follower notices are intended to discourage appeals in cases where the planning has been shown to be ineffective in another case. The guidance now explains in what circumstances it is reasonable for a taxpayer not to take corrective action, but to pursue an appeal. Examples are included.

A section on multiple grounds of appeal has also been added.

From the weekly Tax Update published by Smith & Williamson LLP

Tax avoidance

128. HMRC issues guidance on its new power to publish information about tax avoidance schemes

Section 86, Finance Act 2022 provides HMRC with the power to publish information about tax avoidance schemes and about persons suspected to be promoters of those schemes. 

HMRC has issued guidance explaining when details may be published, the type of information that may be published and where it may be published, alongside details concerning the process for making representations about whether the information should be published. 

Contributed by Richard Jones

 

International

129. Consultation launched on crypto-asset transparency framework and CRS improvements

The OECD released a public consultation document on 22 March 2022 looking at two areas to improve the automatic exchange of financial account information between the tax authorities of different jurisdictions.

The first aspect is a new framework for the automatic exchange of information on crypto assets, known as the crypto-asset reporting framework (CARF). The CARF will cover those assets that can be held and transferred in a decentralised manner without the intervention of traditional financial intermediaries. 

Businesses that provide services to exchange such assets for other crypto assets or monetary currency will need to carry out due diligence procedures to identify their customers, and then report the aggregate values of the exchanges and transfers for these customers on an annual basis.

The second aspect involves extending the scope of the common reporting standard (CRS) to cover electronic money products and central bank digital currencies. The proposals also include changes to cover indirect investments in crypto assets through investment entities and derivatives. In addition, it proposes improvements in due diligence procedures and reporting outcomes to increase the usability of CRS information for tax administrations and limiting burdens on financial institutions, where possible.

Written responses to the consultation were invited until 29 April and a public consultation meeting will be held at the end of May 2022. Following the consultation, the OECD plans to finalise the rules and commentary to the CARF and the amended CRS. The OECD is due to report back to the G20 on the CARF and the amended CRS at the G20’s October 2022 meeting.

Contributed by Richard Jones