This is our rolling update. We will add points of interest as we note them throughout the month, and update our guides on these topics as we go.
PAYE matters: see PAYE Update Feb 2011
Investigations and amnesties
The Plumbers' Tax Safe Plan (a tax amnesty for everyone) is a new initiative by HMRC to persuade everyone (not just plumbers) to get their tax affiars in order.
Penalties
Reasonable excuse
What counts are a reasonable excuse in the event of tax compliance failure?
Increased penalties for offshore offences
Increased penalties for offshore income and CGT apply from 6 April 2011.
HMRC operates its own version of Schedule 24 FA 2007: it is not keen on suspending penalties for one-off errors in returns or documents attributable to carelessness. The Tax Tribunal has found otherwise. Our summaries of recent case decisions provide an update: Tax penalties: grounds for appeal
We have also updated our guide for discussion with clients: Tax penalties: what is reasonable care?
Pensions
We have had a couple of cases where the new rules on contributions made in pension input periods spanning 5 April 2011 (as most will do) mean an unexpected tax charge. We have updated our Pensions: tax rules and planning to illustrate. The new rules do not only affect higher paid earners.
Profit extraction
Write off of a director's loan
In Stewart Fraser Limited [2011] UKFTT 46 (TC) the strategy of releasing an overdrawn loan account did not pay off. The Tribunal decided that in the absence of evidence to the contrary the written off sums were earnings for NICs purposes.
EIS and management buy-outs
In past, HMRC held the general view that a management buyout cannot qualify for relief under the Enterprise Investment Scheme (EIS) due to the prior involvement of the acquiring managers in the trade whose ownership is transferred in the buy-out.
The First Tier Tribunal recently held that relief may be available for the initial subscription of shares as at that point any new company formed to take on a trade in a buy-out has not actually carried on that trade. See Enterprise Investment Scheme.
Motoring
What expenses can I claim? Travel
New updates and top tips in our travel guide for the self-employed: four recent case decisions. On average HMRC has been largely unsuccessful in claims to disallow travel, because it gets the base of operations wrong. Is it time HMRC updated its training and manuals - on this aspect?
Advisory fuel rates
HMRC have announced new advisory fuel rates will apply for company car drivers from 1 March.
NICs on motoring expense allowances
HMRC are appealing to the Upper Tribunal in the NICs motoring expense case Total People Ltd. Until the appeal is decided HMRCs position remains unchanged: there must be a clear link between the payment made and the actual use of the vehicle.
CGT tax relief on the disposal of a main private residence
There have been a rash of First Tier Tax Tribunal hearings lately concerning CGT relief on disposal of a private residence. In a nutshell, the taxpayers fail to take professional advice and are unable to provide evidence of sufficient quality of occupation. This seems to have reached a crescendo in the case of Alexandra Bradley v HMRC [2011] UKFTT 49 (TC) the taxpayer seems to have completely misunderstood the rules (perhaps after hearing about MP’s flipping homes), but more likely bad use of search engines. See CGT: Main Residence Relief
Individuals: new guidance on Residence
HMRC issued a revised version of their residence guidance HMRC6 - Residence, Domicile and the Remittance basis on 31 December 2010.
This area of tax is a potential minefield for advisers. We have highlighted some of the changes to HMRC6 in Residency: coming to the UK. There also remains little guidance regarding the meaning of working “full-time abroad.”
We have created a new guide Residency: working full time abroad to outline the basics and have updated the case law section for the recent decision in Lyle Dicker Grace [2011] UKFTT 36 (TC) a British Airways pilot was found to be UK resident and ordinarily resident, failing to provide evidence to prove that he had made a distinct break from the UK. Key factors against making a clean break: having a UK employer, house and girlfriends.
Points to note: if you want to leave the UK for tax purposes think carefully about severing all ties in order to make the requisite distinct break.
Capital allowances
Aniti-avoidance - long leases
HMRC has brought in new Budget measures which will deny lessees tax relief on certain residual guarantee payments.
ECO holiday lets are not plant
Mrs McMillin v HMRC [2011] UKTFF 65(TC) Mrs McMillin is a partner for KPMG, who bought an old farm and set out building a house with four “ECO” holiday cottages. She claimed that the holiday cottages were plant, or if not then items such as stone floors, windows, paint and an earth bank were individual items of plant.
The Tribunal went to look at the properties. They were not convinced that a cottage was plant. Whereas the whole of a dry dock was once found to be plant, a cottage is a cottage it seems. It was argued that if a caravan can be plant then a cottage can be plant too, the Tribunal did not agree.
As to the other items, List C in s23 CAA 2001 includes as plant “any floor or ceiling comprised in” space or water heating systems. Whereas List A in s21 covers items which are treated as buildings and this also includes floors. Mrs McMillin claimed that the stone floors of the cottages were plant, being part of the underfloor heating system and it was noted the screed beneath them (and presumably insulation and pipes below that) were accepted by HMRC as plant. The Tribunal did not agree because upstairs the floors were wooden and if stone floors were plant the system would have required them throughout.
The Tribunal then found that the windows and paint were not plant despite the “eco” credentials of both.
The claim for the cost of the earth mound or bund was rejected by the Tribunal on the basis that it was provision of expenditure on the alteration of land and so excluded from being plant by s22. It had no special significance and looked to the Tribunal as if the main purpose of its creation had been to dispose of waste from the site.
Our conclusions: as technology changes there may be more of these sort of cases. Be mindful of the definitions of what is and what is not plant and machinery when you are at the design stage rather than after incurring any costs.
Partnerships
Stamp Duty Land Tax: HMRC guidance
The long awaited chapter on Partnerships is published.
Direct tax: we have expanded our note on running a company with a LLP (or other form of partnership). It is complicated, and you really need to think carefully about introducing land and property and thereafter monitor the CGT/IHT position for incoming and outgoing partners. More to come in this area, email us if you are interested.
Companies
Associated companies
New rules are expected to be introduced from 1 April 2011. It will no longer be necessary to attribute the rights of associates where there is no substantial commercial interdependence between two companies, see Associated companies: new rules from 2011
Company residency
Advisers often ask if there is any clear cut test to determine company residency. S14 CTA 2009 states that a company incorporated in the UK is UK resident for corporation tax purposes, however a company may be treated as non-resident under double taxation agreements.
Jonathan Schwarz talked briefly on company migration on the occasion of Temple Tax Chambers' recent Corporation tax update. Where a company is resident in two OECD contracting states the OECD model article 4(3) provides a tie-breaker, its residence shall be decided as being in “the state in which its place of effective management is situated”.
When advising companies on migration the general view has been that the place of effective management would be the country where the board of directors regularly holds its meetings. In Laerrstate BV v HMRC, that test was downplayed by the circumstances of the case; it was decided that the place of residence was the country where the controlling director happened to be located when he made key decisions and this was not where the board regularly met. On those terms the company was resident in the UK. The lesson learned; you must consider all the facts.
However, Jonathan draws attention to the UK-Netherlands tax Treaty (freshly signed in 2011 by the Netherlands, but strangely referred to as the 2008 Treaty). This this is more of a brain-teaser than a tie-breaker because it states that residence shall be determined by "the mutual agreement of the competent authorities." So, in contrast to the OECD model, there is no mention of effective control. Unfortunately for those attempting to advise in this area no criteria is given for determining mutual agreement.
Insolvency taxation: know your accounting periods
Advising a company that is considering going into adminstration or liquidation? Plan ahead, if possible, in order to maximise the tax charge in the accounting period before the event. The reason is obvious; if the company does go under, it will advance the prospects of a pre-pack if all of its liabilities go to. Barrister Philip Ridgway (again at the Temple Tax Chambers corporation tax event) discussed the importance of obtaining the right advice in order to work out exactly where accounting periods begin and end when insolvency is around the corner.
VAT
Flat rate scheme: in Fanfield and Thexton Training v HMRC [2011] UKFTT 42 (TC) The Tribunal found that for the purposes of the VAT flat rate scheme bank interest should not be included as part of relevant turnover.
Blinds: are part of the cost of a building (just like a fitted kitchen or fitted wardrobe) according to the VAT Tribunal in John Price (TC/2010/01287) this means that a self-builder will be able to reclaim VAT on the cost under the VAT self-builder's scheme. However HMRC says that it is not going to change its policy despite the Tribunal's finding.
Ferrets: are pets (in case you ever wondered) so their food is standard rated (and not zero rated as a supply of animal feed). Supreme Petfoods Ltd v Revenue & Customs [2011] UKFTT 19 (TC) (21 January 2011.
Tribunal rules on costs applications in relation to appeals lodged with the VAT Tribunal
Advisers Ernst and Young report: the First Tier Tribunal recently issued decisions in cases dealing with its discretionary power to award costs in relation to appeals originally made to its predecessor, the VAT and Duties Tribunal (the VAT Tribunal). These decisions are relevant to any VAT appeals started before April 2009. Where affected taxpayers wish to be able to recover costs (if successful), these decisions suggest that it would be better to make any application for the old costs regime to be applied as soon as possible (although it may be that HMRC will resist any such application). Any taxpayers who have ongoing VAT appeals which were started before April 2009 may wish to consider their position in the light of these developments.
Anti-avoidance
New spotlight: anti-avoidance of anti-avoidance
Schemes designed to avoid an income tax on charge under the new rules designed to tackle disguised remuneration for EBTS are singled out by HMRC.
E-filing by agents: avoiding personal liability
When an adviser (agent) files electronically on behalf of a client company the agent should:
- Make a copy (electronic or paper) of the information.
- Have confirmation, by the proper officer or other person authorised to act for the company in this regard, that the information is correct and complete to the best of the knowledge and belief of that person.
- The confirmation must be in writing, but may be given in electronic or non-electronic form.
Completion of a declaration in the return by the proper officer or other person authorised to act for the company in this regard that the return is correct and complete to the best of the knowledge of that person, as required by the Finance Act 1998, Schedule 18, paragraph 3(3).
HMRC Directions under SI 2003/282 have been updated see http://www.hmrc.gov.uk/thelibrary/ct-online.htm
The Professional Bodies have also recently issued guidance on dealing with HMRC and this contains further advice on avoiding personal liability.
Consultation corner
One last one standing (closing 11/3/2011)
Simplification of tax penalties (bolting the door after the horse has bolted?)
After what seems like a life time of consultation on the topic of “Modernising Powers, Deterrents and Safeguards”, and the rolling introduction of some 30 new tax penalties and compliance measures into our statute books, the penny seems to have finally dropped: it is all too tricky and even HMRC is getting the new system wrong. The solution? Shake it up again…HMRC published a discussion document on “The Simplification of Regulatory Penalties” on 31st January 2011. The closing date for comments is 11th March 2011.
The consultation asks, do we:
a) Scrap it the existing fixed and "Up to" type penalties, across all the taxes and duties and have a fixed penalty system that cuts out discretionary penalties? Or
b) Review all penalties and start again?
