Autumn 2011 Tax Update

This is a round-up of what we found interesting in SME tax over the last couple of months and ahead of the draft 2011 Finance Bill.

Anti-avoidance

HMRC has created new teams to start making compliance checks into SME direct tax avoidance schemes. Obvious points for review include:

Whether the scheme:

• Is actually the same as the one declared under DOTAS
• Has been implemented correctly

A General Anti-Avoidance Act (GAAR)

Graham Aaronson QC has reported on the possibilities of introducing a General Anti-Avoidance Rule (GAAR) in to the UK's tax code. This would apply to tax as well as NICs.

Phone calls with HMRC (used in evidence)

If HMRC calls a client make sure that a transcript of the call is accurate and retained. Although HMRC says that it records calls, a recent Tribunal decision reveals that HMRC's impression of what was said in a phone call was not accurately recorded and more to the point not the same as the taxpayer's. The Tribunal believed the taxpayer's account of the call.

When matters like this come up at the Tribunal it can seriously damage your credibility if your evidence is found to be unreliable, as HMRC found...More

Employment status

This selection of recent cases reveal that nobody is any closer to defining sensible tests for employment status.

Not an employee

In Brian Turnbull [2011] TC 1243 a driver was found not to be an employee of a haulage contractor even though he used its vehicle. The Tribunal concluded that:

• Employment status not a mechanical exercise, a picture needs to be painted.
• There was no mutuality of obligation.
• A person can be in business on own account, even when all he supplies is his services.

In contrast:

In Weight Watchers (WW) v HMRC, the Upper Tax Tribunal upheld the decision of the First Tier Tribunal and decided that WW leaders were employees. Key factors:

• Substitution: leaders were unable to provide their own choice of substitute.
• Control: WW dictated the way that classes were run.
• The ability to profit or loss: this was limited the price of the products was set by WW.

Construction industry and employment status: special factors

In PA Bell [2011] TC1234the First Tier Tax Tribunal considered whether a bricklaying subcontractor was a worker for NICs purposes. They found him self-employed.

The conventional tests for control were found to be affected by construction site specific factors which mean that a main contractor would always have overall control and the Health & Safety rules, which together dictate:

• Working hours
• How the work is done
• The level of direction by supervisor

These need to be factored in when considering site workers.

Close Investment Holding Companies

Two contrasting decisions on CIHC are included in our Close Investment Holding Companies note. Top tip: if your activities are wholly or mainly letting to related parties and you state that in your accounts (the principal activities note) it is quite difficult to argue otherwise.

Joint Property

We have had two decisions from the Tribunals which illustrate how the doctrine of constructive trust is applied in practice. In each case property was intended to be held jointly but purchased in the names of a single individual. Both cases need not have got as far as the Tribunal if the taxpayers had been advised make formal declarations of trust. See Joint property: legal v beneficial ownership

EIS relief

All money raised must by issue of relevant shares must be employed wholly for the purpose of the qualifying business activity within a time limit of 2 years.

A company held cash in an instant savings account: the Upper Tier Tax tribunal held that this did not satisfy the purpose test and disqualified EIS relief, case: Christopher Richard Skye Inns Ltd v HMRC [2011] UKUT B25 (TCC)

See Enterprise Investment Scheme (EIS)

Tax relief on loan interest

Tax relief is given on a qualifying loan made to a close company under section 354 ITA 2001.

No relief is available for overdraft interest recharged by proprietor, see W Green TC1502

See Interest relief: making a loan to a close company

VAT: single supply directions

Customs may make a direction to combine two businesses so that they are treated as a single taxable supply.

This may be expected when there is artificial separation of businesses to stay beneath the VAT registration threshold, but it may also happen in innocent cases. The test is whether the businesses have financial, economic and organisational links.

Businesses typically caught: husband and wives running different businesses from the same trading premises.

For example: where a husband runs an accounting practice, wife runs a bookkeeping and payroll bureau. We summarise recent cases in our guide VAT: income splitting (single supply directions)

VAT costs sharing direction

Charities, higher education colleges and other bodies may group together to save VAT costs. Reclaims are now possible for last four years.

CGT Entrepreneur’s Relief – part disposal of a business

Entrepreneurs' Relief may apply on the disposal of a business, or part of a business by an individual.

• It may also apply on the sale of a business’ assets provided that they were in use at the time that that unincorporated business ceases.
• It does not apply when on the disposal of business assets but the business has not ceased.

So when you sell off assets, are these part of a business or just some its assets?

Most of the cases in this area involve farmers selling surplus land, but a non-farming case heard recently by the First Tier Tax Tribunal illustrates the difficulties in determining whether the asset being disposed of is part of a business or its assets.

• In M Gilbert v HMRC [2011] UKFTT the taxpayer was a food broker: he acted for nine suppliers. He claimed Entrepreneurs Relief on the disposal of part of his business to one of his suppliers, this included assets consisting of goodwill, trademarks and a customer database.
• This was a transfer as a going concern and once sold off the part sold was able to run as a separate business. He was able to continue running the rest of his business with his remaining lists in a reduced scale.
• HMRC denied relief claiming that the disposal amounted merely to a disposal of business assets. HMRC claimed that it was necessary that the part sold could be separately identifiable in its own right.
• The Tribunal looked at the background to Entrepreneurs’ Relief and went cross tax into both VAT and Industrial Buildings Allowances before agreeing that the part sold was significant and taking into account HMRC’s tests, even if not required by the legislation the two parts were separately identifiable.

How this differs from farming cases? Farming cases tend to involve the disposal of farmland. The business remains farming before and after with no significant difference between the business carried on before and after.

See Capital Gains Tax: Entrepreneurs' Relief

IHT Business Property/Agricultural Property

In HMRC v Atkinson & Anor [2011] UKUT the Upper Tax Tribunal reversed the decision of the First Tier Tribunal: a bungalow let to a farming partnership failed to qualify for APR once the farmer who occupied it moved into separate residential care.

See Business Property Relief (IHT)

Christmas planner

Times and due dates for the next month

Avoiding late PAYE penalties

Our PAYE late payment penalties buster is a guide created for you to discuss with clients. It pays to change your behaviour, but with some irony we conclude not in the way that HMRC wants.

Appealing tax penalties

• Is your excuse reasonable?
• More to the point how will you prove it?

We have created a new summary which is really to emphasise the need to be active in obtaining and retaining evidence

Other points on "reasonableness"

A taxpayer must be a good witness and show the Tribunal that he honest and acts in a way that someone who seriously intends to honour their tax obligations would react B & J Shopfitting Services [2010] TC390

Penalties: what rate is reasonable?

Now we move into the new tax penalty regimes we are seeing some stark contrasts.

A Moran v HMRC TC 1420 PAYE failure to deduct on payments to bar staff: 45% penalties. The Tribunal said that it found that 55% abatement was generous.

D Collis V HMRC TC 1431 income tax on benefits the employee failed to declare them on her tax return and was fined 15%.

Our verdict: an employer will be deemed to understand its obligations under PAYE and so may be viewed as dishonest or careless if it fails to operate it. An individual may claim to be confused by the tax system. It probably helps that most judges find tax confusing too. 

See Tax penalties: grounds for appeal

Latest tax consultations: at a glance

Modernising the administration of the personal tax system: tax transparency for individual
Considers integrating the operation of income tax and national insurance contributions: next steps
Our verdict: misses the spot, it is only for PAYE
Closes 24 Feb 2012

PAYE Real time information
Improving the operation of PAYE
Our verdict: passes even more work to the employer and a nightmare for share scheme reporting
Closes:9 January 2012

Lecturers, teachers, instructors or those in a similar capacity
This examines the repeal of the Social Security (Categorisation of Earners) Regulations>
Our verdict: a welcome simplification of NICs rules
Closes 6 January 2011

PAYE Pooling
Considers whether associated employers might like to group their PAYE operations.
Our verdict a legal minefield and unlikely to progress with PAYE Realtime reporting on-going
Closes: 15 December 2011