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Weekly Tax Update 15 September 2021
The latest tax update and VAT round up for the week.
Tax Update provides you with a round-up of the latest tax developments. Covering matters relevant to individuals, trusts, estates and businesses, it keeps you up-to-date with tax issues that may impact you or your business. If you would like to discuss any aspect in more detail, please speak to your usual Smith & Williamson contact. Alternatively, Ami Jack can introduce you to relevant specialist tax advisors within our firm.
1. General
1.1 Budget date set as 27 October
The Treasury has confirmed that the next Budget will be held on Wednesday 27 October, alongside a Spending Review.
The last two Autumn Budgets were both delayed to Spring, so this is the second Budget held in this calendar year, following the 11 March 2021 Budget.
www.gov.uk/government/news/chancellor-launches-vision-for-future-public-spending
1.2 FTT finds that a scheme was notifiable under DOTAS
A tax avoidance scheme involving forward purchase and sale contracts was notifiable to HMRC under the DOTAS regime.
The taxpayer was a limited liability partnership that had designed and promoted a tax avoidance scheme. The scheme involved an individual simultaneously entering into a forward purchase contract and a forward sale contract in respect of financial securities. In all cases, the scheme users repeated the transaction until a significant tax loss was generated. In a separate case, the FTT had found that the only or main purpose of the arrangements was to secure a tax loss. This ruling only considered whether or not the financial structures were notifiable under DOTAS.
The FTT found that the structures were notifiable. The structures amounted to arrangements, and those arrangements were expected to enable a person to obtain a tax advantage. That tax advantage was the main or one of the main benefits expected to arise from the arrangements. It also met three of the prescribed hallmarks: a premium fee was charged, it was a standardised tax product, and it was a loss scheme. The taxpayer was therefore liable to penalties for failing to notify HMRC of the scheme.
HMRC v Redbox Tax Associates Limited LLP [2021] UKFTT 0293 (TC)
2. Private client
2.1 NICs and dividend IT to increase by 1.25%
From April 2022, the rates of NIC for the employed and self-employed will increase by 1.25%, as well as NICs paid by employers. The rates of income tax on dividends will also increase by 1.25% from the same date.
For dividends, the increase will be 1.25% added to each income tax rate band from April 2022. This means the dividend basic rate will change from 7.5% to 8.75%, the higher rate from 32.5% to 33.75% and the additional rate from 38.1% to 39.35%. The £2,000 tax free dividend allowance is unaffected.
For NICs:
- the rates on self-employment income (Class 4) will increase by 1.25%;
- the rates paid by employees on employment income (Class 1 primary) will increase by 1.25%; and
- the rates paid by employers on salaries and benefits (Class 1 secondary, Class 1A and Class 1B) will increase by 1.25%.
These increases apply from April 2022 to the current NIC paying population, but from April 2023 the NIC 1.25% increases will also apply to those over state pension age. This will be done by splitting the 1.25% out into a separate ‘health and social care levy’ which will operate independently from NICs, but use the same thresholds and reliefs, at least initially. The one year delay is due to the need to modify HMRC systems.
www.gov.uk/government/publications/health-and-social-care-levy/health-and-social-care-levy
www.gov.uk/government/news/chancellor-launches-vision-for-future-public-spending
2.2 HMRC update on worldwide disclosure facility penalties
Taxpayers issued with protective assessments relating to offshore tax matters before the expiry of the requirement to correct extended deadlines may be contacted by HMRC shortly to discuss penalties.
Under the requirement to correct legislation, some time limits for HMRC to inquire into offshore tax matters were extended to 5 April 2021. Prior to this date, HMRC issued some taxpayers with protective assessments, if a settlement had not been agreed.
HMRC is now reviewing the penalty position for these taxpayers. Officers will contact them, or their agents, to gather evidence of any mitigating factors, and then penalties will be issued.
https://www.tax.org.uk/worldwide-disclosure-facility-penalty-assessments-update-from-hmrc
2.3 HMRC nudge letters for unsubmitted 2018/19 returns
HMRC’s wealthy external forum has notified the CIOT that it will shortly be writing to taxpayers who filed returns for 2017/18 and 2019/20, but not 2018/19, despite receiving notices to file. Agents will be sent copies.
Wealthy taxpayers will be targeted for this prompt to bring their tax affairs up to date. The letter will advise them to submit a return and arrange payment of any tax due. HMRC will be in contact regarding late filing penalties. If taxpayers believe they have a reasonable excuse, they should contact HMRC using the number on the letter. Determinations will be considered for those who do not respond.
https://www.tax.org.uk/hmrc-nudge-letter-outstanding-sa-returns
2.4 Trust income found not to be earnings
Loans made by a remuneration trust to the sole shareholder of a company have been found not to be taxable as earnings, despite the fact that the trust was funded by this company through which he worked. The company agreed that the loans were taxable as distributions.
A dentist, who had previously been self-employed, established a company through which his dental practice was run. The company established a trust, which received payments from the company of its entire profits, and loans were then made to the dentist indirectly. The amounts and timing of the loans matched the payments to the trust closely. This was a scheme intended to extract profits from the practice tax free for the dentist, and allow the company to obtain a tax deduction for payments to the trust.
HMRC contended that the PAYE and NICs were due on the payments to the trusts, as they were earnings from employment or disguised remuneration, as ‘fruits of his work’, and challenged the availability of this deduction for the company. The FTT found that the payments were not earnings, but that if it was incorrect in that then a deduction would be available. The company had previously accepted that the loans should be taxed as dividends.
The FTT came to its conclusion after a thorough review of case law, finding that such evidence as there was pointed to the monies being paid to the dentist for his services as a director, rather than as a salary. If he had not used the trust, he stated that he would have received dividends, not salary, which was in fact the arrangement he is now using. The fact that he used an ineffective structure did not change the underlying reason for the extraction of funds.
Marlborough DP Ltd v HMRC [2021] UKFTT 304 (TC)
2.5 Appeal allowed in discovery case
The FTT found that discovery assessments were invalid, though issued in relation to a real discovery, as the taxpayers had not acted negligently.
The taxpayers entered into avoidance schemes for SDLT sub-sale relief, later agreed to be ineffective. HMRC did not raise enquiries in the enquiry window in error, despite spotting an issue, but later raised discovery assessments. These were in relation to retrospective legislation introduced in FA2013, as the SDLT returns had not been amended to accord with the new legislation. The FTT found that a discovery had been made as insufficient tax had been paid in relation to the transaction.
The FTT went on to find that the assessments were invalid, and allowed the appeals, as the taxpayers had not acted negligently in failing to amend their returns to accord with the retrospective legislation, nor had anyone acting on their behalf.
The promoter had been acting on behalf of some of the appellants, as they had written to HMRC regarding the retrospective legislation. HMRC had however not met the burden of proof to show that the promoter’s conduct was negligent, as HMRC had not established whether or not a reasonably competent tax adviser would have taken the view that the return needed to be amended.
G C Field & Sons Ltd & Ors v HMRC [2021] UKFTT 297 (TC)
3. PAYE and employment
3.1 Cars found to be taxable benefits although company fully reimbursed
Directors leased cars through their company, at no cost to the company as they reimbursed it in full. The FTT found that there was a taxable car benefit, as the directors had obtained a more advantageous financing deal by using the company name rather than leasing the cars personally.
A company acquired some cars on lease purchase, and made them available to the two directors. The full costs were recharged to the directors. This was done through the company as it was offered a good finance rate. The directors were paid a mileage allowance when on company business. HMRC considered that provision of the cars was a taxable benefit, and issued assessments for IT and NICs.
The FTT found that although the directors had reimbursed the company for its costs, they had still obtained a benefit, as the finance terms were better than they could have obtained as individuals, though at no cost to the company. IT and NICs were due on the car benefit, which under the legislation is calculated to be a greater value than the actual benefit received. The behaviour of the taxpayers was found not to be careless, as it was a reasonable assumption that there was no benefit, and professional advisers were employed. Some of the assessments therefore failed as the extended time limit did not apply and penalties for inaccuracies were cancelled.
Smallman & Sons Ltd, Lisa Garrety & Brian Garrity v HMRC [2021] UKFTT 300 (TC)
4. Business tax
4.1 FTT rules on definition of small and medium-sized enterprises for R&D
A company was held not to breach the small and medium-sized enterprise (SME) thresholds, because its investor was a venture capital company. The FTT did not define ‘venture capital company’, but did provide a list of characteristics common to such companies.
The taxpayer was a company involved in gene sequencing detection. It claimed R&D relief under the SME scheme. HMRC argued that it was a large company and therefore only entitled to R&D relief under the large company scheme.
The taxpayer did not breach the financial thresholds for being an SME on its own. The size limits, however, generally require the financial figures to be aggregated with partner enterprises. If the partner enterprise is a venture capital company it may be exempted from this rule. It was agreed that if the major corporate investor in the taxpayer was a venture capital company, the taxpayer did not breach the SME limits and was therefore entitled to SME R&D relief.
There is no statutory definition of ‘venture capital company’, but the FTT listed eight characteristics that such companies usually exhibit. These include investment in high-risk, speculative new ventures with a view to a high reward and an intention to maximise return through an exit strategy. It agreed with HMRC that a strategic investment in order to benefitting the wider group is generally not the activity of a venture capital company. In this case, the investment was more of an opportunistic one, the investor company satisfied the eight characteristics and any strategic benefit was ancillary to its main purpose of achieving a high return. The investor was found to be a venture capital company. The taxpayer was therefore an SME and the appeal was upheld.
DNAE Group Holdings Limited v HMRC [2021] UKFTT 0284 (TC)
4.2 FTT decision on unallowable purpose and debt restructuring
The FTT has disallowed interest deductions for a group, finding that the debits related to an unallowable purpose. The group had reorganised its debt with the aim of claiming increased interest deductions and accessing significant losses much earlier than would otherwise be possible.
The taxpayers were a group of companies that undertook a debt reorganisation. This involved assigning several intra-group loan receivables to one group company, increasing the interest rate on those loans, and issuing new loans. As a result, the creditor company was able to utilise brought-forward non-trade loan relationship losses of £48 million in two to three years, rather than an estimated 25 years. The group also incurred increased interest costs. HMRC denied a large proportion of the tax deductions relating to these arrangements on the basis that the loans were for an unallowable purpose.
The FTT found that the only purpose of the new loans was to obtain a tax advantage by way of the group accessing losses earlier and claiming higher tax deductions for interest payments. There were found to be two main purposes of the pre-existing loans: the obtaining of a tax advantage, and the original commercial purposes for which the loans were first taken out. In particular, the fact that the interest rates had been increased during the reorganisation indicated that the original commercial purpose was no longer the only purpose.
The FTT held that all the debits in respect of the new loans were attributable to the unallowable purpose and were therefore disallowed. The debits in respect of the pre-existing loans were disallowed to the extent of the increased interest rate. The total disallowance was capped at the amount of losses used by the creditor company to offset the loan relationship income. The fact that the restructuring had been informally discussed with the group’s Customer Relationship Manager did not amount to HMRC’s approval of the arrangements, especially because not all the facts were disclosed.
Kwik-Fit Group Limited (and others) v HMRC [2021] UKFTT 0283 (TC)
4.3 FTT allows an appeal regarding a form mix-up
A company accidentally submitted an Enterprise Investment Scheme (EIS) form instead of a Seed Enterprise Investment Scheme (SEIS) form. The FTT ruled that the company should not be denied authority to issue SEIS certificates to its investors, without which they could not claim SEIS relief.
An online fashion start-up company had received investment under the SEIS, for which it had received advance assurance from HMRC. It then mistakenly submitted an EIS compliance statement instead of an SEIS compliance statement. HMRC refused to authorise the company to issue SEIS certificates to its investors, arguing that the statutory requirements had not been satisfied in relation to the shares. The investors were therefore prevented from claiming SEIS IT relief in respect of those shares.
The FTT upheld the taxpayer’s appeal against HMRC’s refusal. It noted that the requirements for HMRC to authorise a company to issue SEIS certificates are substantively the same as for EIS certificates. Furthermore, both parties agreed the matter arose from a genuine mistake. The FTT held that the equitable remedy of rectification was available to the company. The erroneous form should be treated as if it had been rectified to reflect the information and declarations of the correct form.
Fashion on the Block Limited v HMRC [2021] UKFTT 0306 (TC)
5. Tax publications and webinars
5.1 Tax publications
The following Tax publications have been published.
5.2 Webinars
The following client webinars are coming up over the next week.
- 21 September: Professional Practices Autumn Webinar Series
6. And finally
6.1 Another baby on the way
Regular readers may well have noticed that NIC is going to be reduced substantially in 2023. No; we’re not making that up. The reduction is to smooth the arrival of our latest baby tax, the snappily-titled Health and Social Care Levy (see Article 2.1 above). And finally is intrigued, as ever, by the possibility of a new arrival to join the tax family. As a newborn, it will be small but by all accounts, will have a very respectable birth weight. Will it survive to grow to maturity? Will it grow in complexity to fill its own volume of the Yellow Book, or will it just be bullied by its older and bigger siblings? It’s the joy of any infant that its future possibilities are limitless.
But for now, it’s splendid that we have a new tax, if a levy is a tax, whose purpose it seems is mainly not to be another tax, if NIC is a tax. (Non) tax for (non) tax’s sake? That is And finally’s kind of thinking.
Disclaimer
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.
