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.
1.1 HC refuses to modify order causing tax charge
The HC has refused to order a majority shareholder to use a tax avoidance scheme to purchase shares. The HC had previously ordered that it must buy out the minority shareholder, but despite the fact that a straight purchase would result in a large tax bill for the vendor, there were no grounds for the HC to force a reluctant party to engage in supposed aggressive tax avoidance.
The minority shareholder obtained a court order forcing the majority shareholder to purchase its shares. Following the judgment, the minority shareholder discovered that a straight purchase would result in a large income tax charge. The wording of the order was to be agreed between the parties, so the minority shareholder requested that the majority shareholder make the purchase through a structure that would prevent a tax charge from arising. The majority shareholder did not agree. The minority shareholder applied to the HC for an order in its desired terms.
The majority shareholder argued that the proposed structure was aggressive tax avoidance, with which it did not wish to be associated, and that the delay needed until the tax year 2020/21 was unacceptable. The minority shareholder contended that this was a small, speculative risk, compared to the great disadvantage of a 38.1% tax charge, and that HMRC would not view a court-ordered transaction in this way.
The HC decided that the scheme could reasonably be viewed as aggressive tax avoidance. It refused to modify the order, holding that ‘The Court should not without very good reason order reluctant parties to enter into a scheme that could be held to be improper’, though had the parties agreed it would have been permissible for them to structure the transaction in that way.
Estera Trust (Jersey) Ltd v Singh & Ors  EWHC 2039 (Ch)
1.2 HMRC report on the Annual Tax Summary
HMRC has published a report that examines the recall, engagement and use of the Annual Tax Summary by taxpayers. In general, taxpayers prefer to receive it by post, but are unlikely to read it if they pay tax under PAYE.
The research was undertaken to improve HMRC’s understanding of how taxpayers engaged with the Annual Tax Summary (ATS), which has been issued to taxpayers since 2014. 54% of PAYE taxpayers interviewed remembered having received the ATS in the last 12 months, compared to only 33% of self-assessment taxpayers. Of those who recalled receiving it, approximately one-third of taxpayers had read it in full. Self-assessment taxpayers were more likely to have read it, whereas PAYE taxpayers were unlikely to have done so. The majority of taxpayers would prefer to receive the ATS through the post than have an online version.
1.3 Taxpayer opinions on YouTube tax support
HMRC has published a report that sets out its findings on how small and medium enterprises interact with tax support delivered in YouTube videos.
Videos posted on YouTube are the fastest-growing digital support product for small and medium enterprises (SMEs). The research was conducted to inform HMRC’s understanding of SME interaction with the videos, and its views on quality, user satisfaction, effectiveness and improvements. It found that 67% of users watched the videos in full, and 86% said the videos contained actionable guidance. Two out of five users said they would recommend the videos to others, and, of all user groups, employers were most likely to find the videos clear. The level of detail provided in the videos was a concern among those surveyed.
2. Private client
2.1 FTT confirms Entrepreneurs’ Relief available as company was trading
The FTT has found that a company was trading, despite the lack of business income arising following the financial crash. The company was seeking new business and this was for the purpose of a trade it was preparing to carry on. Entrepreneurs’ Relief (ER) was therefore available.
The taxpayer owned a company that traded as a successful business in the London Metal Exchange until the financial crisis, when the volume of trades dramatically decreased. Around this time, it invested just over 70% of its cash reserves in bonds in order to safeguard them, at which point most of the income of the company was derived from the bonds.
The taxpayer claimed ER on liquidation of the company in November 2015. HMRC denied the claim for ER on the basis that the company had ceased trading over six years before liquidation. It noted that the last invoice was issued in March 2009 and claimed that this is when it ceased to trade. The taxpayer argued that there were still active attempts to do deals until June 2014, and that this was primarily by telephone conversations. As a result, there was very little documentary evidence supporting this. After this time, the taxpayer suffered various health problems, which disrupted the continuity of negotiations for deals an ultimately caused him to cease his efforts and dissolve the company.
The FTT found that it was more likely than not that the company was carrying on trading activities at least up to November 2012. These activities were carried out for the purposes of a trade it was preparing to carry on, being its old trade. The FTT noted that the whole purpose of the activities was to seek new business and prepare the ground for the continuance of the trade once market conditions improved.
The FTT also found that the activities of the company did not, to a substantial extent, include activities other than trading activities. It considered that the activities of the company were entirely trading activities directed at reviving the company’s trade and putting it in a position to take advantage of the gradual improvement in global financial conditions.
ER was therefore available on liquidation.
Potter and Potter v HMRC  UKFTT 0554 (TC)
2.2 Appeal reinstated three years after strike-out
The FTT has reinstated an appeal three years after striking it out as the taxpayer had failed to comply with directions. HMRC had forwarded the strike-out letter to the taxpayer’s agent, rather than the taxpayer.
In 2015, the taxpayer appealed a CGT assessment to the FTT. Neither he nor his agent responded to letters from the FTT, so the appeal was struck out after warnings. He applied for it to be reinstated in 2018, contending that his agent had assured him the matter was in hand, and not notified him of the striking out. HMRC argued that the time limit should be observed to allow HMRC to close matters within a reasonable time.
The FTT reinstated the appeal. It found that HMRC had only sent on the strike out notice to the agent, not the taxpayer as well. This was insufficient, and in view of the taxpayer’s serious health problems his reliance on his agent was reasonable.
Nowroozi v HMRC  UKFTT 533 (TC)
3. PAYE and employment
3.1 Prime Minister announces a review of the loan charge
The Prime Minister has confirmed that he will initiate a review of the loan charge, but has not yet set out any details of how this will be undertaken.
The issue of the loan charge was raised during the Prime Minister’s Questions last week, and Mr Johnson acknowledged that it was a ‘very, very difficult issue’. He announced that a thorough review would be undertaken, and the Treasury has stated that the details will be set out in due course. Campaigners have urged that the review be conducted independently of HMRC, and that the loan charge be suspended until it is concluded.
4. Business tax
4.1 FTT denies capital allowances on satellite launches
An appeal against HMRC’s decision to refuse capital allowances on the cost of launching six leased satellites has been dismissed by the FTT. The statute that deemed there to be a sale on the succession of a trade, which has since been repealed, did not apply in this case because the satellites did not belong to the predecessor. Additionally, the launch costs did not qualify as expenditure on the provision of plant or machinery.
The taxpayer had succeeded to the trade previously carried on by a body corporate established under an international convention to operate a telecommunications satellite system. The predecessor had leased six satellites, and borne the launch costs. Capital allowances had been claimed by the lessors, and the predecessor was exempt from UK CT. The lease agreements were novated to the taxpayer when it took over the trade.
The taxpayer claimed writing down allowances on part of the market value of the satellites on the basis that they were deemed to be sold to it on the succession. The legislation in point deemed the assets held on the succession to a trade to be sold to the successor at open market value. This statute has since been repealed. Given that the lessors had claimed capital allowances on the cost of providing the satellites, the taxpayer proposed that the full market value be apportioned to allow only the market value attributable to the launch expenses incurred by the predecessor.
The FTT agreed with HMRC’s argument that the satellites did not belong, nor were they deemed to belong, to the taxpayer. The deeming provision did not, therefore, apply to this succession, and the taxpayer was not entitled to claim capital allowances on any element of the market value of the satellites. Even if this was incorrect, the launch costs did not amount to ‘provision’ of plant or machinery, nor was the predecessor required to provide plant or machinery under the terms of the leases. The satellites could not therefore be deemed to belong to it at the time of succession, so the statute did not operate to deem a sale at market value. The appeal was dismissed.
Inmarsat Global Limited v HMRC  UKFTT 0558 (TC)
4.2 FTT rules on SDLT annuity and connected party provisions
The FTT has upheld a decision by HMRC to increase the chargeable consideration on a purchase of land to market value. Where there is a transaction between connected parties in exchange for an annuity, the consideration is deemed to be market value under the connected parties rules. The annuities rules, which limit the chargeable consideration to the first twelve annuity payments, do not operate in this scenario.
The taxpayer was a company owned by a husband and wife (the Directors). Two transactions were undertaken on the same day: a property was transferred from the Directors to the company in exchange for a perpetual annual annuity of £3,000, and a second property was transferred from the company to the Directors in exchange for a perpetual annual annuity of £2,500. No written contracts had been drawn up for either transaction, and there was no evidence that any annuity payments had been made. The appeal was in respect of one of these transactions.
The SDLT returns were both filed on the basis that the chargeable consideration was limited to the value of the first twelve annuity payments in accordance with the annuities rules. These amounts were both less than £40,000, so the returns showed that no SDLT was payable. HMRC argued that the two transactions amounted to an exchange, and that the chargeable consideration was therefore calculated by reference to the market value of the properties. Alternatively, the consideration should be deemed to be market value because the parties were connected, or because the transactions formed a scheme that triggered the SDLT anti-avoidance provisions.
The FTT examined the interaction of the provisions governing the consideration deemed to be payable for connected party transfers and transfers in exchange for an annuity. It held that the connected party rules should be applied, with the effect that the chargeable consideration was the market value of the property. The annuity rules were found to apply only where the annuity represents the basis by reference to which the chargeable consideration is to be valued. In this case, the chargeable consideration was to be valued by reference to the market value, not the annuity. It also held that, on the balance of probabilities and without the benefit of sight of a written contract, the transactions did not amount to an exchange. There was insufficient evidence to determine whether or not the transactions comprised a scheme to which the anti-avoidance provisions might apply.
M & M Builders (Norfolk) Ltd v HMRC  UKFTT 0541 (TC)
5.1 Physical, legal and mental barriers uphold input VAT claim for business vehicles
The FTT has found for a sole trader in an appeal against HMRC’s refusal to allow VAT credits on the purchase of three cars. It found that the physical, legal and mental barriers put in place by the taxpayer were sufficient to ensure the cars were not ‘made available’ for private use. These included storing the keys in a safe, reconciliations of mileage to business trips, and contracts prohibiting private use.
The taxpayer had purchased three high-end vehicles for use in his mainframe computer consultancy business. He claimed input tax on the purchase of the cars on the basis that they were each used exclusively for business purposes. HMRC denied the claim and contended that the cars were made available for private use. HMRC noted, in particular, that the vehicles were insured for both social and business use at purchase, and solely for social use in subsequent years.
The FTT identified the two relevant issues: first, the taxpayer must prove that he did not intend to use the car for private use, and second, that it was not made available for private use. It found for the taxpayer on both points. He had implemented several measures to prevent private use by either himself or his family members, who worked as contractors for his business. These measures included storing the keys in a safe to which only he had the code, keeping mileage records and reconciling them against business trips, and requiring his family to enter into contracts prohibiting private use of the vehicles. He had also had several conversations with HMRC in regard to VAT over several years and was well aware of the rules pertaining to vehicles. Whilst these barriers primarily prevented private use by his family, the mental barrier provided by keeping the keys in a safe was found to be sufficient to prevent him from privately using the cars. The FTT also accepted his evidence that the insurance for social purposes was a result of an uncharacteristic mistake made by his late wife, who had suffered from brain cancer. The appeal was upheld.
Barry John Graham v HMRC  UKFTT 0517 (TC)
5.2 Postponement of the new VAT Domestic Reverse Charge (DRC)
The VAT Domestic Reverse Charge on buildings and construction services has been postponed for a year to October 2020.
It was announced last Friday that the DRC for buildings and construction services will be delayed until 1 October 2020. It was previously set for 1 October 2019. This is due to the substantial lack of awareness of the new rules in the construction industry and to avoid coinciding with any Brexit. HMRC has also recognised that businesses in the construction sector will need time to prepare for the impact to the new rules and the adverse cash flows for many affected businesses, as they will no longer receive VAT from customers where the reverse charge applies.
The purpose of the DRC for building and construction services, under which each party in the supply chain self-accounts for the VAT until the end user, is to combat fraud. In order to avoid HMRC disallowing VAT paid, it is essential that businesses receiving building services carry out sufficient due diligence on their suppliers, which can be demonstrated to HMRC in the event there is a fraudulent party in the supply chain.
6. And finally
6.1 Advowedly mine
Following And finally’s dive into Norman tax evasion last week, we were interested to come across more medieval terms the other day. It is amazing just how many rights in land the English Law has accumulated over the years. Freehold and leasehold are familiar to many, but advowson, manor, and feu duty are all terms used as recently as FA2019.
However, in these days of strict anti-money laundering checks, the dilemma of whether or not to act for those holding certain historical property rights is not wholly resolved. Most firms accept that the Normans are beyond punishment, but for their descendants the ideal answer to ‘Source of funds?’ is still not ‘acquired by right of conquest.’
|ATT – Association of Tax Technicians||ICAEW - The Institute of Chartered Accountants in England and Wales||CA – Court of Appeal||ATED – Annual Tax on Enveloped Dwellings||NIC – National Insurance Contribution|
|CIOT – Chartered Institute of Taxation||ICAS - The Institute of Chartered Accountants of Scotland||CJEU - Court of Justice of the European Union||CGT – Capital Gains Tax||PAYE – Pay As You Earn|
|EU – European Union||OECD - Organisation for Economic Co-operation and Development||FTT – First-tier Tribunal||CT – Corporation Tax||R&D – Research & Development|
|EC – European Commission||OTS – Office of Tax Simplification||HC – High Court||IHT – Inheritance Tax||SDLT – Stamp Duty Land Tax|
|HMRC – HM Revenue & Customs||RS – Revenue Scotland||SC – Supreme Court||IT – Income Tax||VAT – Value Added Tax|
|HMT – HM Treasury||UT – Upper Tribunal|
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.