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 Draft Scottish Budget released
The Scottish Draft Budget was announced on 6 February 2020. The Public Finance Minister promised that Scottish taxpayers would not pay more income tax in 2020/21 than on their current income.
The announcements included increases to the thresholds of the basic and intermediate rates of Scottish IT, which will be increased in line with inflation. The higher and top rates of Scottish IT will not be changed for 2020/21. The existing residential LBTT rates and thresholds have not been changed, but a third band has been added in respect of non-residential leases. It will impose a 2% tax on non-residential leases where rental income exceeds £2 million. It will only apply to contracts entered into after 5 February 2020.
These changes will be confirmed after the UK Budget has been delivered on 11 March 2020.
1.2 OTS to review claims and elections
The OTS has published a scoping document, which sets out the terms of its forthcoming review of claims and elections in the UK tax system.
The review aims to determine the number and type of claims and elections that exist in respect of the ‘main taxes’ in the UK. It will also examine how the most significant claims can be simplified, both in terms of the complexity of the rules and the administrative requirements. The scoping document specifically raises the issue of reliefs and exemptions that, in practice, require a claimant to engage a repayment agent who charges a fee in return for preparing the necessary claim.
A call for evidence will be issued shortly, and the OTS expects to publish the findings of the review in Autumn 2020.
2. Private client
2.1 UT overturns FTT ruling on commercial farming
The UT has found that an organic farming business was not carried on on a commercial basis. The judgement, which overturns an FTT decision, sets out the correct approach to the test for sideways loss relief for farming businesses.
The taxpayer’s business had not made a profit for approximately 17 years and HMRC treated the trade as non-commercial and denied sideways loss relief. The FTT had heard evidence from an expert witness and determined that a competent organic farmer would not have expected to make a profit during the tax years in question. The test for sideways loss relief was therefore held to be satisfied and the appeal was allowed.
The UT overturned this decision on the basis that the FTT had interpreted the test incorrectly. The correct approach is first to determine what activities were actually carried on in each year of loss. Second, assume those activities were carried on at the beginning of the loss period. If a competent farmer would have determined that, in those circumstances, a profit would not have been made until after the end of the year of loss, the test is met and sideways loss relief is available. It is important that the actual activities are considered in this test; general categorisation such as ‘organic farming’ is not permissible. Under this approach, and based on the expert evidence, there was a reasonable expectation that the business would make a profit long before it actually did. The business was therefore not run on a commercial basis and sideways loss relief was not available.
HMRC v Ardeshir Naghshineh  UKUT 0030 (TC)
2.2 FTT distinguishes between entitlement to, and entitlement to receive, income
The FTT has found that annual payments between related companies in a film scheme were income taxable on the participating individuals. The FTT found that a taxpayer may have an entitlement to income without also having an entitlement to receive that income.
The taxpayers had participated in a film scheme under which annual payments were made in respect of film distribution rights obtained by the taxpayers. The scheme required the taxpayers to instruct that these payments were made directly to a lender company. The payments substantially offset the interest costs the taxpayers incurred on the loans they took out to enter into the scheme. The issue before the FTT was whether or not the annual payments from the film distribution company were taxable income in the hands of the taxpayers. It found that their activities amounted to a non-trade business because they had an identifiable structure and were neither haphazard nor unconsidered. The annual payments were held to be income of that business because the taxpayers were entitled to it, despite it being paid directly to another recipient. The FTT ruled that a taxpayer can have an entitlement to income without also having an entitlement to receive that income. The taxpayers benefitted from the offsetting of the annual payments against their interest liabilities. It did not matter that the taxpayer had to agree that they would not receive the annual payments in order to participate in the scheme. The annual payments were therefore taxable income. The interest incurred by the taxpayers could not be deducted from these annual payments because the loans had a dual purpose: to achieve losses for the taxpayers and to generate income from the film rights businesses.
Mr Thomas William Good and another v HMRC  UKFTT 0025 (TC)
2.3 FTT finds property was not taxpayer’s residence
The FTT found that, based on the evidence, the taxpayer had never lived in a property as a residence and so no private residence relief (PRR) was available on sale.
The taxpayer sold her London property in February 2014. She had let the property for most of her ownership, but claimed that it was her main residence for 6 months before sale and that the last 36 months of ownership were therefore covered by PRR. She also owned and lived in a substantial property in the country, and had not nominated either property as her main residence. HMRC disallowed the claim, arguing that it was never her residence, or that if it was her residence it was not her main one.
The taxpayer claimed that she lived in the property for 6 months while she personally renovated it with a view to retiring there. The FTT concluded that the taxpayer’s evidence was not entirely credible, and there was a complete lack of evidence to suggest that she did live in the property in this period. It was put on the market in October 2013 and the photographs of the property did not give the impression that it was occupied as a home. Her two dogs also remained at her country house during this period. It also found that she had formed an intention to sell the property in September 2013 so even if she did move it, she never intended to occupy it permanently or with any degree of continuity. The taxpayer’s appeal was dismissed.
Carol Adams v HMRC  UKFTT 56 (TC)
2.4 FTT considers ER, transactions in securities and business investment relief
The FTT has considered various issues relating to the sale of shares in a company by the taxpayer and the subsequent enquiry by HMRC. The FTT found that entrepreneurs’ relief was not available but also that there was no ‘transaction in securities’ and so the gain was subject to CGT. It also found that payments made to the taxpayer by a company resulted in a remittance.
The taxpayer, either individually or with his wife, controlled three close companies, ADL, AML and Allamhouse. Allamhouse owned AML, and in 2011 the taxpayer sold ADL to AML. The key points decided by the FTT were that:
- ‘Substantial’ for the purposes of company activities for entrepreneurs’ relief purposes should be taken to mean ‘of material or real importance in the context of the activities of the company as a whole’. It found that ADL was clearly carrying on some trading activity. The proportion of its asset base devoted to rental properties, however, demonstrated that its property investment and rental activities had real importance and could not be ignored. Those non-trading activities have to be regarded as ‘substantial’ in the context of the activities of the company as a whole. Entrepreneurs’ relief was not available.
- The mere fact that the result of the transactions might have been achieved in a different manner, which would have given rise to an income tax receipt, does not automatically mean that a main purpose of the transaction was to obtain an income tax advantage. In this case, the taxpayer had a clear purpose for the transfer of shares to unite the companies under common ownership, and a clear purpose to receive the proceeds in cash, to fund his retirement. While the latter was a personal reason, it was still a non-tax reason. The FTT found that the income tax advantage was merely an incidental benefit of the transaction and so the gain remained subject to CGT.
- The taxpayer made loans using his foreign income and gains to Allamhouse on which he claimed business investment relief. Allamhouse declared dividends which he left in the company pending subsequent withdrawal, crediting them to his loan account. The amounts were later paid out, and the FTT found that these were loan repayments and were part disposals of his single investment in Allamhouse. As he did not take any mitigation steps within 45 days, these were taxable remittances.
Allam v HMRC  UKFTT 26 (TC)
2.5 Mixed partnerships caught by anti-avoidance legislation
The profits of two mixed partnerships, which had been allocated to a company and transferred offshore, have been reallocated to a UK individual. The FTT ruled that the structure was caught by the mixed partnership anti-avoidance rules.
The taxpayer, a successful investment adviser, had set up a highly profitable offshore equity fund. The fund was managed by a UK limited liability partnership (LLP). The trade executions were carried out by another UK LLP. A UK company was a member of both of these LLPs. Approximately £19m of profit was allocated to the company by the LLPs. The taxpayer was the sole director of the company. The company’s profits were paid into an offshore trust of which the taxpayer’s children were beneficiaries. The taxpayer was, at various times during the period in question, also an employee of the company and an employee and member of the LLPs.
HMRC argued that the profits allocated to the company by the LLPs were only allocated because of the taxpayer’s ability to enjoy them. It therefore reallocated the profits to the taxpayer under the mixed partnership anti-avoidance legislation. The taxpayer argued that the profits were allocated to the company as a reward the company’s services, which were provided by him as its employee. The FTT agreed with HMRC. The taxpayer’s activities could not be divided between his employments, memberships and directorships; he had at all times essentially been carrying out a single role for multiple entities. The profit allocated to the company could not therefore be said to be by reason of his activities as its employee. Only a 5% return on capital could be attributed to the company from each LLP. The remainder was taxable on the taxpayer.
Nicholas Walewski v HMRC  UKFTT 0058 (TC)
3. Trusts, estates and IHT
3.1 FTT finds IHT home loan scheme void
The FTT has found that the sale agreement, transferring a house to trustees under an IHT ‘home loan scheme’, was not valid. The house therefore remained in the taxpayer’s estate at death but did not form part of his settled estate. The pre-owned asset tax he had paid was not in fact due.
The taxpayer owned and lived in a property. He implemented a ‘home loan scheme’ under which he agreed to sell his house to the trustees of a life interest trust, of which he himself had a life interest and was one of the trustees. The proceeds were left outstanding under a loan agreement. He then assigned this loan to his three children. The contract was not completed so that no stamp duty was payable. He paid pre-owned asset tax from 2005/06 onwards. He died in 2013.
The judge noted that the effect of the sale and loan agreements was that the taxpayer agreed to sell the house to the trustees with completion to occur, and consideration to be paid, following his death. This was the right he subsequently assigned to his children.
The judge then considered the Law of Property Act and found that the written terms of the loan and sale agreement did not reflect the true agreement reached between the parties on the sale of the house. The sale agreement was therefore invalid and the house formed part of the taxpayer’s estate on death. It did not form part of his settled estate and the assignment to his children were also void. He noted that the CGT paid on the disposal to the trustees and pre-owned asset tax were therefore not payable, although left it to the parties to consider whether or not they were now refundable.
He went on to find that if this was challenged and the sale agreement was not void, then by agreeing to sell the house to the trustees, his right to dispose of it freely was restricted. The full value of the house at the date of death would therefore still be included in the value of his estate. The value of the house, less the loan, would also be included in his settled estate, resulting in double taxation. The judge stated that ‘if you play with fire, do not be surprised if your fingers are burnt’.
Executors of John Herbert deceased and trustees of Herbert Life Interest Settlement v HMRC  UKFTT 53 (TC)
4. PAYE and employment
4.1 HMRC announces change to off-payroll working rules
HMRC has made a small change in the implementation of the off-payroll working rules, commonly referred to as IR 35. The rules will now only apply to services provided after 6 April 2020, rather than, as originally proposed, payments made after 6 April 2020.
This small but welcome change will enable businesses to be more certain of the position as they move into the new regime which shifts responsibility for operating the rules to the organisation that engages the worker.
These rules are being extended from the public sector to small and medium enterprises.
This move is separate from the Government’s review of the implementation of the changes to the rules, which is scheduled to conclude this month and the House of Lords call for evidence (see following article 4.2).
4.2 House of Lords calls for evidence on off-payroll working rules
The House of Lords Finance Bill Sub-committee is investigating the forthcoming extension of the off-payroll working rules to the private sector. It is seeking views from the public on the expected impact of these proposals.
The draft Finance Bill, which was published in July 2019, includes the provisions that will impose the off-payroll working rules on medium and large private enterprises. The Sub-committee has set out several questions covering the effect of the existing laws on the public sector and the anticipated outcomes of the new rules. It includes specific question on how private organisations will determine the tax status of workers and the Check Employment Status for Tax tool.
The deadline for submitting written evidence is 25 February 2020.
5. Business Tax
5.1 FTT rules on interaction between UK and EU group relief claims
A UK company has successfully appealed that a group relief claim under UK law was not automatically withdrawn as a result of a subsequent claim for EU group relief. The FTT found that it would be ‘almost impossible’ to claim cross-border group relief if the claimant was required to cancel the domestic claim.
A UK company made claims for group relief in respect of other group companies resident in the UK (the domestic claims) for 2006 and 2008. It later made claims for group relief in respect of EU group companies under EU law. The domestic claims and EU claims were for the same accounting periods. At the time, the outcome in Marks & Spencer Case C-446/03 had not yet been determined, and the EU group relief claims were dependent on the outcome in that case. The CJEU subsequently ruled in Marks & Spencer that EU group relief would only be available if there was no possibility of those losses being relieved in any other way.
The EU group losses did not meet the criteria, so the UK company withdrew the claims for EU group relief. When the UK company sought to rely on the domestic claims, HMRC argued that those claims had been withdrawn. It contended that making a claim for cross-border relief under EU law required the domestic claims to be cancelled.
The FTT ruled that a claim for cross-border group relief under EU law did not first require the domestic claim to be withdrawn. The cross-border claims were speculative, pending the outcome of another case, and the deadlines for the claims were tight. The company could not reasonably be required to choose between a valid domestic claim and a speculative cross-border claim; it would have to choose the certain domestic claim. This would make it almost impossible to exercise the right to a cross-border claim for group relief. The appeal was upheld.
LINPAC Group Holdings Ltd v HMRC  UKFTT 0060 (TC)
5.2 Consultation opens on Country-by-Country Reporting
The OECD has invited comments from the public on the operation of the Country-by-Country Reporting (CbCR) regime.
CbCR was introduced in 2015 as a mandatory reporting requirement for large multinational enterprises with annual global turnover in excess of €750 million. It requires entities to disclose information to tax authorities on the tax positions, transfer pricing arrangements and financial data of their group companies. The consultation is focused on the use of CbCR submissions by tax authorities, particularly as regards to risk assessments, transfer pricing and statistical analysis. The consultation closes on 6 March 2020.
6.1 VAT treatment of payment charges
The FTT has found that additional charges for customers who do not pay by direct debit are a taxable supply. The charges were held to be an integral part of the supply of media services.
The representative member of the VAT group provided television, broadband and telephone services. Customers made payment to another member of that VAT group and incurred additional charges if they did not pay by direct debit. The case concerned whether or not those charges amounted to a supply, and if so, the correct VAT treatment of that supply.
The FTT found that the payment handling charges formed an integral part of the supply of the media services by the representative member of the VAT group. The payments were therefore taxable on the representative member. In the alternative, it held that the payment handling was ancillary to the supply of media services. Again, the charges would be taxable on the representative member. It went on to make several further rulings to clarify particular aspects of the case: the payment company was not itself making a supply, the presence of a VAT group had no effect on the VAT treatment, and there was no abuse of rights by the VAT group.
Virgin Media Limited and another v HMRC  UKFTT 0030 (TC)
7. Tax publications and webinars
The following client webinars are coming up over the next few months.
- 17 March 2020: S&W Sessions: The Budget
7.2 Tax publications
The future of Inheritance Tax
Inheritance Tax (IHT) is one of the more controversial taxes in the UK. It has received increasing attention over recent years, particularly in relation to the complexity of the rules and their perceived impact on social equality. A number of reports on IHT have been issued, two in particular shed some light on how IHT in the UK could develop and put forward possible changes to the regime.
8. And finally
8.1 It's a Dog's Life
We confess to a guilty pleasure this week in reading the unfortunate case of Carol Adams (article 2.2 above). It plunged us off to an admittedly rather different world of the late legendary French rock star Johnny Hallyday. What might bring this icon to mind? The answer is the dogs.
Johnny Hallyday was in fact Belgian and sadly bumped up against the Belgian residence rules. Where is your residence? Well, it seems if you are Belgian, it is where you have your dog, pipe and slippers and where you buy your newspaper. Exactly.
The lesson is simple; if you are tax planning, make sure the tail wags the commercial dog. Or something like that.
Carol Adams v HMRC  UKFTT 56 (TC)
|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. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. 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 writing.