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 New HMRC Charter
The new HMRC Charter has been published following a public consultation earlier this year. The new version has improved content and visibility, and a more ‘human’ tone.
The Charter sets out standards of behaviour and values to which HMRC will aspire when interacting with taxpayers. The new Charter was drafted with a more accessible tone, and was designed to be more visibly embedded within HMRC’s activities. Some of the language from the older version was reinserted following concerns raised by the tax community that the standards of the new version had been diluted. The principles in the Charter will be linked into policy development, internal HMRC programmes and HMRC’s customer service work.
1.2 COVID-19: Chancellor increases support packages
The Coronavirus Job Retention Scheme (CJRS) has been extended to support employment, and the level of the next taxable grant for the self-employed has been increased to 80% of average profits for three months under the self-employment income support scheme (SEISS).
The support available under the extended CJRS will be the same as that offered in August 2020, and will now continue to 31 March 2021. The Government will pay 80% of the wages of eligible employees, subject to a cap of £2,500, for the hours a furloughed employee does not work. Employers will pay the NICs and pension contributions for staff under the CJRS. Flexible and full-time furloughing will both continue to be available. The Job Support Scheme will take effect after the extended CJRS has ended. The level of employer contributions will be reviewed in January.
The third grant of the SEISS is now set at 80% of three months’ worth of average trading profits, covering November to January. The taxable grant will be capped at £7,500. The claims window will still open on 30 November, but the level of the fourth SEISS grant, covering February to April, has not yet been announced.
1.3 UK Wealth Tax Commission: initial report
The commission, set up in Spring 2020 to study the feasibility and advisability of a wealth tax in the UK, is due to report on 9 December. It has released a number of evidence papers on which it will base its final report.
The 13 core and 20 additional papers cover a variety of considerations, including public attitudes to a wealth tax, how it could be implemented, and what effects it could have, as well as potential alternatives to a wealth tax, and how the tax base would be selected.
The initial report gives no information on the final conclusion, but helpfully framed the questions as follows:
‘Who would pay it, and on what wealth? How would it affect incentives, for example to save and invest? How would we value assets? What mechanisms would be available for those who have low incomes relative to their wealth? How much revenue could it raise? How would it impact wealth inequality and the creation of wealth? Is there any need for a wealth tax in addition to existing taxes? And would the public support it?’
2. Private client
2.1 Search warrants upheld regarding the loan charge
Two users of loan charge schemes have been denied judicial review of the lawfulness of search warrants issued against their homes and offices. The HC dismissed their arguments that they had been engaging in lawful tax avoidance, not tax evasion, as HMRC had found irregularities in the documentation.
In the course of a criminal investigation by HMRC, search warrants for the homes and business premises of two loan charge scheme users suspected of fraud by false representation and cheating the public revenue were issued, and the searches carried out. The individuals applied to the HC for judicial review of the lawfulness of the warrants. They argued that the warrants were issued without meeting the prerequisite that there were reasonable grounds for supposed that an offence had been committed. They had engaged in lawful tax avoidance, not unlawful tax evasion, and there were no reasonable grounds for supposing that they had acted dishonestly. In addition, more proportionate measures such as production orders should have been used.
The HC considered the requirements of the legislation, and dismissed the applications. It found that HMRC had reasonable grounds for suspecting tax evasion due to the existence of backdated documents, purporting to confirm the status of the scheme at the outset, but believed by HMRC to be an attempt to adjust the scheme after the introduction of the loan charge legislation. The claimants here were professional advisers who introduced others to the scheme, so HMRC was reasonable in suspecting dishonesty rather than mistake.
Ashbolt & Anor v HMRC & Anor  EWHC 1588 (Admin)
2.2 FTT finds short term residence qualifies for CGT exemption
The FTT has found that the disposal of a property in which the taxpayers lived for less than two months qualified for private residence relief (PRR) on disposal, as they had moved in with the intention of living there long term having completed building work. The fact that they received a good offer, unsolicited, around the time they moved in did not mean that they would not have lived there long term otherwise.
The two taxpayers purchased a home, and after a year of building works, moved in. Six to eight weeks later, they accepted a unsolicited, repeated, offer to purchase it at a good price, and after the sale moved back to the rented accommodation they had occupied during the building works. They did not declare the disposal to HMRC.
HMRC argued that the sale did not qualify for the PRR, as their occupation was not ‘of the quality and necessary degree of permanence or continuity’ to qualify the property as their main residence. The offer had first been made before they moved into the property, so they did not move in with the intention of long term residence.
The FTT allowed the appeal and cancelled penalties for inaccuracy, finding that as the taxpayers had moved into the property with their family on completion of the building work, although their lease had not run out, it was likely that they intended to live there indefinitely. If it were not for the unexpected offer, increased after they moved in, the occupation would have continued.
Core & Anor v HMRC  UKFTT 440 (TC)
2.3 Discovery assessment on child benefit valid
The FTT has dismissed an appeal against discovery assessments for the High Income Child Benefit Charge (HICBC), finding that under the legislation this type of assessment can be issued for the HICBC.
The taxpayer, who was not in self assessment, failed to declare liability for the HICBC in 2013/14 although he received an awareness letter, as he did not realise that his employment benefits counted towards the threshold for repayment. When he became aware of his liability in 2018, he notified HMRC voluntarily. After discussions, HMRC issued discovery assessments covering four tax years. The taxpayer appealed.
The FTT dismissed his appeal. It considered whether or not the legislation empowered HMRC to raise discovery assessment for HICBC, and found that it did. The taxpayer had not received a notice to file, but he was liable for the charge, so obliged to notify chargeability. His failure to do so led to a loss of tax, so HMRC was entitled to assess it.
Wiseman v HMRC  UKFTT 383 (TC)
2.4 HMRC ‘nudge’ letters on residence and domicile
HMRC has announced three new campaigns of ‘nudge’ letters. These are sent to taxpayers that HMRC believes may have omitted to report an event, as a way of encouraging them to get their affairs in order without starting a formal enquiry. The latest campaigns target those deemed domiciled in the UK, those who have not filed returns for 2017/18, and an educational letter about residence is also being sent.
The first letter will go to taxpayers who were previously non-UK domiciled, but are now deemed domiciled for tax purposes under the FA2017 changes. It will remind them that they are taxable on worldwide income and gains, so should include them in UK tax returns. It will also give guidance on the conditions for being considered deemed domiciled, and ask them to check their status against them. Different versions will go to those who need to check 2017/18 and 2018/19 returns, and those who just need to check 2018/19.
Another letter is being sent to those taxpayers dealt with by the Wealthy team in HMRC who have received a notice to file for the year ended 5 April 2018, but have not yet submitted a return, but have submitted ones for the years either side. The letter will ask them to file a return and arrange payment for any liabilities. A helpline number will be provided, and penalty details will be sent separately. Responses are requested by 30 November 2020.
A letter will also go to taxpayers dealt with by the Wealthy team with some information about the Statutory Residence Test, and links to guidance on how to work out residence status. They will be asked to check their status and ensure that it is reported correctly on their 2019/20 tax returns.
3. Trusts, estates and IHT
3.1 Legacy found to be chargeable to IHT as non-business property
In the latest case concerning the availability of business property relief from IHT on furnished holiday accommodation, the FTT found that it was not available on three flats. The services provided to guests were incidental to the letting activity, and there was a lack of contemporary evidence to offset this. The business was therefore chiefly one of holding investments.
The deceased taxpayer had owned four of the five flats in a converted manor house. He lived in one, and let the others out when he acquired them, as furnished holiday accommodation. His executors claimed that business property relief applied to the flats, reducing the IHT due. HMRC opposed this, holding that the business was ‘of making and holding investments’.
The FTT considered the nature of the business in detail, examining the advertising, booking and reviewing processes, what services were offered to guests, and what facilities were available, as well as the hours spent on business work by the deceased and his family. The executors argued that the services provided, including dog-sitting, baby-sitting, book lending, therapies, arranging activities and so on, made the business amount to a trade rather than merely a letting business.
The FTT dismissed the appeal, finding that this was simply a letting business with some incidental services that did not change the character of the business. The non-investment activities, such as babysitting, did not happen on a regular basis. In addition, there was a lack of contemporary evidence, the executors’ case relying heavily on testimony from past guests. The deceased had been in poor health in the latter years of running the business, and it was unlikely that he had undertaken substantial concierge services.
Cox, Executors of the late v HMRC  UKFTT 442 (TC)
4. Business tax
4.1 CA reverses UT ruling on alternative methods of profit apportionment
The CA has found that the actual basis of profit apportionment was available to companies with unevenly spread profits in a year a tax rate changed. It overturned the UT’s ruling that an apportionment method is only just and reasonable if it is limited to mitigating the factors specific to the company.
The taxpayers were oil companies that suffered losses in the second half of 2011 due to storm damage and unexpected maintenance costs. In that year, the supplementary charge on oil and gas production was increased from 20% to 32%. By default, companies with accounting periods straddling the date of rate change were to time-apportion their profits for tax purposes. An election to use a different apportionment method was, however, available if time apportionment produced an unjust or unreasonable profit. The companies elected to apportion profits on an actual basis. They argued that the excessive costs in the second half of the year meant that spreading the profits evenly over the period would be unjust.
The FTT agreed with this position, but the UT overturned its decision. It found that an alternative apportionment method is only just and reasonable if it is limited to counteracting factors specific to the company. The CA disagreed and upheld the FTT’s ruling. An election to use a just and reasonable basis of apportionment was available to any company with profits that differed greatly throughout the year and could be disadvantaged by a tax rate change during the period. There was no requirement to limit that apportionment to account for factors unique to the company.
Total E&P North Sea UK Limited and another v HMRC  EWCA Civ 1419
4.2 Taxpayer wins $4bn interest expense case
The FTT has ruled that interest incurred on the acquisition of an investment business was tax-deductible in full. Although obtaining a tax advantage was a main purpose of the loan, the whole expense was attributable to the commercial motivation. It also found that the loan arrangement did not require a transfer pricing adjustment.
The taxpayer was a US company that was tax resident in the UK. It had been incorporated to facilitate the acquisition of part of Barclay’s investment business, and had incurred interest expenses of approximately $4bn. HMRC argued that a deduction was not available because the loans were for an unallowable purpose. Alternatively, HMRC argued that the loans would not have been made between independent enterprises and so should be disregarded under the transfer pricing regime.
The FTT found for the taxpayer on both issues. First, it held that an independent enterprise would have made a comparable loan to the taxpayer if particular covenants were obtained. No adjustment was therefore required for transfer pricing purposes. Second, the FTT held that obtaining a tax advantage was so integral to the arrangement that it must have been a main purpose of the arrangement. The FTT also accepted, however, that the loan had a commercial purpose and would have been entered into in the absence of the tax advantage. The whole interest expense was apportioned to the commercial purpose of the loan; none was attributed to the unallowable purpose of obtaining a tax advantage. The entire amount was therefore tax-deductible.
Blackrock Holdco 5 LLC v HMRC  UKFTT 443 (TC)
4.3 HMRC consultation on chargeable gains a collective investment vehicles
The proposed changes aim to remove disproportionate administrative burdens from some life assurance companies and collective investment vehicles (CIVs). They also rectify minor drafting errors.
The definition of ‘collective investment vehicle’ is to be amended. Some additional companies will therefore be classified as CIVs and be able to make exemption elections. The rules for substantial indirect interests in UK land are also to be amended. This will ensure that some non-UK life assurance companies and some non-UK, non-property rich CIVs will be treated as not holding substantial indirect interests. The disproportionate administrative burden on such investors will therefore be removed.
HMRC is seeking view on these draft amendments, some of which will apply retrospectively. The consultation closes on 16 December 2020.
5.1 Extension to relaxed time limits for opting to tax
The extended 90-day deadline for notifying HMRC of an option to tax now applies to decisions made between 15 February 2020 and 31 March 2021.
Taxpayers that decide to opt to tax land and buildings are usually required to notify HMRC of this decision within 30 days. To assist business affected by the pandemic, HMRC extended this time limit to 90 days. This extension initially applied to decisions made between 15 February 2020 and 30 June 2020. It will now apply until 31 March 2021.
6. Tax publications and webinars
6.1 Tax publications
The following Tax publications have been published.
7. And finally
7.1 Charter Cavil
There is one small comment in the newly-published HMRC charter that gives us pause.
It says ‘… we will take firm action against the small minority who bend or break the law by not paying their tax’. We do not agree to the conflation of bending the law with breaking the law. If you paraphrase the comment as ‘we will take firm action against the small minority who are acting lawfully’ you will take our point.
If HMRC needs to move against bending the law, the action is to change the law, not to move against citizens behaving lawfully.
|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.