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 Competent authority agreement on the UK/US tax treaty
An agreement between the UK and USA has clarified how the Limitation of Benefits article will operate after Brexit. A UK resident will continue to be treated as a European Community resident for the purposes of the Derivative Benefits Test.
The UK/US tax treaty contains a Limitation of Benefits article, which restricts who can claim treaty benefits. The Derivative Benefits Test within that article refers to a resident of a Member State of the European Community. The Competent Authority Agreement confirms that, despite Brexit, residents of the UK will continue to meet this requirement of the test. The availability of benefits under the UK-US tax treaty will therefore not be affected by the UK’s withdrawal from the EU.
2. Private client
2.1 CA finds that film partnerships were trading
Overturning an UT judgment, the CA has found that two out of the three film LLPs in the appeal were trading, though on a basis where a small proportion of expenses were allowed. This restriction, together with most of those expenses being found to be capital, meant that a greatly reduced proportion of sideways loss relief was available.
Three film partnerships were marketed as tax avoidance schemes, in which taxpayers could invest borrowed money, and then use the partnership losses to reduce their taxable income. This sideways loss relief was disallowed by HMRC on the basis that the LLPs were not trading. The UT agreed with HMRC.
At the CA, the LLPs did not have permission to challenge the ruling that they were not trading on the basis suggested by the LLPs, which was that the LLPs incurred the full budgeted cost of the film, then earned a limited share of profits. They were permitted to challenge the UT finding that the FTT’s decision that they were not trading under the contractual arrangements whereby they incurred 30% of the film costs for 30% of the income.
The CA restored the FTT decision, finding that two of the LLPs were trading on this ’30:30 basis’ with a view to profit. An expectation of a profit calculated on this basis was realistic, and a view to profit on this basis was supported by the evidence. In addition, it did not challenge the FTT finding that most of that 30% of costs was counted as capital expenditure. The greatly reduced amount of allowable income expenditure considered on this basis means that a much smaller amount of sideways loss relief is available to taxpayers.
Ingenious Games LLP & Ors v HMRC  EWCA Civ 1180
2.2 Property found to be one dwelling for SDLT
The FTT has dismissed a taxpayer’s claim that an annexe to his newly-purchased house constituted a separate dwelling. Multiple dwelling relief (MDR) did not apply.
The taxpayer submitted an SDLT return containing a claim for MDR, which was rejected by HMRC. HMRC’s finding that the house was one dwelling was upheld by the FTT. Although the annexe had its own bathroom and entrance, it did not have a fully functioning kitchen. There was space for kitchen appliances and a sink to be installed, but they were not present. The annexe was therefore unsuitable for use as a separate dwelling.
Mason v HMRC  UKFTT 271 (TC)
2.3 Income from land sales found to be trading income
The FTT has found that a taxpayer who sold plots of land from the grounds of her home, a listed building, to fund renovations, was taxable on the proceeds. The plots were changed from a capital asset to trading stock, then sold as part of her trade of building and construction.
The taxpayer sold plots of land in the vicinity of her home. The proceeds were used for the restoration of said home, a listed building. HMRC sought to treat these proceeds as trading income, or alternatively to apply CGT to the gains. The taxpayer held that the plots were part of the garden or grounds of her home, so private residence relief applied, and no tax was due.
The taxpayer held that this was not a trade, as it was a one-off transaction with no associated trade. Her husband, the co-owner of the main house, was a builder, but the plots sold had been in her sole name for over two years. The FTT considered the badges of trade, and ultimately found that a trade existed. There were multiple transactions, as six separate plots were sold. The taxpayer had worked for a building firm, though in an administrative capacity, so was found to be carrying on a trade. Although the land was acquired with the purchase of her home as a capital asset, she had appropriated the plots to trading stock, a disposal for CGT, and later sold them, in the course of a trade.
Whyte v HMRC  UKFTT 270 (TC)
2.4 Woodland found to be part of residential property
The FTT has held that a property with 16 acres of grounds was a purely residential purchase for the purposes of SDLT. There was no evidence that an area of woodland in the grounds had a commercial or agricultural use; it was found to be simply part of the grounds.
The taxpayer purchased, in one transaction, a house with almost 16 acres of land and outbuildings. On their SDLT return, they classified it as residential. Later, they applied to amend the return to mixed use, as there was an area of woodland on the land purchased that they considered was agricultural land.
The FTT considered the nature of the land, and the evidence presented of its historic uses. It found that there was no evidence that it had ever had a commercial purpose, or any purpose other than that of woodland. It was ‘passively integral’ to the grounds of the house, and as such was part of the residential property.
The How Development 1 Ltd v HMRC  UKFTT 248 (TC)
3. PAYE and employment
3.1 UT overturns FTT findings in IR35 case
The UT has found that the FTT was not entitled to make two particular findings of fact based on the evidence before it. This may mean that the FTT’s decision will be overturned; the parties are awaiting a UT ruling in a separate case on similar matters.
A doctor provided locum medical services to hospitals through his personal service company (PSC). The FTT ruled that the arrangements in relation to one of those hospitals would have amounted to employment if the hospital had contracted directly with the doctor. The implication was that, under the IR35 legislation in force at that time, the PSC was liable for IT and NICs on the payments made by the hospital. The IR35 rules have since changed and the liability is now on the employing entity.
The FTT’s decision was based on several findings, two of which were the subject of appeal to the UT. First, the FTT found that the hospital was required to give one week's notice before terminating the arrangements. Second, it found that there was an obligation on the hospital to provide 30 to 40 hours of work each week. The UT found that the FTT was not entitled to make these findings of fact based on the evidence available. The final question was whether or not these incorrect findings are significant enough that the FTT’s decision should be overturned. The parties agreed that this issue will depend on the outcome in a separate case, HMRC v Professional Game Match Officials Limited. Once that decision has been made, the UT will make its final ruling in this case.
George Mantides Limited v HMRC  UKUT 205 (TCC)
3.2 HMRC Employer Bulletin: August 2021
The latest Employer Bulletin from HMRC covers information and updates on COVID-19 support measures as well as PAYE.
It includes information on:
- the coronavirus job retention scheme;
- informal payrolling of benefits in kind;
- making PAYE settlement agreements; and
- guidance on and support with the off-payroll working rules.
4.1 FTT clarifies the operation of onward supply relief
A taxpayer has lost its appeal over onward supply relief (OSR) because it did not have the necessary authority to transfer or agree to transfer title of the goods. Fiduciary authority did not amount to power to deal with the title to the goods.
The taxpayer was a UK company that had been denied OSR on consignments of goods from China. It did not act directly for the owners of the Chinese goods; a Czech company liaised between the owner and the taxpayer. The FTT first determined how the legislative provisions on OSR should be interpreted, and then examined how they applied to the contractual arrangements. For OSR to be available in this case, there must have been a supply of goods through an agent acting in his own name. ‘Through an agent’ was found to mean that the agent had authority to give rise to a transfer of title to goods to his principal or to cause title to his principal’s goods to be transferred to another. In this case, the taxpayer did not meet that condition. The taxpayer did not have nor did it exercise the relevant authority to transfer or agree to transfer title of the goods. It had fiduciary authority to deal with the goods in a manner which made it an agent, but it was not an agent with power to deal with title to the goods. Furthermore, it did not act in its own name in relation to the supply. The appeal was dismissed.
Scanwell Logistics (UK) Limited v HMRC  UKFTT 261 (TC)
5. Tax publications and webinars
5.1 Tax publications
The following Tax publications have been published.
The following client webinars are coming up over the next week(s).
- 7 September 2021: The Contemporary FD Bitesized
6. And finally
6.1 We all make mistakes
The most recent set of DWP accounts have drawn more mirth than sympathy, revealing as they do a ‘little’ mix-up over IR35. DWP used the HMRC Check Employment Status Tool (CEST) for their contractors in all good faith, but historic misclassifications have left it with an £87.9m bill from HMRC.
It is nice to see HMRC applying the rules so firmly and consistently, but it can’t have done much for inter-departmental relations.