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. Private client
1.1 Large payments found to be taxable income, not gifts
The FTT has found that payments of £40m to a lawyer were nearly all taxable income, rather than gifts, based on an analysis of the facts. His appeal on CGT losses was granted, the FTT finding that he was the beneficial owner of family jewellery lost in a burglary.
The taxpayer, a lawyer, was for many years involved in the business affairs of a wealthy family. He received over £40m in payments that he did not regard as taxable income. HMRC contended that all the payments were made by virtue of his service to the family interests. Some payments were described as inducements to leave his former employment paid by a family company, which the FTT found were trading income based on contemporary documentation. Other payments were described as presents from one of the family members due to their friendship. These were also found to be taxable income, based on the FTT’s view of the business relationship between the parties and services provided. One payment of EUR217,000, for a holiday, was accepted to be a genuine gift.
In a separate issue, the taxpayer accepted that he had brought £2m worth of diamonds into the UK without declaring them, or paying import VAT. HMRC had issued an assessment for this amount out of time, but the FTT found that this was still a valid assessment. The time limit did not apply in a case of fraudulent conduct, and the taxpayer had acknowledged that it was such in making his disclosure.
Finally, the tribunal considered a claim to CGT losses on a theft of jewellery from the taxpayer’s home. HMRC had disallowed the claim, on the grounds that the jewellery was the property of the taxpayer’s wife, and described as such in the police report. The taxpayer contended that as the purchaser, he was the beneficial owner, and thus entitled to the losses. The FTT allowed his appeal on this point, noting that the ownership of jewellery within a family is often unclear, and that it was inappropriate for HMRC to rely on statements made to the police in the immediate aftermath of a frightening crime.
Mullens v HMRC  UKFTT 131 (TC)
1.2 Pre-trading activities did not qualify as a business
Entrepreneurs’ Relief (ER) has been denied on a sale of assets by a partnership, because as it was conducting pre-trading activities there was no qualifying business, so the assets were not business assets.
The taxpayer established a partnership, the business of which was to develop and operate power plants. It sold two of the planned three plants before commencing to trade. The taxpayer’s claim to ER was denied on the grounds that the plants were not business assets in the pre-trading period.
The taxpayer submitted that the definition of business in the ER legislation could include pre-trading activities, amongst other points suggesting that Parliament had not intended to exclude these activities. On a detailed analysis of the legislation wording, and the background to its introduction, the FTT dismissed his appeal, finding that the ‘natural and ordinary’ meaning of ‘business’ required the trade to exist at the time of disposal.
Wardle v HMRC  UKFTT 124 (TC)
1.3 Guarantee rights ineligible for Entrepreneurs’ Relief
The FTT has found that a transfer of the beneficial interest in rights, which could not themselves be transferred, was a disposal for the purposes of CGT. The disposal was ineligible for Entrepreneurs’ Relief (ER) as, although the rights carried more value than the shares in the company, they could not be defined as ordinary share capital.
A company was set up with both shares, all of which were non-voting, and ‘distribution rights’. The latter carried the voting rights, rights to surplus assets after repayment of share capital, and a right to share in profits, if they exceeded a low threshold. Distribution rights could not be transferred, but the taxpayer arranged that he would assign a beneficial interest in them in exchange for cash consideration. Effectively, he agreed to exercise his voting rights at the discretion of the purchaser, who wanted to acquire a subsidiary. He claimed ER on this, and following an HMRC enquiry changed to position to argue that the transfer was not a disposal at all.
The tribunal found for FTT that there was a disposal. There is no requirement for rights to be linked to an underlying asset to allow transfer of a beneficial interest, the rights themselves are assets. ER was however not available, as the rights were not shares, and the ER legislation cannot be viewed as being intended to refer to such rights. In any case, the taxpayer did not have the minimum 5% shareholding to qualify for ER.
Tenconi v HMRC  UKFTT 107 (TC)
1.4 Two more multiple dwelling relief claims rejected
The FTT has dismissed taxpayers’ appeals in two similar cases, finding in each that each annexe was not independent enough to constitute a separate dwelling, so no multiple dwellings relief (MDR) was available to reduce the SDLT.
The first case involved a house and annexe joined by a conservatory, that had previously been separate buildings, and still had lockable doors. The annexe, which the taxpayer was considering letting out, had its own bathroom and entrance. The FTT found that the linking conservatory did not indicate that there was only one dwelling, but the key factor was the kitchen. Although there was both a cooker and a sink, they were too close together for safe use, and the open plan kitchen posed a fire risk. Though capable of separate occupation, the annexe was not capable of safe separate occupation, so could not lawfully be let as a dwelling.
The second case involved an annexe occupied by the taxpayer’s adult children. Although it had its own entrance, heating system, and electricity meter, there were no kitchen facilities. There was an area that could be converted for use as a kitchen, with water and electricity, but on the video tour provided to the FTT no kitchen appliances were present. The FTT found that the annexe and house were only suitable for use as a single dwelling on this basis.
In each case an SDLT return was submitted for a single transaction, then amended by the taxpayer to claim MDR. In neither case were the properties separate for council tax. There have been a number of these cases recently, possibly due to third parties suggesting to taxpayers that an annexe may qualify. Additional guidance from HMRC could be of assistance.
Mullane v HMRC  UKFTT 119 (TC)
Mobey v HMRC  UKFTT 122 (TC)
1.5 Employment expenses disallowed
An employee’s claims to expenses have been dismissed for lack of evidence. The mileage records were not good enough to prove the claim, and other expenses were not shown to be wholly, exclusively, and necessarily for the purposes of his employment.
The taxpayer, a scaffolder, claimed mileage expenses, subsistence, tools and associated costs, and accountancy fees against his employment income. The FTT dismissed his appeal against HMRC disallowing every expense. No explanation was given as to why he used a personal vehicle rather than the one provided to him by the company, and the other expenses were disallowed on the same basis that no proof of a temporary workplace had been provided.
The FTT allowed his appeal against penalties for carelessness, finding that he had not had sufficient guidance on the level of record-keeping required of him.
Storey v HMRC  UKFTT 109 (TC)
1.6 No loss relief for taxpayers found not to be trading
Sideways loss relief has been denied to taxpayers who participated in a tax avoidance scheme designed to create losses. They were not trading, and there was no economic loss.
The taxpayers, participants in a scheme, both claimed losses on contracts for difference sales. They claimed to be self-employed options traders, and as such offset the losses against other income as trading losses. The FTT found that there was no trade, merely a tax avoidance scheme in which the taxpayers had little involvement, and there was no economic loss. Although it had been 16 years since the events, the discovery assessment was valid, as the taxpayers were aware that there was no real trade, so had behaved deliberately.
Outram v HMRC  UKFTT 126 (TC)
1.7 Communal garden held not to constitute mixed use property
The FTT has upheld HMRC’s decision that a taxpayer should pay residential SDLT rates rather than mixed use on a property with which he acquired the right to use a communal garden. His garden access was merely a right attached to the property rather than an interest in the land.
The taxpayer purchased a freehold property on a London square, and with it received a key to the communal square garden, with some usage conditions attached. He amended his original SDLT return to change the residential rate to that of mixed-use property, on the basis that an equitable interest in a communal garden was not residential property. The FTT dismissed his appeal, agreeing with HMRC that the taxpayer’s rights over the garden did not constitute an equitable interest in land. Given that the terms attached to it included a statement that access could be revoked on three months’ notice, use was just an interest pertaining to the main property.
Khatoun v HMRC  UKFTT 104 (TC)
1.8 Concept of staleness rejected by SC
In the final hearing of a long running discovery case, the taxpayer has won, as his original return was found to have all the information needed. There was no deliberate inaccuracy in his return, which was completed to the best of his ability. HMRC has however won another, as the SC comments on the concept of ‘staleness’ reject it as a factor in the validity of discovery assessments, noting that time limits already exist in the legislation.
The taxpayer participated in a tax avoidance scheme, and self-assessed on the basis that the scheme had worked. On advice, he claimed large employment-related losses in the partnership pages on his return, as the correct entry could not be made on the employment pages, with a disclosure explaining the position. HMRC opened an enquiry into the return within the prescribed time limit, but it was subsequently found to be opened under the wrong section of legislation and therefore invalid. HMRC then issued a discovery assessment on the basis of a deliberate inaccuracy.
The SC agreed with the CA, finding for the taxpayer that he had included all the relevant information on the return, even if in the wrong boxes, so there was no inaccuracy. The fact that he had been unable to use the form as intended was due to issues with the form itself. It also rejected HMRC’s definition of deliberate, finding that there must be an intention to mislead the Revenue, and the taxpayer must know that the statement is inaccurate, which was not the case here.
The SC also considered the discovery issue. The CA and UT had found that HMRC should not have raised an assessment in 2014 for a discovery made in 2009, as it was ‘stale’. The SC rejected this, along with the whole concept of staleness in tax discoveries, concluding that the only legitimate time limits are those set out in statute. It agreed with the FTT that there had been a qualifying discovery.
HMRC v Tooth  UKSC 17
1.9 New tax return questions on COVID-19 support
The new self-assessment forms include questions on COVID-19 support and an option to declare overclaimed amounts.
The self-assessment return form for the tax year ended 5 April 2021 includes a new box, which taxpayers must tick if they or their business received payments under the COVID-19 Government support schemes, to confirm that they have included that amount in their taxable profits. This will apply primarily to those who claimed under the Self-employment Income Support Scheme (SEISS) or the Coronavirus Job Retention Scheme (CJRS). The supplementary pages have been updated to include sections for this income.
A section has also been added to the basic form called ‘Incorrectly claimed coronavirus support scheme payments’ which taxpayers must use if they incorrectly claimed any payments under CJRS, SEISS, or Eat Out to Help Out and still need to inform HMRC about the overpayment.
2. Trusts, estates and IHT
2.1 OECD reports on IHT
The OECD has published a report on IHT in OECD countries, suggesting carefully planned increases.
The OECD report looks at the regimes in place in each of the 37 countries, and considers the role that IHT could play in the future.
It concludes that IHT is an important revenue source, and a significant tool to tackle wealth inequality. Currently, only low levels are raised in most of the countries, so it points to increases in the various inheritance taxes, carefully planned and with few exemptions to ensure a wide tax base. Exact reforms would depend on the circumstances of each country.
3. PAYE and employment
3.1 New guidance on umbrella companies and fraud
HMRC has published new guidance warning against tax fraud involving mini umbrella companies. Recent evidence suggests that recruiters are using small umbrella companies to avoid higher tax burdens.
The guidance explains how mini umbrella companies set up to enable fraud can also be used to avoid taxes including PAYE, NICs and VAT. Usually, this involves splitting the total number of employees between small companies and claiming tax exemptions that are only available to small businesses, such as the Employment Allowance and VAT Flat Rate Scheme. The guidance identifies the warning signs of this type of fraud, including unrelated business activities, foreign national directors and a short business lifespan. Businesses using or providing temporary labour are encouraged to undertake necessary and proportionate due diligence checks, be clear who pays their workers and to check the credibility of the supply chain. This publication follows a recent report from the BBC, which found widespread NIC fraud by recruitment businesses using mini umbrella companies.
4. Business tax
4.1 Amazon wins €250m appeal to the CJEU
The CJEU has overturned the EC’s ruling that an Amazon group company received an undue reduction in its tax burden. The Amazon group is therefore not required to repay an estimated €250m in State Aid.
The case concerned a tax ruling issued by the Luxembourg tax authority regarding the pricing of an annual royalty fee for the use of intangible property. The ruling had agreed that the arm’s length royalty payment should be determined using the transactional net margin method, using a particular group company as the tested party. In 2017, the EC found that the resulting price was too high, which artificially reduced the taxable profits of the company making the payment and amounted to unlawful State Aid. Luxembourg was therefore ordered to recover the missing tax from Amazon.
The CJEU annulled that decision in its entirety. It held that the EC’s findings were not capable of establishing that the tax burden of the subsidiary was artificially reduced as a result of overpricing the royalty payment. Furthermore, the EC had not proven that the methodological errors identified had necessarily led to an undervaluation of arm’s length revenue resulting in a reduced tax burden. Several other errors in the EC’s findings were identified. Overall, the CJEU held that none of the EC’s findings was sufficient to demonstrate the existence of a tax advantage.
Luxembourg v Commission T-816/17
Amazon EU Sàrl and Amazon.com, Inc. v Commission T-318/18
4.2 New guidance on plastic packaging tax
The plastic packaging tax (PPT) will come into effect in 2022. It will apply to importers and manufacturers of plastic packaging.
From 1 April 2022, PPT of £200 will arise on each metric tonne of plastic packaging manufactured in or imported into the UK, including where the imported plastic packaging already contains goods, such as food and drinks. PPT will not apply if 30% or more of the plastic used in its manufacture is recycled. It will also not apply to manufacturers or importers of less than 10 tonnes of packaging each year. Manufacturers and importers of at least 10 tonnes of plastic packaging over 12 months must register for the PPT, even if they will not have a PPT liability because that packaging is partly recycled. Registration will commence on 1 April 2022. The legislation introducing PPT is in the current Finance Bill, which is expected to receive Royal Assent in summer 2021. Until then, the proposed law is subject to change. More guidance and secondary legislation are expected later in 2021
5.1 FTT clarifies pricing between related VAT groups
The FTT has ruled that open market value (OMV) for VAT purposes should be based on comparable transactions or actual costs, rather than an arm’s length price. This decision highlights the importance of VAT when pricing transactions between members of the same CT group, even when no pricing adjustments are needed for direct tax purposes.
The taxpayer was the representative member of a VAT group comprised of some companies within a CT group. Other members of that CT group formed a second VAT group, which was not entitled to recover input tax fully. Management services at below market value were supplied by a member of one VAT group to a member of the second VAT group. The supply was not easily identifiable, and the judgment noted that the CT group ‘did not operate in a way that reflected the existence of two separate VAT groups within it’. HMRC issued an assessment increasing the output tax on the transaction to the VAT that would have arisen if the transaction had taken place at OMV.
The taxpayer and HMRC disagreed over how to calculate OMV. The FTT ruled that arm’s length pricing, though often consistent with OMV, is a direct tax concept and not the correct approach for VAT. For VAT purposes, OMV should be based on a comparable transaction, or the full cost incurred if no comparable transaction is available. In this case, there was no comparable transaction so the full cost was the basis for OMV.
Jupiter Asset Management Group Limited v HMRC  UKFTT 96 (TC)
5.2 Consultation on simplifying the VAT land exemption
HMRC is considering proposals to simplify the VAT treatment of land and property. The suggested reforms are very broad, and would significantly change the VAT treatment in the UK Following recommendations from the OTS in 2017, the Government is seeking opinions on the current VAT rules related to land and property. The consultation sets out several possible fundamental reforms, including:
- making all minor and short-term interests in property taxable;
- removing the ability to opt and making all transactions exempt, or taxable at a reduced rate; or
- using registration with the Land Registry as the basis of VAT liability.
HMRC also welcomes other suggestions from respondents. The consultation closes on 3 August 2021.
5.3 HMRC accepts zero-rating for manual blinds
HMRC has confirmed that it considers manual blinds to be building materials for the purposes of construction services. This policy revision follows an FTT ruling last year.
Revenue and Customs Brief 5 (2021) sets out HMRC’s policy on the VAT treatment of the installation of blinds. Prior to the decision in Wickford Development Co Ltd v HMRC in October 2020, HMRC held that roller blinds were not building materials. Following the FTT’s ruling in that case, HMRC has revised its position. It now accepts manual blinds and shutters as building materials for VAT purposes. These items can therefore be zero-rated when installed as part of a qualifying build. Motorised blinds and curtains are excluded from this position.
Wickford Development Co Ltd v HMRC  UKFTT 387 (TC)
6. Tax publications and webinars
6.1 Tax publications
The following Tax publications have been published.
7. And finally
7.1 Staleness goes off
Last week, HMRC lost a case at the SC. Despite taking quite a serious blow on the findings around deliberate behaviour, HMRC does have some consolation, as the SC, in the noble spirit of pleasing everyone, abolished the concept of staleness in the next breath.
Mr Tooth is to be congratulated on a double win: five SC judges on his side, and an entry into the CTA examination syllabus.
From HMRC’s side, expect staleness appeals on every judgement in long-in-the-tooth cases.