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 Budget 2021: rumours of a delay to Spring
It has been reported in the press that the Chancellor may be considering postponing the Autumn 2021 Budget to the Spring. If this goes ahead, it would be the third year running that the Budget has been postponed to Spring.
The reported reasons are that a delay will allow more time for the economic impact of the end of support measures to become clear. If the Budget is postponed, then the Chancellor may hold a three year spending review in the Autumn, though postponing tax measures to the Spring.
1.2 HMRC agent update 86
HMRC has published Agent Update 86, which provides an overview of the recent issues of which tax agents should be aware. It includes guidance on a new payment method for tax bills, directly from a bank account, for those with HMRC online accounts.
The latest Agent Update summarises various recent issues and changes, including guidance on:
- the remaining COVID-19 support measures;
- a campaign helping taxpayers to identify tax avoidance schemes;
- student loans and PAYE;
- how HMRC uses information from banks to set PAYE codes;
- support with the off-payroll working rules;
- a review of online CGT guidance;
- next steps with the trust registration service;
- the new ‘pay by bank account’ system; and
- HMRC agent services.
1.3 ATT warns against more frequent tax payments by small businesses
The ATT has expressed concern that mandating more frequent tax payments will cause cash flow problems for small businesses. It recommends first improving the existing Budget Payment Plan.
The Government has recently sought evidence on the impact of more timely tax payments under IT and CT. In its response, the ATT has warned that the proposals will be detrimental to some small businesses. It recommends that the shift to earlier tax payments be made voluntary, so that small businesses are not negatively affected. This may be the case for businesses that invoice on credit or those with large, unexpected expenses. The ATT highlights the Budget Payment Plan as a useful alternative that could be improved before earlier payments are made compulsory.
1.4 Updates to GAAR guidance
HMRC has updated its general anti-abuse rules (GAAR) guidance in line with the changes made in Finance Act 2021. The guidance now reflects the extension of the GAAR to partnerships, as well as other minor and technical amendments.
Parts A, B and C and E have been updated, while Part D remains the same. section E3.26, which explains the procedures for counteractions by HMRC in relation to partnerships. In addition, following the enactment of Finance Act 2021, all references in the GAAR guidance to ‘taxpayers’ should be interpreted as including partnerships.
1.5 New GAAR Advisory Panel opinion on employee loan arrangements
The GAAR Advisory Panel has found employee reward arrangements involving a trust to be contrived and abnormal. The arrangements purported to deliver payments free of IT and NICs in the form of loans from an employer-funded trust.
Under the arrangements, the directors of a company, who were also the sole shareholders, made small loans to an offshore trust. The company later made several large contributions to the trust, and claimed CT deductions on those contributions. The contributions amounted to 220% of pre-contributions profit in the first period and 75% in the second period. The directors then received loans from the trust, which were equal to 90% of the company contributions. The company and directors argued that the funds loaned by the trust were not subject to IT or NICs. The trust had been devised to benefit those in the trade of money lending, rather that have a class of beneficiaries consisting of employees. Thus, it was asserted that the loans from the trust were not linked to the directors’ employment. The GAAR Advisory Panel found that the arrangements as a whole were contrived and abnormal and appeared to serve no purpose other than to avoid tax. Entering into and carrying out the arrangements was held not to be a reasonable course of action in relation to the relevant tax provisions.
1.6 No right for taxpayers to attend third party information notice hearings.
The CA has found that when deciding whether or not to approve a third party information notice, the FTT cannot hold the hearing in the presence of the taxpayers, and that in addition the hearing should normally be private.
In the course of enquiries into the taxpayers’ corporation tax returns, HMRC wished to send third party information notices to some individuals, and applied to the FTT for permission to issue them. The companies and individuals applied to the FTT for permission to attend the hearing, and to make representations at it. The FTT and UT declined the request, and the CA has now agreed that the appellants cannot attend.
The CA considered the tribunal regulations, and the legislation governing information notices. It found that the FTT had no power to permit the taxpayers to attend, and that in addition the hearing should normally be private.
Kandore Ltd & Ors v HMRC  EWCA Civ 1082
2. Private client
2.1 New FAQs on property CGT reporting
HMRC has published a list of frequently asked questions with answers on some of the issues taxpayers have encountered while using the new 30 day CGT online reporting system.
The document covers information on amending the returns, and use of estimates, how to obtain repayments, offsetting CGT payments, authorising an agent, how personal representatives can use the service, non-residents filing returns, and using paper returns.
2.2 Bonus payments made to LLP members taxable as earnings
The UT has upheld an FTT ruling that bonus payments, made to former employees after they became members of an LLP, should be treated as earnings for IT and NICs.
Bonuses were paid to five members of an LLP under a Long-term Incentive Plan (LTIP). They were all previously employees of the LLP and were admitted to the scheme while still under employment. Under the contract, payment would be made once prescribed conditions had been met. At the time of payment, the five employees had become members of the LLP. The taxpayer claimed that the payments were made to the individuals in their capacity as a member of an LLP, so should be treated as a share of the LLP profits. This would have been subject to IT and Class 4 NIC. HMRC sought to tax the payments as deferred employment income subject to IT and Class 1 primary and secondary NIC.
The FTT held that the bonus payments should be treated as earnings received from employment for the purposes of IT and NIC. Whilst the most common form of payment to a member of an LLP was a share of the profits, it did not follow that all payments received by a member should be characterised as such. Furthermore, the payment was not made solely by virtue of their member status. They were also required to satisfy the conditions of the scheme, which was only open to employees.
The UT agreed with this analysis, dismissing the taxpayer’s arguments that LLP members could not receive employment income, and that the accrued bonus payments were contingent on the contractual requirements being met, which only happened after the employees had become members.
Charles Tyrwhitt LLP v HMRC  UKUT 165 (TCC)
2.3 HMRC wins appeal on SDLT refund time limit
The UT has found that the 12 month time limit for amending SDLT returns still applies even if the amendment is to obtain a repayment of SDLT in respect of a substantially performed contract that was never fully performed. This overturned the FTT judgment.
The taxpayer purchased a 25 year lease on a property, with agreement that it could develop it. It also purchased a separate lease of the property for 201 years. Two years later, both leases were given by the taxpayer to his brother. There were still payments due to be made for the 201 year lease, which became the brother’s responsibility. Having made an SDLT return for the full amount ultimately due, the taxpayer claimed an SDLT refund for the amounts of consideration that he had not paid before the gift.
The FTT found that this amendment was in time, as although the normal deadline for amendment has passed, on its reading of the legislation the 12 month time limit is overridden in circumstances where an amendment is made to an SDLT return that had been filed when a contract was substantially performed, but ultimately the contract was never completed. The UT overturned this, finding that no exception applied.
HMRC v Candy  UKUT 170 (TCC)
3. Trusts, estates and IHT
3.1 Taxpayer loss on review of non-resident trust tax credits
On judicial review, the HC has agreed with HMRC that extra-statutory concession (ESC) B18 only allows a taxpayer a tax credit on payments from a non-UK resident trust if that income arose to the trustees within the last six years. The taxpayers argued that the six year limit did not apply.
Beneficiaries of non-UK resident trusts are not automatically entitled to tax credits on payments from the trust. There is however an ESC, B18, that allows the beneficiary to claim a UK tax credit if the underlying source of the payment is income on which the trustees paid UK tax. This is limited to income arising within the six years preceding the tax year in which the payment was made.
In this case, the taxpayers wished to claim a credit for older tax, of about £4million, and asked the HC to conduct a judicial review to determine whether or not the ESC really did impose a six year limit.
The HC considered the changes in wording of the ESC, as it has been updated several times since being introduced in 1978. The taxpayers argued that on a strict reading the 6 year limit did not apply to payments to UK resident beneficiaries, as the payment is effectively treated as if made from a UK resident trust. The HC rejected this, agreeing with HMRC that despite changes to the wording of the ESC, the six year time limit applied.
Murphy & Anor v HMRC  EWHC 1914 (Admin)
4.1 CA confirms the interpretation of the financial services exemption
The CA has upheld an UT ruling that loan servicing activities do not qualify for the VAT exemption for financial services. To qualify, the services need to form a distinct whole that fulfils the essential functions of a financial transaction.
The taxpayer provided loan servicing to a bank. These activities included setting up and closing loan accounts, producing direct debit instructions, processing repayments, interacting with borrowers and performing reconciliations. The taxpayer did not, however, actually provide the loan. It argued that its services were VAT exempt under the exemption for financial services.
The FTT and UT both found that the services were not eligible for that exemption. The taxpayer appealed on the grounds that the UT interpreted the exemption too narrowly. The CA examined recent EU and UK case law in detail, and agreed with the FTT and UT. The taxpayer was not eligible for the financial services exemption because its activities did not ‘form a distinct whole that fulfils the essential functions of a financial transaction’. First, it did not provide loan origination services. Second, it did not directly credit or debit an amount; it merely passed on information to third parties to do so. Third, the taxpayer’s role was limited to giving instructions or orders that were executed by a different party. Fourth, it did not assume responsibility or liability for achieving a transfer or payment in the services it provided.
Target Group Limited v HMRC  EWCA Civ 1043
5. Tax publications and webinars
5.1 Tax publications
- 29 July 2021: The Contemporary FD Bitesized
6. And finally
6.1 Pick your battles
In 2016, the then-Chancellor permanently moved the Budget to Autumn. It seemed, briefly, to stick. But for various reasons the Budget for the last few years has crept back into March. And if recent rumours are anything to go by, the same will happen again this year.
It’s not that we disagree with the decisions to push back recent Budgets. General elections, Brexit and the pandemic are all momentous events well worth adjusting for. But if this is going to be the third year in a row, we should probably just accept that it is not an Autumn Budget anymore. There are bigger battles to fight in tax and the economy.