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 Season’s Greetings
We wish all our readers a Merry Christmas and a happy and healthy New Year.
The next edition of Update will be published on 12 January 2021.
1.2 Budget date confirmed as 3 March 2021
The Chancellor has announced that the Budget, postponed from Autumn 2020 due to the pandemic, will be in March.
The Treasury states that it will ‘set out the next phase of the plan to tackle the virus and protect jobs’.
1.3 New consultation: Follower notices and penalties
HMRC has launched a new consultation on proposed changes to the penalties charged for failing to take corrective action in response to a follower notice, designed to discourage litigation.
Follower notices are issued by HMRC to those who have used a tax avoidance scheme, if HMRC has already won litigation against another taxpayer about the same scheme. They require recipients to remove the tax advantage they obtained under the scheme; for example, by amending their tax return.
The proposed change is to cut the penalty rate for non-compliance from 50% to 30% of the disputed tax, but introduce a penalty of 20% for those whom the tribunal decides acted unreasonably in continuing to litigate against HMRC’s decision.
The closing date for comments is 21 January 2021.
1.4 HMRC agent update 80
HMRC has published Agent Update 80, which provides an overview of the recent issues of which tax agents should be aware, focusing this time on tax returns in the approach to the deadline.
The latest Agent Update summarises various recent issues and changes, including guidance on:
- avoiding submission problems with tax returns, with examples of what can cause these;
- completing a paper return;
- a possible software issue mislabelling Business Asset Disposal Relief claims as Investors’ Relief;
- submitting the last income tax return for a non-resident company landlord;
- claiming tax repayments using BACS;
- how to defer VAT payments; and
- agent authorisation: using the correct process.
1.5 HMRC warns against tax avoidance schemes involving revenue service trusts
Spotlight 57 highlights arrangements whereby businesses attempt to avoid tax by transferring rights to future revenue to an offshore trust.
Under these arrangements, a business will not include revenue in its tax return because it purports to have sold the rights to that income to an offshore trust. HMRC is not notified of the transfer of rights to the trust, which is not subject to UK tax. The trust then transfers the revenue back to the business owner, either directly or through a personal management company. In HMRC’s view, such schemes do not work. It will challenge promoters of these schemes and investigate the tax affairs of those who use them.
1.6 Bill for taxation after Brexit receives Royal Assent
The Taxation (Post-transition Period) Act 2020 received Royal Assent on 17 December 2020.
The Act makes provision for VAT, customs and excise issues after the UK transitions out of the EU. It provides the legal framework for how VAT will operate across Northern Ireland and Great Britain from 1 January 2021.
2. Private client
2.1 HMRC update on Making Tax Digital for IT
HMRC has confirmed that businesses that took advantage of some COVID-19 support schemes will not be eligible to take part in the pilot of Making Tax Digital (MTD) for IT.
Claiming any of the following grants will make a taxpayer ineligible:
- Self-Employment Support Scheme for sole traders;
- Coronavirus Job Retention Scheme; or
- Eat out to Help Out Scheme for businesses in the hospitality sector.
This is likely to be due to software constraints. MTD will become compulsory for some taxpayers from April 2023.
3. PAYE and employment
3.1 Employer reimbursement for COVID tests tax exempt
HMRC has announced that if an employer reimburses an employee’s purchase of a COVID-19 test, no IT nor NIC liability will arise in the 2020/21 tax year.
This exemption will be legislated for in the next Finance Bill to have effect from 25 January to 5 April 2021, but HMRC will not use its powers to collect tax on any reimbursements from 5 April 2020.
It is understood that the test should be being purchased for business reasons; for example, to allow an employee to travel abroad for work.
3.2 Furlough scheme extended to April 2021
The Coronavirus Job Retention Scheme (CJRS) will now run until 30 April 2021.
The Government will continue to pay 80% of the wages of eligible employees in respect of hours not worked. The existing cap of £2,500 per month will continue to apply.
4. Business tax
4.1 CA finds UT mischaracterised FTT decision on company residence
The CA has found that the UT was not justified in setting aside a FTT decision on company residence. The FTT’s decision therefore stands, but one CA judge noted that he did not endorse the FTT reasoning.
In 2004, a tax planning scheme was devised to enable a group of companies to access indexation relief on the disposal of companies and properties. The scheme depended on three newly incorporated companies being tax resident in Jersey at the time they acquired particular assets. The FTT had ruled that those companies were UK tax resident because central management and control of the companies was exercised in the UK. The UT reversed the decision.
The only issue before the CA was whether or not it was open to the UT to make the decision that it did. The CA set out seven points on which the UT had mischaracterised the FTT’s decision. More generally, it found that the UT did not recognise the significance of findings of fact that the FTT had made. The UT’s ruling was therefore set aside; in light of the FTT’s decision, the companies were therefore UK tax resident.
HMRC v Development Securities plc (and others)  EWCA Civ 1705
4.2 UT refers UK group gains rules to the CJEU
The UT has requested a preliminary ruling from the CJEU in respect of two cross-border group gains transactions. The CJEU’s decision may affect the interpretation of the recently introduced instalment regime for exit charges.
The taxpayer, a UK company, made two disposals to non-resident group companies. Neither disposal qualified for nil gain/nil loss treatment, which would have operated had the transferees been UK tax resident. The taxpayer argued that the tax charges violated the EU principle of freedom of establishment. In a long and complex judgment, the FTT found that the freedom of establishment was infringed in relation to only one of the two transactions. Both the taxpayer and HMRC appealed this decision.
The UT found that it could not resolve the issues with complete confidence. Furthermore, the outcome of the case was likely to be widely applicable to other transactions. It therefore decided that a preliminary ruling should be requested from the CJEU before the transition of the UK out of the EU is completed. In addition, after the FTT’s decision HMRC had introduced an instalment method for paying the tax arising on transactions such as the ones in this case. The UT noted that the CJEU’s decision may inform the interpretation of that regime.
Gallaher Limited v HMRC  UKUT 354 (TCC)
4.3 Proposal for reforms to the taxation of asset holding companies
HMT is inviting responses to proposed changes to the taxation of asset holding companies (AHCs). The reforms are intended to encourage AHCs to be established in the UK by introducing targeted exemptions from capital taxes and withholding taxes.
An initial consultation on the taxation of AHCs in alternative fund structures was held earlier in 2020. The second consultation focuses on the detailed design features of a new regime for taxing AHCs. The aim of the reform is to deliver an appropriately targeted, proportionate and internationally competitive tax regime for AHCs. This is expected to encourage more AHCs to be established in the UK. The proposal also includes changes to the taxation of Real Estate Investment Trusts (REITs).
AHCs are companies used as intermediate entities in investment fund structures, to facilitate the flow of capital, income and gains between investors and underlying investments. The reforms include specific reliefs for gains realised by AHCs, which would not pay tax on disposals of investment assets. Instead, the gains would be taxed in the hands of the investors on disposal of their interests in the AHC. The relief would not apply to assets that derive 75% or more of their value from UK land. The Government is also considering exempting AHCs from withholding tax on interest payments and limited exemptions from stamp taxes.
The second consultation closes on 23 February 2021. The Government anticipates publishing draft legislation in 2021, before holding a technical consultation period.
4.4 HMRC allows a pragmatic approach to filing for corporate non-resident landlords
HMRC has confirmed that in some circumstances it will allow corporate non-resident landlords (NRLs) to file their final IT tax return on the basis of a 31 March year end. The final five days from 1 April to 5 April 2020 should then be included in the first CT return.
Many property businesses draw up accounts to 31 March, rather than 5 April, and habitually file IT returns on that basis. The five days from 1 April to 5 April are often included in the tax return for the following tax year such that each tax return covers a full year from 1 April to 31 March. HMRC has updated its Property income Manual to confirm that it will accept this approach for the last IT return of corporate NRLs, which transferred to CT on 6 April 2020. Their final IT return is for the tax year 2019/20. This relaxation applies where the NRL has consistently filed its IT return on a 31 March basis, and the difference in adjusting for the five days is not substantial. HMRC expects such NRLs to include those five days in its first CT return. The same pragmatic approach will also be accepted where an NRL’s year ends on an earlier date, for example 30 September 2020. In this situation, the first CT return should reflect the NRL’s results for the period 1 April 2020 to 30 September 2020.
4.5 OECD releases guidance on transfer pricing during the pandemic
The report provides guidance on the practical application of the OECD Transfer Pricing Guidelines (TPG) in light of the COVID-19 pandemic.
The recent economic disruption has presented new challenges for businesses and tax authorities implementing the OECD TPG. The TPG informs many domestic transfer pricing regimes around the world. The new report explains how the TPG should be applied in view of the current economic environment. It addresses issues such as comparability analysis, losses, COVID-specific costs, government assistance and advance pricing arrangements.
5. Tax publications and webinars
The following client webinars are coming up over the next weeks.
- S&W Sessions: Planning for 2021 tax changes
6. And finally
6.1 Never say never again
Our attention was drawn to a Philippic in the Daily Mail this week against the nascent wealth tax.
The proposed tax was denounced as bonkers, retrospective, vengefully persecutory, and, we need hardly add, unfair. Readers will be able to form their own views as to how far, if at all, they agree with these particular sentiments; but we take a wider view.
We warned last week that a wealth tax could have a short, but hated, existence. We remember too, though, the ‘thundering cheers of applause’ at the abolition of another short-lived tax so unpopular that Parliament even ordered the destruction of all documents connected with it. The tax in question? IT, in 1815.
|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.