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 HMRC Chief Executive to step down
Sir Jonathan Thompson will step down as Chief Executive of HMRC in Autumn 2019. Sir Jonathan will take on the role of Chief Executive of the Financial Reporting Council as it transitions into a new audit regulator. He has served as Chief Executive of HMRC and First Permanent Secretary since April 2016. The Government has not yet announced his replacement.
We wish him well in his new appointment.
1.2 Scottish income tax revenue increases, but falls far short of forecast
Figures published on income tax revenue from Scottish taxpayers for 2017-18 show an increase of 1.8% on 2016-17, but were £941m short of the budgeted amount. The number of Scottish taxpayers fell slightly.
HMRC has published a report on Scottish income tax for 2017-18. The key findings were that, although revenue rose by 1.8% from 2016-17, there was a shortfall of £941m from the budgeted amount. £204m of this will be taken from the Scottish Budget.
The overall number of Scottish taxpayers has fallen, but the numbers in the higher and additional rate bands of income tax has increased slightly.
2. Private client
2.1 Losses not incurred in course of appellant’s trade
The appellant attempted to claim losses incurred by his son in an aborted attempt to purchase a property off plan. The FTT found that the property was not held on bare trust for him, so the losses were not his.
The appellant’s son and daughter-in-law purchased a property off plan, paying a 10% deposit. Due to lack of funds, the purchase was not completed on construction, and the deposit was forfeited. A substantial sum was also paid to the property developer for breach of contract. The appellant claimed these sums as losses. He argued that he was the beneficial owner of this property, as his son was simply acting as agent, and he had refunded him for the deposit and litigation. He had made other off plan purchases personally, none of which had been constructed, so contended that he was carrying on a trade.
The FTT agreed with HMRC that no bare trust existed, as there was no evidence of an agreement. The property was therefore not a part of any trade of the appellant, and he could not claim losses. HMRC also argued that the appellant was not trading at all, as no properties had been acquired, just contracts, but the FTT rejected this, though it had no effect on the rejection of the appeal. The penalty for deliberate inaccuracy was upheld.
Lim v HMRC  UKFTT 434 (TC)
2.2 FTT finds partial closure notice cannot be issued on domicile alone
In opposition to the decision in Embiricos, an FTT judge has found that partial closure notices cannot be issued without a determination of the amount of tax. In both cases, the application for the partial closure notice concerned domicile, in an effort to challenge that conclusion without the need to provide information on overseas assets.
The taxpayer died in the UK during a domicile enquiry. HMRC continued the investigation, and issued an information notice for details of the taxpayer’s foreign income and gains in the years in question. Here, as in the Embiricos case, the agent appealed the notice and applied to the tribunal for a partial closure notice on the question of the taxpayer’s domicile, so that this point could be appealed and resolved without any information on the taxpayer’s overseas assets being supplied.
HMRC argued, as in Embiricos, that it was impossible to issue a closure notice without a tax determination, so a partial closure notice on domicile without looking at overseas assets could not be issued. The FTT rejected this in Embiricos, but took the opposite view here on a different reading of the legislation. It also refused a full closure notice, and upheld the information notice, as the enquiry was legitimate and the information necessary for HMRC to determine the correct amount of tax.
The judge also congratulated HMRC on the ‘careful, considered, and patient way’ in which it had responded to the tax agent’s series of complaints, which included sending information about the HMRC officer’s personal Facebook page to every member of the HMRC board twice, and demanding the resignation of the Chief Executive.
Executors of Mrs R W Levy v HMRC  UKFTT 418 (TC)
Embiricos v HMRC  UKFTT 236 (TC)
3. PAYE and employment
3.1 HMRC to clarify the loan charge, says Financial Secretary
During questioning by the House of Lords Economic Affairs Committee, the Financial Secretary to the Treasury Jesse Norman MP stated that HMRC would shortly announce clarifications to the operation of the loan charge. He expects these announcements to ‘settle some of the public concerns’ and confirmed that HMRC would not apply the loan charge to a tax year that was closed on the basis of fully disclosed information.
The questioning focused on the loan charge and HMRC’s blanket application of the provisions to taxpayers who had intentionally participated in a disguised remuneration scheme and those who did not properly understand their tax affairs. The Committee expressed concern for the treatment of taxpayers who had been told to participate in such schemes by their employers at the risk of losing their jobs. This situation, the Committee noted, had occurred where local authorities employed workers under disguised remuneration schemes. The Financial Secretary responded by saying such situations were very uncommon and support would be provided for them. He also remarked that such individuals had been involved in the avoidance of tax, and it is not the role of the tax system to discriminate between different scheme users. The loan charge, the Financial Secretary noted, is not ‘retrospective’ because it does not create a tax liability that did not exist at the time. He did accept that the loan charge is ‘retroactive’ , though he did not note this as a point of concern. He also confirmed that HMRC would not continue to seek payment from individuals who has no realistic prospect of paying the tax; if their circumstances changed HMRC would then recommence debt collection.
4. Business tax
4.1 SDLT relief denied on temporary residence for self-employed contractors
Relief from the higher rate of SDLT has been denied to a company on the basis that the property was not solely acquired for an exempt purpose, such as a rental business. The FTT also distinguished between a rental business and the provision of accommodation that forms part of a trade.
The company supplied self-employed carers. It acquired a property with rooms that were let out on a short term basis to carers who needed temporary accommodation before starting an assignment. The local council had granted permission for the use of the property to be changed from a dwelling to temporary residence for residential carers. The company argued that it was eligible for relief from the higher rate of SDLT because it qualified for the exemption for rental businesses.
The FTT dismissed the appeal on the grounds that the property was not acquired exclusively for any of the exempt uses listed in the exemption provisions. It held that the property was acquired to obtain a better return on the surplus funds than the bank offered in interest, and to support the provision of the carer training business by offering cheap accommodation. It also found that the accommodation did not constitute a rental business. While the provision of breakfast items and a housekeeper to maintain communal areas did not prevent it from being a rental business, on the facts of this case it was not a rental business separate to the other company activities. The accommodation formed part of the same business activity as the provision of carers and the training of those carers, and was therefore part of a trade. HMRC’s decision was upheld.
Consultus Care & Nursing Limited v HMRC  UKFTT 437 (TC)
5.1 Consultation on simplifying the partial exemption and the Capital Goods Scheme
HMRC is seeking views on how to improve the operation of the partial exemption rules and the Capital Goods Scheme. This follows the conclusions of the VAT review undertaken by the OTS in 2017.
The Government announced plans at the Spring Statement 2019 to explore options to improve both these areas of VAT law and procedure. The OTS has found that the administrative requirements of these rules can be extensive in comparison to the outcome, which can be a relatively small adjustment. The consultation focuses on the partial exemption special methods, the partial exemption minimum thresholds, and the possible policy solutions to issues caused by the Capital Goods Scheme.
The consultation closes on 26 September 2019.
5.2 CJEU rules that input tax on investment management fees is not recoverable
The CJEU has ruled that input tax cannot be recovered on investment management activities that generate funds to be used in taxable activities. The taxpayer cannot ‘look through’ the investment management activities to the future taxable activities supported by the funds managed. An immediate link to taxable activities is required.
The University of Cambridge had submitted a claim for the repayment of input tax associated with investment management activities. It argued that the income generated from that investment management supported all of its activities, some of which were taxable. HMRC denied the claim, but both the FTT and UT ruled in favour of the University. HMRC then appealed to the Court of Appeal, which referred the matter to the CJEU.
The CJEU found that the University was not acting as a taxable person in regards to collecting donations and endowments. It held that, in line with Tolsma  STC509, because the donations and endowments were made on a charitable and random basis, they could not be regarded as consideration for an economic activity. These activities therefore did not fall within the scope of VAT, and input VAT could not be recovered.
This is an important decision because it is clear that the courts will not allow a business to ‘look through’ the immediate activity for which the costs were incurred. It is only the immediate link that is important; the purpose of the investment management did not extend to the future use of the dividend and interest income that was generated by those management activities. This principle is equally important for costs incurred when selling shares: a company cannot argue that the shares were sold to raise funds to support its future taxable trading activities. It is the immediate transaction, being the sale of shares, for which the costs were incurred that is important (see BLP Group plc  STC 424).
Mr Tolsma ECJ case C-16/93 (1994 STC 509): https://eur-lex.europa.eu/legal-content/GA/TXT/?uri=CELEX:61993CJ0016
BLP Group plc C-4/94 (1995 STC 424): https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A61994CJ0004
5.3 Changes in accounting for VAT after prices are altered
Revenue and Customs Brief 6 has been published. This explains the new regulations for accounting for VAT when the price charged is reduced or increased after VAT has been accounted for on a supply. Where a price is increased, businesses will be required to account for the increase in VAT in the period in which the price increase is agreed by the supplier and the customer. Where a price is decreased, businesses will be required to account for the decrease in VAT in the period in which the refund is made.
These changes have been implemented to address two issues: HMRC believes that some businesses have been making VAT adjustments without refunding customers, and some businesses are treating errors as price adjustments to avoid the stricter time limits for reporting errors. The amended regulations specify when a change in price occurs, and when the increase or decrease in VAT must be accounted for. A ‘payment’ for these purposes includes monetary payments and an offset against existing liabilities. Increases in price occur when the change is agreed by both the supplier and the customer, and decreases in price occur when the refund is issued. Debit and credit notes, if required, must be issued within 14 days of the change in price. Specific rules are set out in the regulations that detail what is to be included in a debit and a credit note. The change in VAT is to be accounted for in the period in which the price changes. If a business does not issue a debit or credit note within the time limit, or fails to account for the VAT in time, this error must be corrected under the normal rules.
These rules will apply from 1 September 2019. HMRC has confirmed that its VAT notices and guidance manuals will be update before this date.
6. And finally
6.1 Just a moment
Last week, we noticed in passing some dubious comments by HMRC concerning the proposed Finance Bill draft provisions on HMRC ranking in insolvency; so dubious we started to get hot under the collar. We discovered that HMRC was quoting the Treasury. HMT said
‘From 6 April 2020, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers but held in trust by the business go to fund public services as intended, rather than being distributed to other creditors such as financial institutions’
Almost everything about that sentence is questionable. First, the taxes aren’t paid in good faith; they are withheld, so the taxpayer doesn’t get a choice. Second, who says the taxes necessarily ‘fund the public services’? A lot of it will, but by no means all. Well, you may think this is cavilling, but to us it was worrying that the comments just hadn’t been thought through. The argument may sound persuasive until you ask yourself who might otherwise be paid out. It seems that financial institutions with fixed charges will still rank before HMRC, where employees (otherwise than for redundancy payments) will only rank alongside HMRC. Put another way, employees and other creditors end up paying the tax owed by the employer. Quite how this works out as ‘a fair share of tax’ is beyond us. Perhaps the HMRC correspondent didn’t trust himself to comment further; let’s hope so.
|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||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.