USA
Weekly Tax Update 23 September 2020
The latest tax update and VAT round up for the week.
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. General
1.1 House of Lords committee to investigate HMRC powers
The Finance Bill sub-committee has issued a call for evidence on the draft Finance Bill. It will report on the effectiveness of the measures and their impact on taxpayers. It intends to focus on the new proposals for dealing with promoters of tax avoidance schemes and changes to HMRC’s civil information powers, among other areas.
The House of Lords Economic Affairs Finance Bill Sub-committee considers parts of each year’s draft Finance Bill. It has asked for contributions to its inquiry into the draft Finance Bill 2020-21.
The primary areas it will consider are:
- the new proposals for tackling promoters and enablers of tax avoidance schemes;
- the new tax checks on licence renewal applications; and
- the amendments to HMRC’s civil information powers.
In each area, it will consider the effectiveness of the measure, as well as its impact on taxpayers’ rights. It has also asked for views on the Government’s proposals on new notification requirements for uncertain tax treatments, and on the use of retrospective provisions in other areas of the draft Bill.
Contributions to the inquiry should be submitted by 7 October, after which the committee will report to the House of Lords with its recommendations.
1.2 Non-resident SDLT surcharge: professional bodies comment on draft legislation
The CIOT and STEP have highlighted their concerns with the draft non-resident SDLT surcharge legislation, and asked for detailed guidance to be provided.
The CIOT and STEP have released comments on the draft legislation introducing the 2% SDLT surcharge for non-resident purchasers of UK residential property.
The submissions include:
- comments on joint purchases where one spouse is non-UK resident and one UK resident;
- concern around the new test for individual residence, the complexity it adds and potential anomalous outcomes;
- suggestion of a simplified test for determining whether or not a UK company falls within the surcharge;
- request for clarification of the rules where a UK resident company is treaty non-resident; and
- calls for detailed guidance to be published prior to 1 April 2021 to allow taxpayers and advisers to familiarise themselves with the new rules.
2. Private client
2.1 Compensation for mis-selling held to be income
Compensation paid by a bank to a taxpayer has been held to be income in nature. It was set as the difference between the interest he paid on a mis-sold loan product used to fund his property rental business, and that he would have paid on a better product he should have been offered. This is the lead case for a number of similar appeals.
The taxpayer had substantial bank borrowings with which he funded his UK property rental business, and paid interest at a set amount above the Bank of England base rate. In 2007, he took out an interest rate protection product with the bank, which was a condition of his latest loan but applied to the whole of the borrowings. Under the terms of the product, both he and the bank were liable to pay interest at differing rates, but this was netted off. As a result, the taxpayer was obliged to pay substantial amounts to the bank.
In 2013, the bank found that it had not met regulatory requirements when selling the product, as it should have offered him a more beneficial product. The arrangement was terminated. Compensation paid by the bank to the taxpayer. This compensation was set as the difference between the interest payments he made, and those that he would have made under the better product, plus interest on it at 8% per year.
The taxpayer contended that the compensation was capital, arguing that it was his lost opportunity cost for not pursuing a course of action other than entering into the mis-sold arrangement. Although the compensation was calculated by reference to the interest, it was not the source. The FTT disagreed, finding for HMRC that although the taxpayer had been prevented from entering into the better arrangement by the mis-selling, the loss the compensation was paid to cover was the loss of overpaid interest. The whole of the compensation payment was liable to income tax, as was the 8% interest paid on it.
Wilkinson v HMRC [2020] UKFTT 362 (TC)
3. Trusts, estates and IHT
3.1 Trust registration service: new regulations laid before Parliament
The new regulations for the trust registration service (TRS) were laid before Parliament on 15 September 2020. These modify the registration requirements in accordance with the fifth EU anti-money laundering directive (5AMLD).
The principal changes made are to expand registration requirements to include most express trusts, and to bring further non-UK trusts into scope. Following consultation, HMRC announced in July that some express trusts would be out of scope. The regulations will generally come into force 21 days from the date they were laid, but the majority of trusts newly in scope have until March 2022 to register.
https://statutoryinstruments.parliament.uk/timeline/4oUJTCxG/SI-2020991/
4. VAT
4.1 UT upholds FTT decision on agency arrangements
The UT has ruled that an essay-writing business acted as principal for third-party writers. It was therefore liable to VAT on the full consideration for the supply. The UT reiterated that the terms of a contractual agreement and the commercial and economic reality of the arrangement need to be examined to determine if an agency relationship exists.
The taxpayer operated an online business where third-party writers produce essays and dissertations for academic customers. The writers were not employed by the taxpayer and were often not VAT registered. Customer fees were shared between the taxpayer and the writer. The taxpayer only accounted for VAT on the element that it retained.
HMRC argued that the supply was a single supply of academic work to a customer by the taxpayer. The full amount payable by the customer should therefore be subject to VAT at the standard rate. The taxpayer argued that it was acting as agent on behalf of the third-party writers. On that basis, it was not required to account for VAT on the amount received by the writers. The FTT had ruled in favour of HMRC that the taxpayer made the supply to the customer as principal.
The UT examined the meaning and effect of the relevant contractual terms. It then determined whether or not these terms reflected the commercial and economic reality of the supply. It upheld the FTT’s decision, though on slightly different grounds. The contracts imposed the ‘core’ obligations on the taxpayer, not on the writers, and this was consistent with the commercial and economic reality of the arrangements. It found that the taxpayer, as principal, had been the sole supplier of the academic work.
All Answers Limited v HMRC [2020] UKUT 0236 (TCC)
https://assets.publishing.service.gov.uk/media/5f2293f78fa8f57ad0429050/All_Answers_v_HMRC.pdf
4.2 Temporary reduced rate for hospitality, accommodation and attractions
The ATT has published HMRC’s response to a series of questions on the operation of the temporarily reduced rate of VAT.
The reduced rate of VAT temporarily applies to some supplies of hospitality, holiday accommodation and attractions. This measure was introduced in response to the COVID pandemic. HMRC has provided clarification on points raised by the ATT regarding how businesses should apply these rules.
The responses include confirmation that the sale of alcohol serviced with a mixer is generally considered to be standard rated for VAT. It notes that VAT should be accounted for on each item if a restaurant offers a promotion for a ‘free’ alcoholic beverage when food is purchased. It also explains how to treat accommodation bookings where the date of the deposit and the date of final payment straddle the temporary change to VAT rates.
www.att.org.uk/sites/default/files/200904%20Response%20to%20ATT.pdf
5. And finally
5.1 A noble fight
We have great sympathy for the CIOT, which has yet again found itself pointing out that the UK tax gap is primarily due to mistakes, not tax avoidance. We can easily imagine the longsuffering sighs as the response to the Tax Gap report was drafted: ‘Until there is real, meaningful simplification of the tax system this rate of errors will continue’. The message, however long ignored, could not be clearer.
But it could be phrased with more style. We much prefer this eloquent summary by the Treasury Committee and the ICAEW witness before it:
‘So you feel very much that as an accountant you are drowning in sludge, the sludge of the tax system, and you’d actually like to do higher more noble things?’
‘Well, yes.’
Chin up, CIOT. The battle for simplifying the tax system rages on, and even the accountancy profession is on your side.
https://parliamentlive.tv/Event/Index/80264e61-cb38-407b-827b-04b79337324f
www.tax.org.uk/sites/default/files/200902%20Tackling%20the%20tax%20gap%20-%20CIOT%20comments.pdf
Glossary
| Organisations | Courts | Taxes etc | ||
| 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 |
DISCLAIMER
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.
Disclaimer
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.
