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 New guidance on the tax treatment of COVID grants
New sections have been added to HMRC’s Business Income Manual to explain the tax treatment of COVID support grants. These include grants under the Coronavirus Job Retention Scheme, Self-Employment Income Support Scheme (SEISS) and any Coronavirus Business Support Grant Schemes.
The new guidance at BIM40456 – BIM40459 confirms the general rule that all COVID support payments are revenue in nature. They should be brought into account when calculating the profit of a business in accordance with GAAP or the cash basis. The exception is SEISS payments; these are taxable in 2020/21 unless they form part of a partnership’s income. If a partner retains a SEISS payment, it is taxable on him as trading profit. If, however, he transfers the grant to the partnership, it should be included as trading income of the partnership in that accounting period. Where grants are referable to multiple businesses, they should be allocated to the individual businesses using a just and reasonable apportionment method. COVID grants cannot be exempted from tax under the trading and miscellaneous income allowance.
2. Private client
2.1 FTT finds conduct not deliberate
The FTT has reduced penalties charged on a taxpayer for an inaccuracy in his return by over £20,000. It found that relying on his out of date knowledge of the residence rules was careless behaviour, not deliberate, although he had not taken steps to ascertain the correct position.
The taxpayer, a qualified accountant, though not practising, moved to Monaco in July 2013. He filed his return for 2013/14 on the basis that he was non-resident, rather than claiming split year treatment, as he did not know that the tax residence rules had changed. This inaccuracy meant that a large amount of UK dividend income was not charged to UK tax. HMRC opened an enquiry, and on the taxpayer’s acceptance that the return was incorrect charged penalties for deliberate behaviour. The taxpayer appealed the penalties on the grounds that his conduct was not deliberate.
HMRC argued that the inaccuracy was deliberate. The taxpayer was not an expert in residence rules, but although aware that it was a complex area he had not sought advice. He was aware that he was required to take steps to ascertain the correct tax treatment, so his conscious choice not to meant that the inaccuracy was deliberate. The FTT partially allowed the appeal, agreeing with the taxpayer that his out of date tax knowledge “was enough to arrive at the wrong conclusion, but not enough to arrive at the correct position”. He had not deliberately sent in an inaccurate document, but acted carelessly in not checking and sending it in at the last minute. The penalties were therefore reduced to the amount for carelessness rather than deliberate behaviour.
Dolan v HMRC  UKFTT 448 (TC)
2.2 HMRC issues more nudge letters on overseas matters
HMRC has announced three new campaigns of ‘nudge’ letters. These are sent to taxpayers that HMRC believes may have omitted to report an event, as a way of encouraging them to get their affairs in order without starting a formal enquiry, or as educational tools to help taxpayers who submit returns dealing with complex areas. The latest campaigns are primarily educational, targeting foreign tax credit relief, overseas workday relief, and relief under double taxation agreements. All the letters will be sent in November and copied to their agents.
The first letter will go to taxpayers who claimed foreign tax relief against employment income in 2018/19. It will explain the conditions and eligibility criteria for claiming foreign tax credit relief against employment income, with the aim of getting them to claim this correctly, or not at all, on 2019/20 tax returns.
Another letter is being sent to those taxpayers who claimed overseas workday relief in 2018/19 and are due to file 2019/20 returns. It will explain the conditions for claiming this, ask them to read them before completing their 2019/20 tax return, and give information on how to correct and errors they identify in their 2018/29 returns.
The last letter will go to taxpayers who claimed relief under a double taxation agreement in 2018/19. It will explain how to claim the relief correctly, if they plan to do so in 2019/20, including which forms to complete and how to apply for a certificate of residence.
2.3 Late filing penalties cancelled for taxpayer who had never been to UK
The FTT has found that a taxpayer who invested in the UK had a reasonable excuse for filing her return late. She had been told by the vendor that no tax would be due, and had made an attempt to comply with her obligations. HMRC’s correspondence had been confusing to a non-resident unfamiliar with UK tax law.
The taxpayer, a Malaysian resident who had never visited the UK, invested in a UK car park. She was told by the vendor’s agents that as the income was below the UK personal allowance, no tax would be due. She was advised to submit a non-resident landlord form to HMRC to prevent tax from being deducted from the rent, and did so. The only income she ever received was £1,600 in 2015-16.
HMRC issued her with a notice to file for 2015-16, which she did late, and on paper. She appealed the late filing penalties. HMRC argued that a choice to invest in the UK carried an obligation to comply with UK laws, and she should have familiarised herself with the requirements, rather than relying on the vendor’s statement that no tax was due.
The FTT, however, allowed the appeal finding that HMRC’s conduct had been confusing. A 2014-15 return was issued and withdrawn with penalties cancelled, and the taxpayer had attempted to file the 2015-16 return, initially sending in only the residence pages rather than the full return. As she had attempted to comply, and was unfamiliar with UK tax law, as well as having received incorrect advice from the vendor, it was reasonable that she had filed the return late, and the penalties were cancelled.
Fei Ling v HMRC  UKFTT 467 (TC)
2.4 Treasury Select Committee discusses wealth tax
This committee is investigating which tax changes should be made as a result of the economic fallout from the coronavirus pandemic. Recently, it has heard evidence on a wealth tax.
No formal findings have been made as yet, as the committee is investigating many options for changes to the tax system.
The Wealth Tax Commission is continuing their work on the report due 9 December. It states ‘Our aim is not to advocate a wealth tax but rather to examine the theoretical case for and against and point out the design, valuation and enforcement details that have to be overcome.’
3. PAYE and employment
3.1 COVID-19: Antigen, but not antibody, tests tax exempt
Tests given to employees to detect current COVID-19 infections (antigen tests) will be exempt from income tax and national insurance rather than being treated as employee benefits.
The legislation allowing this will come into force on 8 December, but HMRC will treat it as in effect from 6 April 2020 by not collecting the IT and NIC due. Antibody tests, which assess whether or not someone has previously been infected, will not be exempt but remain subject to the benefit-in-kind rules.
3.2 Late elections to spread loan charge balances to be accepted
HMRC has announced that elections by taxpayers with outstanding loan charge balances to spread them evenly over three tax years will be accepted up to 31 December 2020. The original deadline was 30 September 2020.
The election allows taxpayers subject to the loan charge to spread their outstanding disguised remuneration loan balance evenly across 3 tax years (2018 to 2019, 2019 to 2020 and 2020 to 2021) rather than being due to pay all with the 2018/19 tax return.
Elections made after 30 September will still technically be late, but will be accepted automatically. HMRC will continue to consider applications after 31 December, but they will not be accepted automatically, and additional information will be required from taxpayer or agent. Once made, this election cannot be revoked.
3.3 Exemption for virtual Christmas parties
HMRC has confirmed that the annual parties tax exemption will apply to virtual Christmas parties. This was communicated to a professional services forum; HMRC’s guidance is expected to be updated shortly.
HMRC accepts that the exemption in ITEPA 2003 s.264 applies to virtual parties in the same way as for in-person events. The same conditions therefore apply, including the £150 limit and the requirement for the event to be available to employees generally.
4. Business tax
4.1 Empirical studies find R&D and patent box reliefs are effective
Independent evaluations of the UK R&D relief and patent box schemes have concluded that these reliefs increase investment and turnover.
The three separate studies examined the impact of these reliefs on the activities of companies and future business performance. The assets of patent box relief claimants were found to have increased by 10% more than those of similar non-claimant companies over the period since the scheme was introduced. The study on the R&D expenditure credit scheme estimates that between £2.40 and £2.70 more is invested in R&D activities by UK companies for every £1 spent on R&D tax credits by the Government. R&D relief for small and medium-sized enterprises was found to be less effective. Every £1 in tax forgone under this regime is estimated to stimulate between £0.60 and £1.28 additional R&D expenditure. A 1% increase in R&D expenditure is estimated to increase a business’s turnover in the following year by 0.021%.
4.2 New guidance on the Finance Act 2020 changes to the intangibles rules
HMRC has published new guidance on the special rules for restricted assets within the intangible fixed assets regime.
Finance Act 2020 amended the tax treatment of acquisitions of pre-Finance Act 2002 assets from related parties. These changes applied to acquisitions from 1 July 2020. The relief is limited, however, for three classes of ‘restricted assets’. The new section in the Corporate Intangibles Research and Development Manual explains the operation of this restriction and includes worked examples on the application of the rules.
5.1 UT confirms FTT decision that juice cleanse programmes are supplies of food
The UT has dismissed HMRC’s contention that the FTT erred in law when deciding how to classify juice cleanse programmes for VAT purposes. The ruling confirms that a multifactorial approach is necessary, with consideration of the product itself, how it is marketed and the purpose for which it is bought and used.
The taxpayer produced raw fruit and vegetable juices, which it sold both in meal replacement programmes and as individual items. The taxpayer argued that the supplies should be zero-rated as food, but HMRC argued that the products fell within the exemption for beverages. The FTT ruled in favour of the taxpayer. It considered the way the product was marketed, why it was consumed by the customer, and the use to which it was put. HMRC appealed the decision on the grounds that the FTT erred in law by focusing too heavily on how the product was marketed. The UT dismissed the appeal, finding that the FTT had considered all relevant factors and had not erred in the weighting applied to those factors.
HMRC v The Core (Swindon) Limited  UKUT 0301 (TCC)
5.2 HMRC clarifies VAT treatment of school holiday clubs
Revenue and Customs Brief 18 (2020) has been released, setting out HMRC’s response to an FTT ruling on school holiday clubs. In light of this judgment, HMRC will consider requests for corrections of past rulings on similar activities.
In 2019, the FTT ruled in RSR Sports Limited v HMRC that a supply of holiday camp services was exempt from VAT under the exemption for the provision of welfare. In response to this decision, HMRC has issued Brief 18 (2020), which explains the FTT’s findings and the conditions required for the exemption to apply. Businesses that may be due a refund of overpaid VAT are invited to apply for a repayment in the usual way. HMRC will also accept requests for corrections of past rulings where evidence is provided to demonstrate that the conditions identified by the FTT are met.
RSR Sports Limited v HMRC  UKFTT 0678 (TC)
6. Tax publications and webinars
6.1 Tax publications
The following Tax publications have been published.
7. And finally
7.1 When shall I marry?
This year, next year, some time, never; the rhyme rang in our ears as we read the HMRC consultation last week over Making Tax Digital (MTD) for CT.
No company will, it seems, be mandated to use MTD for CT before April 2026. It is as if Covid 19 never happened. If the last eight months has brought anything for business, it has been the urgent and sometimes brutal necessity of taking business systems online with employees working at home where they can. Nature is less patient than HMRC, and business’ lead time has been minimal. But after the shock, the tax functions of businesses, like that of their advisers, are now so much better equipped to handle the new normal digital world.
Smaller businesses may have real issues, but MTD for VAT pointed the way for that with a two-tiered approach, with those smaller businesses given more time. The thing is, though, they will be in MTD for VAT by April 2022: they will by then have acquired the computer and the software.
Why, then, the huge delay to our marriage to MTD? It couldn’t possibly be, could it, that HMRC is not itself likely to be quite ready to go up the aisle? This year, next year; sometime…?
|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.