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. Private client
1.1 Consultation on basis period reform
HMRC has published draft legislation for and a consultation on aligning taxation of self-employment profits to the tax year. This is a simplification measure, as currently taxable profits for each sole trader or partner are calculated on their period of account. Making this change will require transitional measures.
The Government has announced a consultation on changing how the taxable profits for each year of self-employment are calculated. The proposal is to change this from the ‘current year basis’, under which taxpayers are taxable on the profits of the accounting year that ended in the tax year, to the ‘tax year basis, where the taxable profits would be those arising in the tax year.
The plan in its current form would come in fully in 2023/24, with a transitional year in 2022/23. For those paying additional tax in the transitional year the impact would be spread over five years. HMRC’s aim is to simplify the system before Making Tax Digital is implemented.
1.2 FTT finds for taxpayer on discovery assessment validity
A discovery assessment was found to be invalid as the taxpayer had taken reasonable care in following HMRC guidance. HMRC should have been aware of the mismatch between the employment income declared on his return, and that submitted by the employer, without making a discovery.
The taxpayer lost access to his electronic payslips after being made redundant. He filed a tax return for the year in which his employment had ended, as he believed too much tax had been deducted under PAYE, and was paid a refund. He had not previously filed returns as his income was taxed under PAYE. After HMRC carried out further checks, HMRC found that the refund had not in fact been due, as the correct PAYE was deducted.
The FTT however found for the taxpayer that the discovery assessment was not valid. The taxpayer had followed the instructions in HMRC’s online tax return system, and deducted £30,000 from the P45 figure for the tax-free redundancy payment, without being aware that his former employer had already taken the £30,000 off the total when preparing the P45. He had therefore not been careless in making the error. In addition, HMRC should have been aware of the discrepancy, as it already had the real time information on his pay figure from his employer.
Loughrey v HMRC  UKFTT 252 (TC)
1.3 Taxpayer appeal on undeclared income lacked evidence
The FTT has largely upheld HMRC’s assessments of undeclared income of the taxpayer over 17 years. He was unable to provide clear evidence of other sources for the payments shown on his bank statements. Where he did supply evidence, the assessments were reduced for two of the years.
HMRC issued the taxpayer with assessments for 17 tax years. He accepted that he had failed to notify liability, but disputed the amounts assessed. HMRC had prepared the calculations largely on assessment on his bank statements, finding that various amounts were rental income and dividends.
The FTT did not accept the majority of the taxpayer’s explanations as to what the payments related to, partly as he did not supply the supporting documents that would be expected. On some smaller points it did however find for the taxpayer, where he supplied clear evidence of other sources for the payments, reducing assessments for two of the years.
Shariff v HMRC  UKFTT 256 (TC)
2. Business tax
2.1 Draft legislation published on business tax matters
The Government has published draft legislation to give effect to previously announced changes to business tax rules. These are expected to be included in the next Finance Bill.
The draft legislation includes measures regarding:
- the tax treatment of asset holding companies in alternative fund structures: the changes aim to enhance the UK’s attractiveness as a location for such companies;
- the hybrid rules: a technical change will ensure that these rules apply to some entities that are treated as transparent in their home jurisdictions in the same way as they apply to partnerships; and
- the structures and buildings allowance statement: the date that qualifying expenditure is incurred or treated as incurred will be included in the SBA allowance statements.
Draft legislation on the notification of uncertain tax positions by large businesses has also been published. Some changes have been made to the proposed rules in response to the second consultation. These include a reduced number of tests that will trigger a requirement to notify, refined criteria for triggering a requirement to notify, and new measures to address uncertainties and changes to penalties. These changes will apply to returns due to be filed on or after 1 April 2022. Draft guidance will be published in due course.
2.2 Taxpayer wins capital allowances case on potato storage
The FTT has found that a potato storage facility was plant, and met the requirements for being both a silo for temporary storage and a cold store. Capital allowances were therefore available to the taxpayer.
The taxpayer produced crisping potatoes, a process that involved storing potatoes in precise climatic conditions until needed by the crisp manufacturers. Capital allowances in relation to a new a potato storage facility had, however, been denied by HMRC. On appeal, the FTT found for the taxpayer. Based on the specific characteristics of the storage facility, the FTT held that it was not the setting for the taxpayer’s trade but an integral part of how the taxpayer carried on a qualifying activity. That is sufficient for the facility to be plant. The storage facility was a building or structure, so, as well as being plant, it also had to meet further conditions to be eligible for capital allowances. The FTT found on the facts that the facility was both a silo for temporary storage and a cold store. The storage facility therefore qualified for capital allowances.
JRO Griffiths Limited v HMRC  UKFTT 257 (TC)
2.3 Termination fee arose from oil contractor activities
A contract termination payment was held to have arisen from oil contractor activities and was therefore ring-fenced for CT purposes.
The taxpayer had hired a crewed oil rig from an associated company, and provided it to another company under a drilling contract. The activities carried on by the crew involved oil rig decommissioning. On termination of the contract, the taxpayer received a lump sum payment. The issue was whether or not that payment arose from oil contractor activities. If it did, it was ring-fenced from other activities for tax purposes. If not, the payment could be set against other CT losses brought forward. Based on the contract and the circumstances of the agreement, the FTT found that the termination fee arose from both the making of the drilling contract and the oil rig operation activities. These were held to be oil contractor activities. The termination payment therefore arose from oil contractor activities, and was ring-fenced for CT purposes.
Wilhunter (UK) Limited v HMRC  UKFTT
2.4 Third SC ruling in franked investment income group litigation case
The SC has found that now-repealed provisions preventing the carrying forward of unused double taxation relief (DTR) credits were in breach of EU law. Unused DTR credits must, by this ruling, be regarded as a remaining available for offset, and restitution should be made for tax already paid because such credits could not be carried forward.
This long-running case concerns now-repealed tax law on advance corporation tax (ACT) and the UK CT treatment of dividend income from non-resident subsidiaries in force prior to April 1999. In summary, the taxpayers argued for repayment of unlawful tax because these provisions breached the freedom of establishment and the free movement of capital under EU law.
The SC ruled on several matters including whether or not HMRC is barred from contesting an award of compound interest and the basis for entitlement to recover interest for tax paid prematurely, the nature of remedy required by EU law in respect of the set-off of DTR, whether or not HMRC were enriched by the interaction of ACT and shareholder credits and the impact of the Eligible Unrelieved Foreign Tax rules introduced in 2001 on the taxation of foreign-sourced dividends of the claimants. Most importantly, the SC found in favour of the claimants that the UK provisions preventing the carrying forward of unused DTR credits due to the offset of management expenses or group relief were in breach of EU law. Unused DTR credits must be regarded as remaining available to be offset against income in future years. Where tax has already been paid as a result of the inability to carry forward DTR credits, the taxpayer is eligible for the restitution of the tax together with an award of interest.
Test Claimants in the Franked Investment Income Group Litigation v HMRC  UKSC 31
3.1 Draft legislation and consultation outcomes for VAT matters
The Government has published draft legislation on electronic sales suppression, as previously announced. Summaries of responses to various VAT consultations have also been published.
The draft legislation introduces new offences for possessing, making, supplying and promoting electronic sales suppression software and hardware. It also introduces new powers for HMRC to investigate electronic sales suppression.
Summaries of the responses to the following consultations have been published, but no draft legislation has been released:
- VAT grouping – establishment, eligibility and registration;
- VAT and the public sector: reform to VAT refund rules;
- VAT and the sharing economy; and
- VAT and value shifting.
A report on the impact of Making Tax Digital for VAT has also been released.
4. Tax publications and webinars
4.1 Tax publications
The following Tax publications have been published.
The following client webinars are coming up over the next week.
- 29 July 2021: The Contemporary FD Bitesized
5. And finally
5.1 Bleak prospects
We must warn you, dear reader, do not attempt to get to grips with the perennial saga of the Group Litigation Order (GLO) cases. Our article at 5.4 merely summarises the latest of three SC rulings, which follow numerous other UK and EU rulings, in only one of several GLOs. These cases are in many ways a parallel to Charles Dickens’ Jarndyce v Jarndyce, the fictious suit at the centre of Bleak House. The proceedings have “become so complicated, that no man alive knows what it means”, and have dragged on such that “a long procession of Chancellors has come in and gone out” – Rishi Sunak is the sixth (if of the Exchequer) since the franked investment income GLO was made in 2003.
We hope the comparison does not extend to the resolution of the cases: Jarndyce v Jarndyce was only resolved after the legal costs absorbed all the funds at stake. We are almost twenty years into this GLO, and the billions of pounds of tax hanging on the outcome could comfortably ensure that we carry on interminably.