Insights

Weekly Tax Update 3 December 2019

  • Written By: Ami Jack
  • Published: Thu, 05 Dec 2019 09:00 GMT

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 Lead SDLT avoidance appeal is dismissed

The FTT has ruled against two taxpayers who sought to avoid SDLT using a sub-sale arrangement. The arrangement was found not to qualify for subsale relief, and to be caught by anti-avoidance legislation. 

The taxpayers had purchased a property and entered into a sub-sale agreement with an offshore company, which was executed on the same day as the purchase. Sub-sale relief was then claimed, reducing the SDLT liability to nil. When retrospective SDLT laws were introduced at a later date, a rider was signed with the intention that it would confirm the arrangements were outside the scope of those anti-avoidance statutes. The Judge noted that approximately 100 similar appeals have been informally stayed behind this case. 

The FTT found that the rider was separate to the transaction and did not alter the sub-sale contract. The sub-sale contract itself was found not to amount to a secondary contract for the purposes of sub-sale relief because it did not entitle the offshore company to call for a conveyance; nor had there been substantial performance or completion of the sub-sale contract. The transaction, therefore, did not qualify for relief. Even if it had qualified, the anti-avoidance legislation introduced subsequently was found to apply, which would have prevented the operation of the relief. The appeal was dismissed.

David Simbarashe Newton and another v HMRC [2019] UKFTT 688 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2019/TC07461.html

1.2 HMRC reminder to declare annual pension allowance charge

HMRC is aware that pension scheme members are forgetting to declare details of their annual allowance charge on their personal tax return. HMRC has asked pension scheme administrators to remind members of this requirement, which still applies even where the charge is being paid by the pension scheme administrator.

An individual is subject to an annual allowance charge if their pension savings in a tax year exceeds their pension annual allowance. The pension scheme administrator can pay this tax liability, but may not be aware of the individual’s personal circumstances and so might not apply the charge correctly. The individual is still required to include the correct amount on their tax return to ensure that the correct amount of tax is paid. HMRC has noted that individuals are not all declaring the annual charge amounts appropriately, and are therefore underpaying tax.

HMRC has asked pension scheme administrators to remind their members of the rules regarding the annual allowance charge and the requirement to report this on their self-assessment tax return.

www.gov.uk/government/publications/pension-schemes-newsletter-115-november-2019/pension-schemes-newsletter-115-november-2019

1.3  Taxpayer denied private residence relief 

The FTT has found that the taxpayer did not provide any reliable evidence that she had lived in the flat that she claimed was her main residence. The gain on sale was therefore subject to CGT.

The taxpayer bought a flat in June 2013.  After substantial refurbishment works, she sold the property at a profit in November 2013. She also owned another property very close to the flat, which she had bought in 2001 and lived in since then. She argued that after buying the flat she had furnished it, moved in and had lived in it throughout the works and that it was her main residence. The FTT found that the taxpayer had not told the utility providers that she was the new occupant of the flat, council tax bills were addressed to her at her other property and there was no evidence that she had actually lived there. It was also sparsely furnished with what she stated to be excess furniture from her other property.

The FTT found that the flat was never occupied by her as a residence, and so could not be her main residence. CGT was therefore payable on the gain arising. 

Simpson v HMRC [2019] UKFTT 704 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2019/TC07476.html

2. PAYE and employment

2.1 Interim pension measures for NHS staff

A temporary solution has been approved, for the 2019/20 tax year only, to the ongoing dispute over tax charges and the NHS pension scheme.

The standard yearly pension contribution limit is £40,000 but is reduced gradually for those earning over £110,000, to a minimum of £10,000. If the limit is exceeded, the tax relief on the excess amount has to be paid back. In response to large tax bills, many senior NHS staff have limited their working hours, resulting in staff shortages for the NHS.

The tax charge can be paid out of the scheme in many circumstances.  This permanently reduces the NHS benefits received by the clinician. The new interim measures, which are applicable for the 2019/20 tax year only, bind the NHS to pay the corresponding amount of the charge to the clinicians on retirement, so that they are not out of pocket.

The rules regarding pension taxation are wholly reserved to the UK Government and any changes to the NHS pension scheme require the consent of HM Treasury. It is being noted by some that the consent to the interim measures could be seen as a change of policy and thus potentially breaking ‘purdah’ rules during the election period. The new measures are applicable to clinicians in England and Wales only.

Scotland is faced with the same issue. The Scottish Government has announced an interim policy that will give eligible NHS staff the option to have their employer pension contributions paid to them as part of their basic salary. This would avoid the pension tax charge being applied as the amounts would be taxable as employment income, at the individual’s marginal rate of tax. The policy will run until 31 March 2020. 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/847925/matt-hancock-pensions-directions-letter-nov-2019.pdf

www.england.nhs.uk/wp-content/uploads/2019/11/action-on-2019-20-pension-tax-impacts-letter-from-simon-stevens-.pdf

www.gov.scot/news/changes-to-protect-nhs-staff/

2.2 Taxpayer wins IR35 case against HMRC in FTT

The FTT ruled in favour of the taxpayer in an IR35 case brought by HMRC against an IT consultant who it had deemed liable for £243,000 of IT and NIC. The case hinged on the lack of sufficient mutuality of obligation and control.

From 2010, the taxpayer entered into a number of contracts for the provision of consultancy services through his personal service company. The contracts were with his previous employer as well as a secondary client, which was also a client of his previous employer and to which some of the projects related. HMRC stipulated that the employment relationship remained, and therefore fell within the scope of the IR35 legislation, as the taxpayer continued to work for his former employer. The contracts with the clients were negotiated and entered into by two separate agencies which the taxpayer’s company had contracted with; however, these agencies were disregarded for the purposes of determining the hypothetical contract.

The FTT found that there was no mutuality of obligation expressly stated in the contract between the taxpayer and the end users. The taxpayer was also not required to be provided with a minimum amount of work, no core hours were stipulated, the taxpayer was only paid if work was offered and undertaken, and the taxpayer could refuse to accept work, though if he unreasonably failed to accept work offered then the contract could be terminated. There was also no paid notice for the end users and the taxpayer did not have the right to claim payment for work done outside of the cancellation of the contracts. 

The FTT considered that, based on the facts as presented to them, the hypothetical contract between the taxpayer and the end users would be one for services and therefore not caught by IR35 legislation. The appeal was allowed in full.

RALC Consulting Limited v HMRC [2019] UKFTT 0702 (TC)

http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11432/TC07474.pdf

3. Business tax

3.1 Transfer of losses under the succession rules

The FTT has ruled on the application of the succession rules and the transfer of losses to a successor company. It held that the question of whether or not relevant assets exceeded relevant liabilities should be applied on the date of cessation of trade. It should not be applied over the whole period during which the trade is transferred. 

The taxpayer was a seafood company that had taken over a trade previously carried on by another company. The successor company had claimed carried-forward losses under the succession rules, which enable a predecessor to transfer unused losses to the successor. This claim was denied by HMRC on the grounds that the predecessor’s balance sheet overstated its relevant assets. The succession rules do not allow the transfer of losses to the extent that relevant liabilities exceed relevant assets. 

The FTT made several findings of fact regarding the assets and liabilities of the predecessor immediately before it ceased to trade. In doing so, it found that the succession rules can apply when a company transfers its trade over an extended period of time. The test for relevant assets and liabilities, however, is to be applied on the day the predecessor ceases to trade. In this case, the date of cessation of trade was taken to be the date of the last invoice issued by the predecessor. On this basis, the relevant liabilities exceeded relevant assets to the extent that no transfer of losses was allowed. 

Spring Capital Limited v HMRC [2019] UKFTT 0699 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2019/TC07471.html

4. VAT

4.1 VAT on tax planning for directors’ remuneration 

The FTT has ruled in favour of a taxpayer that was denied an input VAT claim on tax adviser’s fees in relation to remuneration planning. It confirmed that remuneration tax planning is directly linked to the purposes of a business. 

The company had engaged tax specialists to provide advice on remunerating its directors in a manner that attracted the minimum amount of IT and NICs. The tax planning involved issuing new share capital and the outcome of that planning is the subject of a separate appeal. HMRC refused a claim for input VAT on the advisory fees incurred on the grounds that the services were not for the purposes of the company’s business. In HMRC’s view, the fees were for the exempt purpose of issuing share capital. HMRC also argued that the services had no direct and immediate link to the company’s taxable supplies. 

The FTT held that the advice was not used for the purposes of issuing share capital. Even if it had been, the issuing of share capital was found not to be an exempt activity in the CJEU decision in Kretztechnik and the costs would have been an overhead of the business. The ultimate purpose of the tax advice was to incentivise the directors in a manner that was tax efficient for both the individuals and the company. The FTT rejected HMRC’s argument that this did not amount to an immediate link with the purposes of the business. It ruled that the incentivisation of employees, including directors, has a direct and immediate link to the purposes of the business. Although a decision by the FTT is not binding, this is a helpful case in respect of VAT claims for professional fees.  

Taylor Pearson (Construction) Ltd v HMRC [2019] UKFTT 0691 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2019/TC07464.html

5. Tax publications and webinars

6. And finally

6.1 Well, I never

What do the Conservative Party, the Labour Party, the Institute for Fiscal Studies and Sir Edward Troup, past Tax Assurance Commissioner, have in common? Yes; they all think Entrepreneurs’ Relief (ER) is a waste of print in Tolley’s. So we have learnt with the publication of party manifestos for the election.

In the face of such formidable condemnation, ER must be trembling in its boots and saying its last fond farewells to its friends. Its closest friend is CGT Investors’ Relief (IR); potentially an equally valuable relief, if shyer. One of the notable features of the statements on all sides is an absence of comment about IR, hiding timidly behind ER’s back, trying not to be noticed. Some hope, we think. It’s difficult to see IR escaping being out in the open as ER is being led off to meet its fate.

The reason why it has remained unnoticed is perhaps simply that no one has really qualified for it yet, because of the initial three-year holding period required. No one is in a position really to criticise a relief that has hardly been available. It would be sad indeed if a wayward blow felled IR before anyone had actually claimed it. IR’s has to stand up and show it is not the same as ER, which it certainly isn’t.

Strange and cruel things happen in tax, but surely, we can’t have three years of tax relief that is never given. Courage, IR. 

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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.

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