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 Finance Bill 2021 to be published on 11 March
The Government has announced that Finance Bill 2021 will be published on Thursday 11 March, the week after the Budget.
Draft legislation was published last year. Draft legislation for the Finance Bill was published in July and November 2020, and the final version will be published on 11 March, incorporating any changes announced in the Budget.
The Budget resolutions will be available after the Chancellor’s statement on 3 March.
1.2 Tax after Coronavirus inquiry: report published
The Treasury Committee has published a report following its inquiry into ‘Tax after Coronavirus’. The report is light on definite recommendations for changes, but recommends various areas for reform or review. The key recommendations and conclusions of the report are as follows:
- the report notes that the public finances are not on a sustainable trajectory, so tax rises will be needed;
- it advises against tax increases in this Budget;
- it recommends reducing the tax advantages of self-employment, possibly looking to NICs, and conducting a full review and reform of the tax discrepancies. This would also look at the tax advantages of using a limited company;
- it recommends a 3 year carry back for trading losses incurred during the pandemic;
- it recommends extending the increased annual investment allowance for businesses;
- it is cautious about wealth taxes, advising against an annual tax, and does not seem on balance to support a windfall tax;
- it does not recommend reform of income tax, but suggests freezing the thresholds;
- it recommends total reform of pension tax relief, on the grounds that it is skewed towards high earners;
- it recommends SDLT reform; and
- it recommends reform of capital taxes, referring to the Office of Tax Simplification reports on IHT and CGT, without elaborating on how they should be reformed.
2. Private client
2.1 HMRC wins against another tax avoidance partnership
Losses of approximately £36m have been disallowed after the FTT found that a partnership was not trading. The partnership was held to have been established to generate tax losses for its investors.
The partnership was established, ostensibly, to build a hotel and apartment complex in Montenegro. The arrangements were, however, found to be entirely uncommercial and artificial. The FTT held that the partnership could only have entered into the agreements that it did for the purpose of generating tax losses for its partners. In addition, the contract agreements were accelerated to ensure that the losses would be available for the 2008/09 tax year and not delayed until the following year. The partners also undertook contrived ‘make-work’: artificial activities intended to avoid limits on tax relief for partners who did not spend at least ten hours per week working in the business. Even if the partnership had been trading, the FTT made several other findings that would also have denied the loss relief.Foundation Partners (GP) v HMRC  UKFTT 18 (TC)
2.2 Amounts found not to be partnership profits
In an LLP with complex remuneration arrangements, amounts received by the members under a deferred payment scheme were found to be miscellaneous income, not partnership profits.
A group of employees were entitled to deferred remuneration. An organisational restructuring resulted in some of them becoming members of a new LLP, though they were seconded to the company that they had been working for as employees, and continued to undertake the same work for it. The LLP was entitled to a share of the business profits, including the amount earmarked as deferred remuneration. Under the remuneration arrangements, the deferred remuneration was paid to a corporate member of the LLP, which invested the amount and contributed it back to the LLP as special capital in tranches at later dates. The individual members could then withdraw the amounts on demand, if they had not left on bad terms.
HMRC assessed the partners to tax on the grounds that the amounts were part of their profit shares. The FTT found that this was not so, as the individual members had no rights to the amounts allocated to the corporate member, merely a right to be considered for future distribution. The FTT found that the amounts were instead miscellaneous income, dismissing the members’ contention that the income lacked a source, so did not fall strictly within the wording of the miscellaneous income provision. The reallocation to the members under the arrangements by the LLP was not entirely voluntary, so a source existed.HFFX LLP and others v HMRC  UKFTT 36 (TC)
2.3 Amounts again found not to be partnership profits
In an investment management LLP, amounts received by the members under a deferred payment scheme were found to be miscellaneous income, not partnership profits. The deferral scheme had routed the amounts through a corporate member of the LLP, and as the individual members had no strict entitlement to the amounts this was not part of the ‘profit-sharing arrangements’.
Each year, the LLP retained part of the profit shares that would otherwise have been due to its members, and paid them out to those members in later years if set conditions were met. These withheld amounts were paid to a corporate member of the LLP. It had discretion to contribute the amounts back to the LLP as special capital, to then be invested in the fund managed by each member due to receive deferred remuneration. The members could withdraw the amounts from the fund later if they met the conditions.
The FTT found for the taxpayer that the members were not subject to income tax on the amounts that they would have received if not for the deferral arrangement in the year they arose, as the members were not entitled to receive those amounts. They were instead taxable as miscellaneous income at the point when the members withdrew the special capital.Odey Asset Management LLP v HMRC  UKFTT 31 (TC)
3. PAYE and employment
3.1 SC upholds decision that Uber drivers are ‘workers’
The SC has upheld the Employment Tribunal’s ruling that Uber drivers are workers for employment law purposes. Although the judgement did not consider tax, it has far-reaching tax implications for companies and individuals operating in the gig economy.
The drivers who brought the case argued that they worked for Uber under workers’ contracts, and were therefore entitled to workers’ rights. These include the National Minimum Wage, paid annual leave and whistleblower protections. There was no written contract between the drivers and Uber. The correct approach was therefore to infer the terms of the contract from the conduct of the parties. The SC found that the Employment Tribunal was justified in its decision that the drivers were ‘workers’ for employment law purposes. It also agreed with the Employment Tribunal’s decision on when a driver was working. This included the period when a driver was not actually driving a passenger, but was logged into the app., willing and able to accept trips, and in a territory in which he was authorised to use the app.
This decision may have implications for the PAYE, NIC and VAT positions of both Uber and Uber drivers. These implications may also extend across the wider gig economy, and may prompt businesses to reconsider their business models.Uber BV and others v Aslam and others  UKSC 5
4. Business tax
4.1 Amortisation deductions allowed for a licence
The FTT upheld a taxpayer’s claim for amortisation deductions relating to intangible assets. The existence and nature or goodwill and licence were questions of fact, and the FTT examined the agreements and conduct of the parties in detail.
The taxpayer was a company that had acquired the business of a partnership and the shares in a connected company. The assets acquired included goodwill and a licence. The licence conferred the right to use the partnership’s brand, know-how, assets and client data. The licence had previously been granted to the connected company for an annual fee. HMRC argued that the licence was a financial asset, rather than an intangible asset. It additionally argued that there was no goodwill that could be properly recognised, and that the accounts were not GAAP compliant. On that basis, HMRC disallowed the CT deductions for amortisation.
The FTT found for the taxpayer. The licence was held to be a genuine licence and an intangible asset. The partnership was also found to have had goodwill, which was transferred at the time of the acquisition. The fact that accountants and auditors over several years had all agreed this treatment was also in the taxpayer’s favour. Two past HMRC enquiries into the licence arrangement had found no errors, which also weighed in the taxpayer’s favour.Roger Preston Group Limited v HMRC  UKFTT 38 (TC) www.bailii.org/uk/cases/UKFTT/TC/2021/TC08025.html
5.1 Delays to VAT registration applications
HMRC is currently processing approximately 70% of VAT registrations within 30 days. It expects to be processing 95% of registrations within 30 days by the end of March 2021.
HMRC has recently received a very high volume of VAT registration applications. A majority of these are being processed within 5 working days, but there are substantial delays to many applications. HMRC has requested that applications be made using the online service, rather than by post. HMRC is also contacting some applicants directly where information is missing. A list of several common errors has been provided to the CIOT, and HMRC has asked applicants to check this list to prevent further delays.www.tax.org.uk/policy-technical/technical-news/vat-registration-delays
6. Tax publications and webinars
6.1 Tax publications
The following Tax publications have been published.
The following client webinars are coming up over the next month.
- 10 March 2021: S&W Sessions: The Budget
- 24 March 2021: Private Client Tax Conference
- 25 March 2021: Land agent tax update webinar
7.1 And finally
7.1 Doing it on purpose
How on Earth is a taxpayer expected to understand tax legislation? Regular readers will recall that just last month And finally raised an eyebrow on purposive interpretation of legislation and made, we hope, the pungent but justifiable remark, a propos of the Warshaw case, that 'purposive'… really just means finding a meaning that, actually, the words don't have but somehow ought to have had’.
It happened again last week.
The Skinner case involved Entrepreneurs’ Relief, settlements and qualifying beneficiaries. The basic relevant test for qualifying shares in the legislation was that the company had been the beneficiary’s personal company for a year. This test was passed. Well, actually, apparently it wasn’t. The UT thought that the beneficiary should have been a qualifying beneficiary of the settlement for a year. Why? Because that is what Parliament must have purposed.
But it’s not what it says. Not even close. Are we alone in worrying about this?
HMRC v (1) The Quentin Skinner 2005 Settlement L (2) The Quentin Skinner 2005 Settlement R (3) The Quentin Skinner 2005 Settlement B  UKUT 29 (TCC)
HMRC v Warshaw  UKUT 366 (TCC)
|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.