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 HMRC releases guidance on reporting disclosable arrangements
The guidance on the application of the sixth version of the Directive on Administrative Cooperation (DAC6) has been published. It sets out HMRC’s view on the requirement for intermediaries to report information on cross-border arrangements.
DAC6 requires intermediaries, and sometimes taxpayers, to report information to tax authorities when they are involved in cross-border arrangements that meet particular hallmarks. It applies retroactively to 25 June 2018, but the first reporting deadlines have recently been delayed to January 2021. The guidance explains HMRC’s position on the reporting obligations, and how the five hallmarks should be applied in practice. It forms part of HMRC’s International Exchange of Information Manual.
2. Private client
2.1 Member denied loan interest relief
The FTT has upheld discovery assessments on a film LLP member. The discovery made on reviewing his returns after a judgment on the LLP running the scheme was valid, though the information was present on the returns as originally submitted.
The taxpayer, a member of a film LLP, accepted that he was not entitled to loan interest relief on monies contributed to the LLP. This was due to previous judgments on iterations of the scheme finding that the monies were not used in trading. Instead, he challenged the basis of the discovery assessments, arguing that all relevant information was included in his returns, so there was no discovery or alternatively the assessment was stale. He also stated that he filed ‘in accordance with the practice generally prevailing at the time’.
HMRC contended that the discovery was made when it reviewed the taxpayer’s return following the judgment referred to above, and that claiming loan interest relief on non-trading investments was never a generally prevailing practice. It did not accept the concept of staleness, and alternatively argued that the discoveries were not stale.
The FTT found that the discovery was valid, following a UT decision that no new information had to be supplied to constitute a discovery. The review following a decision was sufficient. It also found for HMRC on the practice point and on the discovery not being stale. The appeal was dismissed.
Hayes v HMRC  UKFTT 266 (TC)
2.2 FTT finds for taxpayer on 1970s NIC payments
The FTT has found that, on the balance of probabilities, a taxpayer did not make a reduced rate NIC election in the 1970s. It preferred the taxpayer’s recollections to records supplied by HMRC.
The sole issue in this case was whether or not the taxpayer had made an election to pay the reduced NIC rate for married women in 1975/76. If so, her state pension entitlement would be impacted for the three years it was in force. Although the burden of proof would normally be on the taxpayer, HMRC assumed the burden in this, as in similar cases, to remove the unfairness of requiring a taxpayer to prove a negative.
The FTT looked at the evidence, which on HMRC’s side was a notation on its records from the time, and records filed by a company under her NI number at the time using the reduced rate. The taxpayer stated that she had never worked for the company, and lived in Germany at the time, speculating that someone else had used her NI number to obtain work under her name. The FTT allowed the taxpayer’s appeal, as it considered it unlikely that she had filed the election in the three weeks between her marriage and her move to Germany, and found that as she did not remember signing such an election it was probable that she had not.
Terry v HMRC  UKFTT 261 (TC)
2.3 Child benefit charge discovery invalid
The FTT has found that discovery assessments for the high-income child benefit charge (HICBC) were invalid, as it was not income liable to income tax within the meaning of the legislation.
The taxpayer had not filed returns, as his income was fully taxed under PAYE. He received a letter from HMRC asking him to check if he was liable for the HICBC and he supplied details of his income. As this was over the threshold and his wife had claimed child benefit, HMRC raised discovery assessments covering three years. The taxpayer raised several points in his appeal, including that the HICBC was not income in the meaning given by legislation.
HMRC argued that a purposive approach should be taken to the meaning of income, that it should be taken as meaning an amount that can be assessed to income tax. The FTT disagreed and allowed the appeals, concluding that child benefit is not income assessable to income tax, and therefore the discovery assessments were invalid.
This produced an anomaly, as the discovery assessments would have been valid if the taxpayer had filed tax returns but failed to include the HICBC. The FTT noted however that HMRC could have instead issued notices to file a tax return.
Wilkes v HMRC  UKFTT 256 (TC)
3. Business tax
3.1 Changes to the Corporate Interest Restriction (CIR) guidance due to COVID-19
HMRC has changed its CIR guidance on appointing a reporting company for CIR purposes. HMRC may in some circumstances nominate a reporting company after the deadline has passed.
If a company has missed the deadline for appointing a reporting company for reasons beyond its control, and it wishes to do so subsequently, HMRC may appoint a reporting company on its behalf. Failing to nominate a reporting company may result in a company being unable to carry forward any unused interest allowance. HMRC will only agree to this request where there was an unforeseeable change in the company’s circumstances. The COVID-19 pandemic is specifically noted as an unforeseeable change in circumstances.
Companies need to demonstrate why the deadline was missed and provide a reason as to why they are asking HMRC to appoint a reporting company for them. They should do this by contacting their Customer Compliance Manager, or emailing email@example.com.
4.1 VAT treatment of supplies to international students
The FTT has ruled on the classification of career coaching services provided to Chinese students studying in the UK. It also examined the VAT implications of contracting directly with the students as compared to their non-EU parents.
The taxpayer supplied career coaching and support to students of Chinese origin. Prior to July 2016, the taxpayer had contracted with the students. It then began contracting instead with the parents, who resided outside the EU. The case focused on the VAT treatment of these services, which depended on the type of supply and the location of the customer.
First, the FTT found that the supplies were not educational; instead, they were ‘other consultancy services’. The place of supply was therefore where the customer belonged. The FTT then considered to whom the supplies were made. The taxpayer argued that, despite contracting with the students prior to July 2016, the supply was actually made to the parents because they invariably paid for the services. The FTT dismissed this argument. It held that the contractual position should be the starting point to identify the customer unless this does not reflect the commercial and economic reality. In this case, the supply was to the students before July 2016 and the parents from this date.
Since the parents were outside the EU, the services provided to them were outside the scope of VAT. The students’ usual place of residence was agreed to be China, which would have meant that those supplies were also outside of the scope of UK VAT. The FTT found, however, that the taxpayer had failed to obtain sufficient evidence to demonstrate the students’ usual place of residence. The place of supply for services provided prior to July 2016 was therefore the UK, so those supplies were standard-rated.
Mandarin Consulting Ltd v HMRC  UKFTT 228 (TC)
4.2 New guidance on historic VAT claims
HMRC’s approach to VAT recovery claims made outside the usual 4-year time limit is set out in a new section of its VAT Refunds Manual.
The guidance focuses on HMRC’s interpretation of two recent cases involving claims by NHS Lothian. These cases clarified the correct approach to determining whether or not a historic VAT claim should be allowed. The civil standard of proof applies, even where detailed records are unavailable. This means that in all cases the evidence supporting the claim is tested on the balance of probabilities. Broadly, HMRC may reject historic VAT claims in two situations. The first is where the witness evidence is in respect of general industry practice instead of the claimant’s activities. The second is where it is not agreed that input tax was incurred, or where the extent to which input tax has already been recovered is not clear.
5. Tax publications and webinars
5.1 COVID-19 hub
6. And finally
6.1 Hold On
Never waste a good crisis. Regular readers will recall that we take a lively interest in HMRC call holding music. We were thumbing through the latest HMRC performance numbers this week and noticed a perhaps unsurprising rise in waiting time for answering calls. We are not going to criticise this in these dark and difficult times.
But what an opportunity! Surely now, if ever, HMRC can be expansive in its choice its music? Given the, now broader, canvas, how about something a bit more substantial? The Eroica Symphony for the brave? Or perhaps, more pessimistically, Messaien’s Quartet for the End of Time?
We don’t recommend one that has been used on our office systems: Beethoven’s 8th Piano Sonata, opus 13.
|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.