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 IT and VAT penalty reform: policy papers published
Further to Spring Budget 2021, policy papers have been published on how the reformed sanctions will work for IT and VAT. The current penalty regime will change to a points-based system for late submission, and a percentage-based penalty for late payment, and interest will be harmonised. For IT, this is effective from 6 April 2023 for some taxpayers, and will be universal the year after. For VAT, for accounting periods beginning on or after 1 April 2022.
Late submission penalties will be points-based. Individuals will incur a point for each failure to meet a submission deadline and, once the points threshold is reached, a fixed £200 penalty will apply for each failure. The threshold will be 2 points for taxpayers who file their tax return annually, but a higher threshold can apply where submissions are due more frequently than annually. Penalty points will also expire after 24 months of continued compliance with filing deadlines.
The new late payment penalty regime will apply penalties calculated as a percentage of underpaid tax at set trigger points. The first penalty will be charged after 15 days at 2%, or will be charged at 4% if 30 days late. A second penalty will be charged at an annualised rate of 4% from day 31, calculated on a daily basis.
The interest regime for VAT will be changed to match that for income tax, so late payment interest will be charged from the date the payment was due, to the date it is paid, and HMRC will pay repayment interest on overpaid tax or tax refunds due to be repaid.
Time to Pay arrangements and reasonable excuse provisions will still apply to help those who have difficulty meeting their payment obligations. Taxpayers will retain the right to appeal penalties.
1.2 Consultation on Scotland's first framework for tax and tax policy
The Scottish Government is seeking to establish a framework for tax policy making, in consultation with stakeholders.
In advance of the Scottish Budget for 2022-23, the Scottish Government has launched a consultation seeking views on its overarching approach to tax policy, and how it should use its devolved and local tax powers in this Budget.
2. Trusts, estates and IHT
2.1 Trust registration service now open for non-taxable trusts
As anticipated, the Trust Registration Service (TRS) opened to non-taxable trusts on 1 September, and HMRC has now clarified the registration deadlines. Planned changes to the ‘claim a trust’ process proved to be impossible.
The deadlines for registration are as follows, for non-exempt trusts:
- non-taxable trusts in existence on or after 6 October 2020: 1 September 2022;
- non-taxable trusts created after 1 September 2022: within 90 days; and
- changes to the trust details or circumstances: within 90 days of the change.
Currently, the legislation gives a 30 day deadline, but this will be amended shortly to reflect the change to 90 days.
HMRC has confirmed that in the August digital services update that one planned upgrade has proved impossible. It will not remove the requirement for the trust to be claimed by the client to authorise an agent to make changes to the trust details. It has been kept as a security requirement despite previous reports that this could be changed.
3. PAYE and employment
3.1 Court of Session reinstates FTT ruling on employment-related securities
The Court of Session (CSIH) ruled that the grant of an option by an employer was not by reason of employment, nor were the deeming provisions triggered. The decision was not unanimous, however, and the judges in agreement had different reasons for their conclusion.
A company issued share options to an adviser to settle a debt that it could not afford to pay in cash. Later, as part of a rescue package, that adviser was appointed as a director, the original option was cancelled and he was granted a new option. The disputed issue was whether or not the new option was employment-related. If so, the exercise of that option was subject to IT and NICs.
The FTT found that the second option was granted as a replacement for the first option, rather than by reason of his employment. It then considered the deeming provision whereby share options must be treated as provided by reason of employment if they are issued by the employer. The FTT found that this deeming provision should not operate in this situation, so as to prevent, as they saw it, an absurd outcome.
The UT overturned this decision. It found that the grant of the second option was conditional on both the adviser becoming a director and the first option being cancelled or amended. It was sufficient that one of the reasons for the grant was the individual’s employment, so the option was employment-related. The deeming provision therefore did not need to be considered.
In a split decision, two of the three CSIH judges rejected the UT’s ruling, but for different reasons. One judge held that the second option was granted to secure the necessary financial investment in the struggling company. Another judge held that the second option was granted in return for the original option being given up. Both judges therefore concluded that the second option was not employment-related. They also both found that the deeming provision was not triggered.
The Lord President dissented, agreeing with the UT’s ruling. One of the two judges in agreement noted in his opinion that he initially agreed with the UT before reading the opinions of the other Lords.
3.2 Interaction of the employment allowance and the Job Retention Scheme
The ICAEW has published guidance clarifying the interaction between the employment allowance (EA) and support received under the Coronavirus Job Retention Scheme (CJRS). This ensures that employers do not receive double relief on Class 1 Secondary NICs.
The EA provides a reduction in employer’s NICs of up to £4,000 for eligible businesses. Such businesses may also have received support under the CJRS in the period from 1 March to 31 July 2020, whereby their employer’s NICs were subsidised by the Government. To prevent double relief, HMRC has provided guidance to the ICAEW on how the two measures interact. It depends on the timing of the claims for EA, and the guidance helpfully sets out two scenarios and the actions required by the employers in each situation. The underlying principle is that EA takes priority over any other deduction, and is given for tax months after an EA claim is made. There are circumstances in which an employer may need to repay an amount of CJRS relief that relates to class 1 secondary NICs.
4. Business tax
4.1 UT rejects FTT ruling on evidence of investment management
The UT has confirmed that formal evidence of managing an investment business is not required to claim management expenses. Even if a parent company is involved in managing an investment business, management expenses may be claimed if the company’s directors participate in the decision-making processes.
An intermediate holding company (the taxpayer) owned a Dutch company, which owned four subsidiaries. The taxpayer undertook a partial demerger that resulted in the sale of the assets of some of those subsidiaries. The taxpayer claimed deductions for the associated expenses, which HMRC denied on the basis that they were not management expenses.
The FTT found that the expenses did not qualify as management expenses because the management activities in relation to the demerger had been carried out by the taxpayer's parent company, not the taxpayer itself. This finding was made because of the lack of formal evidence that the individuals who made the key decisions were acting in their capacity as directors of the taxpayer. Instead, the FTT found that they were acting in their capacity as senior members of the wider group, such that the investment business of the taxpayer was managed by its parent.
The UT rejected this ruling. It held that there is no need for formal evidence of the management of the investment business. The fact that the taxpayer’s directors participated in the decision-making processes of the demerger was sufficient. The expenses did not fail to qualify as management expenses on this basis. The UT went on to consider the deductibility of specific elements of the expenses. It examined how to split the costs of selling a business between management expenses and expenses relating to capital disposals. It ruled that a ‘bright line’ could not be drawn at a specific date such that expenses incurred after that date automatically relate to the disposal of an investment, rather than to the management of an investment. It is the nature of the expenditure that is important, rather than when it was incurred.
Centrica Overseas Holdings Limited v HMRC  UKUT 0200 (TCC)
4.2 All-Party Parliamentary Group: reform settlements with large corporates
The All-Party Parliamentary Group (APPG) has published a report proposing changes to address a lack of trust in HMRC. It recommends public scrutiny of settlements with large corporate taxpayers and a legislated requirement for HMRC to prioritise revenue collection over directions from HMT.
The report proposes two measures to improve what it describes as a ‘shortfall in public trust in HMRC’s operations’. It focuses on settlements between HMRC and large corporate taxpayers. The report states that such settlements provoke widespread concern because they are perceived to be too favourable. The first proposal is the creation of a parliamentary committee to scrutinise publicly HMRC’s settlements with specific large corporate taxpayers. This would involve disapplying confidentiality protections for these taxpayers, which the report argues is a reasonable approach. The second proposal is to constrain the power HMT has over the operations of HMRC. Currently, HMRC must abide by any general direction made by HMT. The report argues that settlement outcomes may be a result of HMT’s direction, rather than HMRC’s independent discretion. The APPG recommends that the statutory requirement to follow HMT’s directions should be restricted to prioritise the collection of revenue.
5.1 VAT treatment of COVID testing services
HMRC has confirmed its view that COVID testing services are exempt from VAT only if the test is administered to the patient and the results are provided by a medical professional. Supervision by a medical professional may also be sufficient.
Revenue and Customs Brief 11 (2021) sets out HMRC’s position on the VAT treatment of COVID-19 testing services. In general, such services only qualify for the medical care VAT exemption if the test is administered to the patient. Self-testing kits therefore do not qualify. Furthermore, the results of the test must be provided by a medical professional, or the activity must be supervised by a medical professional. If these conditions are not met, the supply should be standard-rated. The Brief provides some examples of the VAT treatment applicable in different circumstances.
5.2 Review of VAT concession for counsel’s fees
HMRC has confirmed that it is considering withdrawing the existing concession for legal counsel’s fees paid into and kept in a client account.
A concession was agreed when VAT was first introduced in relation to fees for counsel paid into and kept in a client account by a law firm. The concession allows law firms to treat counsel’s fee as a disbursement for VAT purposes, rather than use normal VAT accounting. The Law Society has announced that HMRC has confirmed that the concession is still available, but it is under review and may be withdrawn. If it is withdrawn, the change will be prospective and notice will be provided in advance. The Law Society is seeking input on the use, benefits and deficiencies of the concession. Submissions close on Thursday 30 September 2021.
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 week.
- 8 September - S&W Sessions: Employee Ownership Trust
7. And finally
7.1 Something must be done. This is something. Must this be done?
On a more serious note this week, we were concerned over the thinking of the APPG on settlements with large corporate taxpayers (see article 4.2 above). The nub of the issue, as perceived by the APPG, is the legal relationship between HMT and HMRC, which, the Committee argues, shields HMT from accountability. The proposed price for sorting this problem out is that, with some safeguards, large corporate taxpayers should lose taxpayers’ confidentiality.
If there is still a problem of trust, and that is not exactly proved by the paper, then surely there is a better solution? Underlying the comments seems to be an unspoken assumption that the right to confidentiality is not important for large corporate taxpayers. It seems to us, however, that the right to confidentiality is not predicated on the size or legal nature of the taxpayer. HMRC might be pressured over, say, a group of any number of smaller taxpayers and that would be potentially equally scandalous; overall, very arguably, more so. Do you solve the problem in the same way? You either believe in taxpayer confidentiality or you do not; it is not divisible by size. It is perfectly possible to believe in no taxpayer confidentiality at all, but we rather suspect this might be an issue for many taxpayers and not likely to be welcomed any time soon. In the meanwhile, just picking off the rights of the larger corporate taxpayer to help cure someone else’s failing would be an unwelcome precedent.