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 Review to look at moving the end of the tax year
The Office of Tax Simplification (OTS) has announced a review of the potential for moving the end of the tax year from its current date of 5 April. Alternatives to be considered are 31 March and 31 December, and the report will be published this summer.
The OTS will conduct a high level review of the benefits, costs, and wider implications of moving the end date of the UK tax year for individuals by 5 days, to 31 March. Most businesses and other countries use 31 December or 31 March as a financial year end date. It will also look at 31 December as a possible alternative. Considerations will include the implications for compliance and practical implications for HMRC. It will also look at international comparisons, including Ireland, which moved its tax year end from 5 April to 31 December in 2002.
The final report is due to be published this summer.
1.2 Government responds to tax after coronavirus report
Although some suggestions have already been implemented, many will now not be taken forward immediately, including a recommended reform of pension tax relief. Suggestions may be considered for future Budgets.
On 1 March, the Treasury Committee published a report on ‘Tax After Coronavirus’ which, though acknowledging that large changes should not be made during the immediate crisis, recommended a number of changes. The Government included some, such as a three year loss carry back, in the March Budget, and has now responded to the other suggestions. It largely explains what measures have already been taken, and does not suggest immediate changes.
Recommendations that the Government will not consider immediately include the suggested reform of pension tax relief; closer alignment of IT and NICs; creating a new VAT framework; reforming SDLT and creating a tax strategy.
2. Private client
2.1 HMRC prevented from reissuing discovery assessments due to procedural error
Before a hearing, HMRC withdrew as it had found errors in its calculation of the liability. The FTT has found that as HMRC withdrew, the appeal against the assessments was allowed, and the recalculated assessments subsequently issued by HMRC were also invalid.
In 2015, HMRC received information that a company had not declared benefits provided to its employees. Following the liquidation of the company, HMRC issued the employees with discovery assessments in 2016. HMRC conducted an independent review at this taxpayer’s request, and found minor errors in the assessments. Prior to the listed hearing for the taxpayer’s appeal, HMRC therefore withdrew from the hearing, on the basis that it was ‘vacating’ its assessments, so there was no assessment to be appealed. The FTT considered the appeal to be automatically allowed and notified the taxpayer.
After recalculation, HMRC issued new discovery assessments, which the taxpayer appealed. HMRC acknowledged before the new hearing that it had no power to reissue assessments, but contended that the 2016 assessments were still live, merely amended. The FTT found that these were invalid, as a decision was taken by the FTT to allow the appeal against the first assessments, and this prevented any further amendments or reissuing.
Kelly v HMRC  UKFTT 162 (TC)
2.2 Inaccuracy found not to be deliberate
The FTT has cancelled a penalty for deliberate behaviour, finding that although the taxpayer had omitted a large sum, this was not deliberate as he had not taken professional advice and did not understand the documents. HMRC did not seek an alternative penalty for careless behaviour.
When the taxpayer was made redundant, he was given payments after the end of his employment, and his former employer wrote off a large loan to him. Neither of these was included on his tax return, as he only declared the amount on his P45. Following an HMRC enquiry, he agreed that he was taxable on the additional amounts, but appealed a penalty issued based on deliberate behaviour. He argued that his former employer had not given him paperwork for these additional amounts, so at the worst his behaviour was careless. HMRC contended that the taxpayer must have been aware that over £175,000 was missing from his return.
The FTT dismissed HMRC’s case for deliberate behaviour, finding that although it was a large amount, the taxpayer had completed his return without professional assistance, so it was understandable that he had made accidental errors, such as believing the loan waiver to be tax-free. To the tribunal’s surprise, HMRC had not sought to advance an alternative case based on carelessness, so the penalty was cancelled.
Rodriguez-Issa v HMRC  UKFTT 154 (TC)
2.3 UT sets aside decision on trading income
The UT has set aside an FTT decision, as it had not properly considered the totality of the case in finding that the taxpayer had not met the burden of proof. The issue of whether or not payments were trading income has been remitted back to the FTT.
The FTT found that some deposits into the taxpayer’s bank account were undisclosed business receipts. It was not satisfied with the taxpayer’s explanation that the payments were loans, and found that he had not met the burden of proof. He had failed to produce documents that could demonstrate his claims.
The UT set aside the FTT decision, finding that the FTT should also have balanced the probabilities of HMRC’s and the taxpayer’s cases more widely. Although it had considered the chances that the payments were not loans, it had not considered the argument that they were not in any case trading income, as the business had already failed. The issue was remitted to be reconsidered by the FTT.
Golamreza Qolaminejite (aka Anthony Cooper) v HMRC  UKUT 118 (TCC)
3. PAYE and employment
3.1 Inducement to accept changes to pension scheme was earnings
The FTT found that payments made to employees to compensate for future reduced pension payments were taxable as earnings, as they were not simply made to put the employees in the same position, but a change to the future conditions of employment.
A large company decided to change its pension scheme arrangements, and made payments to employees to facilitate the change. HMRC held that for 1,100 of the employees the payments derived from the employments, and should be subject to IT and NICs as earnings.
The employer maintained that the payments were compensation for the expected lower pension payments, and reduction in future employer contributions, so were non-taxable as they simply put the employees in the same position as before the change. HMRC argued that as the employees retained the pension entitlements they had accrued up to the date of the change, the compensation for these future reductions was linked to their earnings, so taxable as such. The FTT agreed with HMRC, also noting that the change to pension arrangements was part of a wider renegotiation of working conditions, and could not be separated from the integrated package, and that although the employees lost a right to purchase additional pension benefits, only 7% of scheme members used that right.
E.ON UK PLC v HMRC  UKFTT 156 (TC)
4. Business tax
4.1 G7 comes to agreement on global tax reform
The G7 has agreed in principle that multinational companies should pay tax in the countries in which they operate, and that a global minimum corporation tax rate of 15% should apply.
The G7 ministers agreed the principles of a solution to tackle the tax challenges arising from the digital global economy. The committee, chaired by UK Chancellor Rishi Sunak, has agreed that the largest and most profitable multinational companies should pay tax in the countries in which they operate, even if they have little physical presence there. This would apply to global firms with a minimum 10% profit margin. Over this level, 20% of profits would be reallocated and subject to tax in the countries in which they operate. The deal is expected to result in the UK receiving more tax revenue from international companies, but the details, such as how profits are calculated, are yet to be finalised. The G7 also agreed to the principle of a global minimum rate of corporation tax of at least 15%.
Although described as a global deal, only those countries represented by the G7 have agreed to it; the agreement will be discussed in further detail at the G20 meeting in July.
4.2 Appeal allowed in part on loan to participator issue
The FTT found that payments made by a company did not comprise a loan to a participator. Despite an error in the documentation that meant it was listed in the director’s loan account, it was properly a loan to a different company. A loan relationship was not however created, so no deduction was allowed.
The taxpayer company (A) made a series of payments to another company (B), in which the first’s director and major shareholder also had a 50% shareholding. B was struck off, and A recognised a deduction for a bad debt, claiming that a loan relationship had existed. On enquiry, HMRC found that the payments made by A were in fact made to the shareholder initially, who had gone on to invest them in B. It issued an assessment on the basis that this was a loan to a participator, as well as denying the deduction for the loan relationship debit.
A appealed, arguing that the intent had always been to make loans from A to B, but that amounts had been listed in the director’s loan account in error. The FTT agreed, and allowed the appeal in part, finding that there had not been a loan to a participator. The bad debt deduction for A was however disallowed, as the terms of the arrangement did not create a valid loan relationship.
WT Banks & Co (Farming) Ltd v HMRC  UKFTT 155 (TC)
4.3 Appeal allowed on deferred revenue expenditure
The FTT has allowed a deduction for deferred revenue expenditure (DRE) on a property sale. Maintenance costs on a property were capitalised in the accounts over several years, but still valid as revenue expenditure on disposal of the property, which was an asset used in the trade.
The taxpayer, a UK property business, granted a 10 year lease to its parent company to allow it to operate a power station. The power station was owned by the taxpayer. Shortly before expiry of the lease, the freehold interest in the power station was sold to the parent company. As consideration for the sale was equal to net book value, there was no accounting profit or loss. The net book value included £65m of unamortised DRE and the company recognised a deduction for these costs, which related to maintaining the power station. These revenue expenses had previously been capitalised in the accounts.
HMRC denied the deduction, holding that the sale of the power station was a transaction that fell outside the scope of the company’s property business. The FTT did not agree. HMRC argued, alternatively, that as the DRE was not brought into account as a debit in calculating the profits that were shown in the profit and loss account, there was no basis on which the company was entitled to claim a deduction. The FTT disagreed; all that mattered was that the relevant item had been brought into account as a credit or debit ‘in calculating the profits’. There was nothing in the legislation that confirmed the credits and debits to be taken into account were only those that appeared in the profit and loss account itself. The appeal was allowed.
West Burton Property Ltd v HMRC  UKFTT 160 (TC)
5.1 Heathrow Airport loses appeal against the abolition of VAT-free shopping
The CA has ruled against a challenge to the Government’s abolition of VAT-free shopping.
VAT-free shopping at airports and high street retailers was abolished on 1 January 2021. Heathrow Airport and the other appellants opposed the abolition on several grounds. The arguments ranged from constitutional powers to international trade agreements and procedural issues. The appellants also argued against a refusal to grant permission to appeal for judicial review.
From a tax point of view, the relevant aspect of the case was a discussion and review of the Wilkinson principle R v Commissioners of Inland Revenue ex parte Wilkinson  UKHL 30 which limited HMRC’s powers to use extra statutory concessions (ESCs) to untax amounts, as here, intended by Parliament to be taxed. The court held that the Government had correctly decided that this ESC was ultra vires, beyond its powers.
The CA did not uphold any of the grounds of appeal, or give permission to seek judicial review.
Heathrow Airport Limited and others v HMT and HMRC  EWCA Civ 783
5.2 UT upholds FTT ruling on intragroup services
HMRC has lost an appeal on services provided by a parent to its subsidiaries. The UT confirmed the FTT’s conclusions on how intragroup services should be characterised.
The taxpayer was a UK parent company that charged offshore subsidiaries for management, technical and logistical services. The charges were added to intercompany loan balances which are repayable on demand. Payment had, however, not been demanded. HMRC argued that the arrangement did not amount to making taxable supplies for consideration. On that basis, input tax could not be recovered by the parent. Alternatively, HMRC argued that the taxable supplies were not made in the course of an economic activity.
The FTT rejected both arguments. The UT upheld the FTT’s decision on appeal. First, the fact that payment had not been demanded did not change the characterisation of the agreements and they were found not to be contingent in these circumstances. Second, as the agreements were not contingent, the UT was not required to resolve the question of whether or not an addition to a loan balance amounted to consideration for the services to and payment by the subsidiaries; this important issue remains unclear. Third, whether or not the supplier also provides a loan facility to the recipient of the services cannot affect the characterisation of those services as an economic activity.
HMRC v Tower Resources plc  UKUT 123 (TCC)
6. Tax publications and webinars
6.1 Tax publications
The following Tax publications have been published.
7. And finally
7.1 A brief history of taxes
And finally is delighted to learn that, rather than a load of boring cash, the nation is due to receive from the estate of the late Stephen Hawking a quantity of valuable memorabilia and archives. This is quite a coup for our beloved acceptance in lieu of IHT scheme, but why stop there?
Dear reader, have a hunt around: is there any small item that a museum near you might like? Personally, we hope to induce HMRC to accept our Tolleys collection rather than our next PAYE deduction. Hope for the best for us!