Tips and reminders, short technical notes and news of recent developments in tax. Contributions to this section from readers are always welcome: taxline@icaew.com
Personal taxes
072. Tax rate: a world record?
What is the highest tax rate you have encountered? 45%? 50%? The 98% rate of the 1970s?
How does 25,000% sound? Well, 25,240% to be precise.
It is to do with the ‘marriage allowance’. This lets you transfer 10% of your personal allowance (so £1,260 for the current tax year) to your spouse or civil partner. It can make sense if your own taxable income is less than the personal allowance (£12,570 for the current tax year).
However, it is not possible to make the transfer if the transferee is paying tax at the higher or additional rate of tax. Because it is an all-or-nothing transfer, the ‘cliff edge’ effect at income around the basic rate limit can be startling.
Consider George and Mildred. George’s taxable income for the current year is just £10,000. Mildred’s is £50,270. Making the transfer does not increase George’s tax bill, but it reduces Mildred’s by £1,260 x 20% = £252.
What if Mildred earns an extra £1 of income? Then she will be a higher-rate taxpayer, the marriage allowance will be unavailable and that extra £1 of income will have increased her tax bill by £252.40 – so 25,240%.
But it cuts both ways. Consider Harry, whose income is £50,271, and his wife Meghan, with £10,000. No capacity for marriage allowance there. But if Harry makes a Gift Aid payment to charity of 80p, his basic rate band is extended by the grossed-up amount of £1, he ceases to be a higher-rate payer and (assuming Meghan agrees to the transfer – and why would she not?) his tax bill goes down by £252.20 – and the charity gets a tax refund of 20p to boot. Not a bad return on an investment of 80p.
The examples are of course extremes. But it is a point to look out for if you are within a couple of pounds of paying (or escaping from) higher-rate tax and have a spouse or civil partner of modest means.
Contributed by David Whiscombe writing for BrassTax, published by BKL
Business taxes
073. Capital allowances decision to be remade
The Upper Tribunal (UT) has reached a different conclusion from the First-tier Tribunal (FTT) in a capital allowances case. It found that some safety structures at a uranium processing facility could qualify as plant, despite having the appearance of buildings, as they were essential to obtain regulatory approval to run the business.
The taxpayers operated facilities in Cheshire that processed radioactive material as part of the wider group’s trade of producing enriched uranium for the civil nuclear industry. The construction of the nuclear deconversion facilities cost approximately £1bn.
The FTT agreed with HMRC on denying £192m of capital allowances on part of the facility. The majority of the disputed assets provided safety functions of shielding, containment and protection against seismic events. Although the FTT agreed that two out of five structures were capable of being plant, it determined that all of the disputed assets were ineligible for allowances because they were buildings and none of the exemptions applied.
The UT considered the case law in detail, along with the regulatory background, and decided that the FTT decision must be remade in part. The FTT had decided that the fact that the business would not meet the regulatory requirements without having these safety features did not mean that they were plant, as the business functions could still theoretically be carried out.
As the business could not operate without regulatory approval, the UT held that these safety features were essential to the business. It only accepted the appeal on whether or not the disputed expenditure was ‘on the provision of plant’ in one other structure, finding that the FTT decision that the other structures were not plant was correct. It overturned the FTT conclusion that the structures were buildings, putting a different interpretation on the word.
The case was remitted to the FTT for remaking, as the UT decided that it was more appropriate for the FTT to apply the correct legal principles to the facts, considering the errors of law identified. The parties might wish to present additional arguments or evidence.
(1) Urenco Chemplants Limited and (2) Urenco UK Limited v HMRC [2022] UKUT 22 (TCC)
From the weekly Tax Update published by Smith & Williamson LLP
074. Capital allowances available on studies and project management costs
The First-tier Tribunal (FTT) found that studies and project management costs relating to the construction of offshore wind farms partly qualified for capital allowances.
The taxpayers incurred expenditure of approximately £48m in relation to the construction of offshore wind farms. HMRC accepted that plant and machinery allowances were available on the construction and installation of the wind turbines and the electrical cabling that connected them, but it denied capital allowances on studies and project management costs. It argued that these costs were too remote from, and not incurred on the provision of, the wind farm or the wind turbines themselves.
The FTT found that several of the studies related directly to the necessary design, construction or installation of the turbines and without such studies the turbines would not have been able to perform their function. These costs qualify for plant and machinery allowances. Allowances are also available on a proportion of the project management costs as preliminaries. Those costs that did not qualify for capital allowances could not be deducted from profits as pre-trading revenue expenditure as they were capital in nature.
Gunfleet Sands Ltd v HMRC [2022] UKFTT 35 (TC)
From the weekly Tax Update published by Smith & Williamson LLP
Company tax
075. Evidence to support creative industry tax relief claims
Claimants of the various creative industry tax reliefs may wish to submit additional evidence to HMRC to enable it to quickly assess their claim. This additional evidence can be provided within the company’s tax return or via an online form to support the claim. Claims must be made within the tax return before completing the online form.
Further details are available on HMRC’s website (see tinyurl.com/TX-CreativeInd).
Contributed by Angela Clegg
Payroll and employers
076. Bonus replacement scheme fails
The First-tier Tribunal (FTT) has found that payments made to employees were earnings from employment, ignoring contracts structured to make them exempt from tax as restricted securities under contracts for difference.
The companies entered into arrangements with some employees under which they would make payments to them if the company profits exceeded a threshold, but the employees would make payments to the company if profits were under a separate threshold. The thresholds varied by employee grade and for directors.
On entering into the contract, each employee made a payment to the company, theoretically calculated as the value of the rights they obtained under the contract, which happened to be £10 in each case. HMRC contended that they were artificial tax avoidance arrangements designed to allow the company to give money to employees that escaped income tax and national insurance contributions, and issued PAYE determinations.
The companies held that the rights acquired were restricted securities acquired under a contract for differences, and exempt from liability to income tax on grant. On consideration of the evidence and case law, the FTT supported HMRC’s view that the arrangements were simply a device to deliver earnings tax free, so the appeals were dismissed.
Documents from the time the company implemented the arrangements described them as a replacement for the bonus plan. They were not a further incentive for employees, and the chance of them having to make payments to the employer was practically nil. This element was put into the contracts solely to achieve a tax advantage. The threshold over which the company would make payments was so low as to make these likely, in the view of an expert witness. Employees ineligible for the scheme were paid bonuses instead. The arrangements were artificial and the payments not realistically subject to fluctuation. The payments should be taxed as cash earnings, as they were paid as a result of the employment.
Jones Bros Ruthin (Civil Engineering) Co Ltd & Anor v HMRC [2022] UKFTT 26 (TC)
From the weekly Tax Update published by Smith & Williamson LLP
CGT
077. Private residence relief claim on four properties denied
A taxpayer who bought, renovated and sold four houses in five years, only living in one for a short period, has had his claims for private residence relief (PRR) denied.
The First-tier Tribunal (FTT) accepted that he was not trading, but it rejected his arguments that he had intended to live in each property but had been unable to for various reasons.
The taxpayer purchased and sold four houses in five years. All were registered as empty for council tax, other than for one short period in one property. The taxpayer gave various reasons for not occupying each property after renovation, such as a more attractive property becoming available, and moving in with a relative who needed care. He claimed PRR on the grounds that he had intended to occupy each as a main residence.
HMRC argued that the purchases and sales amounted to a trade in property, subject to income tax. Each house had been renovated and sold at a profit, held for a short period only and residence in them was merely incidental. The FTT rejected this on consideration of the badges of trade, finding that these transactions were not linked to an existing trade and had not occurred over a long period.
For the PRR claim, the FTT considered the reasons given for non-occupation, but it concluded that he had not intended to live in any of the properties as his main residence, so the gains were taxable in full. Live-in care for a relative was not within the exemption for job-related accommodation and there was insufficient evidence to support his other claims. Penalties for deliberate behaviour were upheld as he had not declared the sales and should have known that there were tax implications.
Campbell v HMRC [2022] UKFTT 00046 (TC)
From the weekly Tax Update published by Smith & Williamson LLP
078. Taxpayers lose appeal on overseas gain calculation
The First-tier Tribunal (FTT) dismissed an appeal from taxpayers who had been left with an artificially large UK gain calculated on an overseas property due to exchange rate fluctuations. The tribunal could not deviate from the standard method of calculation set out in legislation.
A UK resident couple bought a holiday let in Switzerland, funded by a Swiss franc mortgage, and sold it some years later. HMRC disallowed a portion of their expenditure on the mortgage based on their exchange rate calculations. The taxpayers argued that in HMRC’s calculation, the economic gain was artificially increased by the currency rate fluctuations around the mortgage repayments.
HMRC stood by the principle that the sale and purchase prices are converted into sterling separately and no special account could be taken of the fact that treating the mortgage costs in this way gave rise to an effective tax rate of 67%. The FTT upheld this, noting that the capital gains tax calculation was mechanistic. Although it was sympathetic to the taxpayers, the result was not required to be fair nor reasonable, and it had no discretion to intervene.
The Office of Tax Simplification recently recommended that HMRC should consider if gains or losses on foreign assets should first be calculated in the foreign currency and then converted into sterling. The government has commented that it does not intend to make this change.
Rawlings & Anor v HMRC [2022] UKFTT 32 (TC)
From the weekly Tax Update published by Smith & Williamson LLP
079. Company purchase of own shares
There has been a change in HMRC practice relating to companies purchasing their own shares where the transaction is undertaken by a single contract with multiple completions.
This arrangement is useful where the company does not have sufficient funds to pay the whole of the consideration immediately. The shares cannot be sold in stages because that would disqualify the transaction, as the company would remain connected with the purchaser until most or all the shares are paid for. A single sale involving multiple completions gives rise to an immediate disposal of all the shares with payment being made in stages – but without any loan indebtedness arising.
HMRC no longer accepts this analysis. In future, HMRC will take the view that the shareholder will continue to be connected with the company within the meaning of s1062, Corporation Tax Act 2010: “A person is connected with a company if the person directly or indirectly possesses, or is entitled to acquire, more than 30% of the issued ordinary share capital of the company.”
HMRC says that this test will be satisfied because although as a result of the sale contract the company will be the beneficial owner of all the shares, the shareholder will still be the legal owner of the shares until completion – and HMRC interprets “possesses” in this context as meaning legal rather than beneficial ownership.
One can understand the point of view, even though it seems a little extreme, and it is certainly a matter that deserves some judicial examination – whether it gets any remains to be seen.
It is, however, interesting to contemplate the wider implications that might not be so helpful to HMRC.
One example would be the definition of control for the purposes of s755D, Income Tax Act 2007. This requires the same test of possession and on the above analysis would be easily avoided by changing the legal ownership and not the beneficial ownership. There are loads of other examples. This could be fun.
Contributed by Peter Vaines, Field Court Tax Chambers
Stamp taxes
080. Taxpayer’s appeal on SDLT subsale dismissed
The Upper Tribunal (UT) has dismissed the taxpayer’s appeal in the stamp duty land tax (SDLT) case Oisin Fanning v HMRC. The decision concerns arrangements implemented in September 2011 for the purchase and sale of a property worth approximately £5m. These involved the execution of an option at the same time as the sale and purchase agreement.
It was agreed by the parties to the appeal that, if the option had not been executed, the transfer of the property to the taxpayer would have been a land transaction attracting SDLT at the rate of 5% of the purchase paid. The taxpayer argued that s45, Finance Act 2003 (FA 2003), which applies where a “contract for a land transaction is entered into where the transaction is to be completed by a conveyance, and there is an assignment, sub-sale or other transaction as a result of which a person other than the original purchaser becomes entitled to call for a conveyance to him”, operated to reduce the SDLT payable.
The First-tier Tribunal (FTT) largely accepted HMRC’s arguments based on s44 and s45, FA 2003 and stated that it would also have accepted alternative arguments based on the anti-avoidance provision in s75A, FA 2003. The UT dismissed the taxpayer’s contention that the FTT was wrong to conclude that the aggregate consideration for the secondary transaction specified in s45(3) was anything more than the £100 paid under the option.
This was sufficient to dispose of the appeal, but the UT would also have rejected an alternative argument by the taxpayer based on s45(3). It declined to comment on arguments based on the anti-avoidance provision in s75A, FA 2003.
From the weekly Business Tax Briefing published by Deloitte
081. Military service found not to exempt taxpayer from LBTT residence requirement
Repayment of the additional dwelling supplement (ADS) has been refused, on the grounds that the property sold shortly after the purchase of a new dwelling was not the taxpayer’s only or main residence. The taxpayer had not owned another property, but due to military service overseas had been unable to occupy the first property.
While the taxpayer was on military service overseas, accompanied by his family, his wife purchased a UK property that the family intended to live in on their return from the posting. In the interim, it was rented out for some years, while containing some of their chattels. On return to the UK, the taxpayer was posted to Scotland, so was unable to reside in the property. He therefore purchased a house in Scotland and paid land and buildings transaction tax (LBTT), with the ADS. The first property was sold a year later and he applied for a refund of the ADS. Revenue Scotland (RS) refused, on the grounds that the first property had never been his main residence at any point in the 18 months before purchase of the second property.
The taxpayer contended that military service overseas should be accepted as a reason for not meeting the residency requirement. He argued that the LBTT legislation would not have intended this result, particularly as the UK capital gains tax and stamp duty land tax legislation recognise the impact of military service on residence. In addition, the Armed Forces Covenant states that serving personnel should face no disadvantage and that the tax system may be adapted for their circumstances.
The tribunal reluctantly upheld the RS decision. It recognised that the taxpayer had no choice about his postings, but as he had not met the terms of the legislation to classify the property as his only or main residence, his appeal could not be allowed. The tribunal could only apply the law as enacted, so could not take the Armed Forces Covenant into account, nor consider fairness in its decision. It noted that a consultation on the ADS is currently open.
Christie v Revenue Scotland [2022] FTSTC 2
From the weekly Tax Update published by Smith & Williamson LLP
082. New cohabitants refused ADS repayment
Two taxpayers who sold their own properties to purchase one together, but paid additional dwelling supplement (ADS) as one property was sold after the purchase, have been refused ADS repayment, as the property had only been the main residence of one.
Two taxpayers purchased a property together. They had previously lived separately and one (C) sold this property on the day of the purchase, and one (S) afterwards, within the 18-month period for ADS repayment. They paid land and building transaction tax and ADS on the purchase. On sale of S’s property, they applied for an ADS repayment. Revenue Scotland (RS) rejected the claim on the grounds that the property had never been the main residence of C and that both purchasers had to meet the conditions for repayment. A worked example on its website allowed for ADS repayment in this situation when both taxpayers sold main residences after the purchase, but it held that this was not equivalent.
The tribunal disagreed with the taxpayers’ argument that the RS interpretation of the legislation was incorrect and dismissed their appeal. It held that the legislation was tightly drawn and it did not allow any leeway in a case like this. Both purchasers had to satisfy the residence condition for the sold property.
Crawford v Revenue Scotland [2022] FTSTC 3
From the weekly Tax Update published by Smith & Williamson LLP
083. Taxpayer loses LBTT ADS case
A taxpayer has been refused a refund of additional dwelling supplement (ADS). Although he sold his only property after purchase of the Scottish property, he had not lived in the first property in the 18 months before the purchase. The fact that he had been unable to live there by reason of his employment did not allow this requirement to be relaxed.
A taxpayer was sent to Brazil by his employer for four years. Before this, he lived in a property he owned in England. On his return to the UK he was sent to Scotland for work and rented a property there. Four years later, he bought the Scottish property and then sold the English property less than 18 months later. On this second sale, he sought to reclaim the ADS he had paid on purchase of the Scottish property.
RS refused his claim as the English property had not been his main residence in the 18 months before purchase of the Scottish property. The tribunal upheld this decision, as although he had been prevented from living there by reason of his employment, the wording of the legislation did not permit any leeway on the requirement to live there in the 18 months before purchase. The appeal was dismissed, with the judge quoting from their decision in a similar case that “this Tribunal does not have jurisdiction to consider … fairness”.
Mohammed v HMRC [2022] FTSTC 4
From the weekly Tax Update published by Smith & Williamson LLP
VAT
084. Postponed VAT accounting and businesses registered under flat rate scheme
HMRC has published Revenue and Customs Brief 3 (2022) (see tinyurl.com/TX-RCBrief3) for businesses registered for the flat rate scheme that are accounting for import VAT using postponed VAT accounting. It explains how they should account for these supplies on VAT return periods starting on or after 1 June 2022.
Postponed VAT accounting allows UK VAT-registered businesses to declare and recover import VAT on the same return. This avoids having to pay it upfront when the goods are imported, only to recover it later.
Businesses registered under the flat rate scheme have previously been advised by HMRC to include imports accounted for using postponed VAT accounting in the turnover subject to the flat rate percentage. It was included in box one on the VAT return – VAT due in the period on sales and other outputs – leading to an incorrect assumption that it would constitute a supply for flat rate scheme purposes and the flat rate percentage should be applied.
The correct treatment under the legislation excludes the value of imported goods from the flat rate scheme calculation. The full amount of import VAT should be added to box one following the flat rate calculation.
Any amounts that may have been due to HMRC, if the correct treatment had been in place for periods starting before 1 June 2022, will not be collected. Businesses will not be penalised in relation to those amounts. In these circumstances, businesses do not need to amend previously declared returns.
If any businesses have overpaid HMRC while they have been adopting the incorrect treatment, businesses should look to recover these amounts using the standard process to correct errors on their VAT returns (see gov.uk/vat-corrections).
The relevant HMRC guidance has now been updated, including VAT Notice 733: Flat Rate Scheme for small businesses (see tinyurl.com/TX-VATNot733).
Find more information on completing your VAT return to account for import VAT if you are using a VAT accounting scheme (see tinyurl.com/TX-AccScheme) and about working out the VAT due on sales in VAT Notice 700/12 (see tinyurl.com/TX-DueOnSales).
Contributed by Neil Gaskell
085. VAT on city cards
A tourist visiting Stockholm might buy a city card from DSAB Destination Stockholm AB for €65, which, for 24 hours, would give them access to various museums, cathedrals, castles and boat trips, as well as travel between the attractions on public transport. In the Opinion of Advocate General (AG) Tamara Capeta, the card should be treated as a voucher for VAT purposes, as the attractions in the city that accepted the card were listed on it and they were obliged to grant admission (at least once) when the card was presented. It did not matter that the card might only work once at some attractions, nor that the card did not record a balance that reduced each time it was used, nor that it would be physically impossible for even the keenest tourist to visit all the possible attractions in the allotted time.
The cards should be classed as multi-purpose vouchers and VAT should be accounted for by the attractions at the appropriate VAT rate. Amounts retained by DSAB should, in the AG’s opinion, be recognised as consideration for distribution or promotion services.
In 2019, the EU VAT Committee considered three different possible VAT treatments for city cards, indicating how complex this area can be. If the Court of Justice of the European Union endorses the variant selected by AG Capeta, then EU Member States will have some certainty on the proper VAT treatment of city cards.
From the weekly Business Tax Briefing published by Deloitte
086. VAT on supply of repair services under warranty
In 2007, Suzlon Wind Energy Portugal (SWEP) purchased 23 wind turbines from Suzlon Energy Ltd in India (SEL India – its ultimate parent company) for €3.9m, and installed them in third-party wind farm projects in Portugal. Defects in the blades soon became apparent and they all had to be repaired or replaced under a warranty provided by SEL India to SWEP.
The remedial work, which cost €8.1m, was carried out in Portugal under a separate services agreement between SWEP and SEL India. SWEP did not charge VAT on the basis that it was merely passing on warranty costs to SEL India and did not make any profit. However, the Court of Justice of the European Union did not agree.
SWEP, which was identified as the service provider in the agreement, invoiced SEL India for upgrades and reports, and was not merely supervising the replacement of the blades under warranty. It recovered input tax on third-party costs relating to the remedial work, and had not recorded the costs in clearing accounts (as it should have done if the costs were disbursements for SEL India). Having identified that SWEP was providing services to SEL India, it made no difference that it was not doing so for profit. The charges to SEL India were within the scope of Portuguese VAT.
From the weekly Business Tax Briefing published by Deloitte
087. UK establishments and VAT groups
In the early 2000s, HSBC Bank plc relocated various call centres and payment processing functions to offshore global service centres (GSCs). Some UK staff were seconded to the GSCs, but in 2017, HMRC decided that the GSCs had not thereby created fixed establishments in the UK and removed them from HSBC’s UK VAT group (exposing HSBC to VAT on the GSCs’ services under the reverse charge).
The Upper Tribunal (UT) has ruled on some preliminary questions relating to HSBC’s subsequent appeal. It determined that Article 11 of the Principal VAT Directive required each GSC to have a UK establishment and not merely (as HSBC argued) that the links between the GSCs and HSBC should have been forged in the UK. The question of whether the UK had properly consulted the EU VAT Committee before amending its powers to de-group companies was not relevant, as taxpayers do not have any directly effective rights under EU law in relation to VAT grouping. Finally, the ability of EU Member States to adopt any measures needed to prevent tax evasion or avoidance was not an implied reference to Halifax and abuse of law, but to a broader anti-avoidance test that did not depend on intention.
The UT also ruled on procedural questions around the standard of proof in appeals relating to the date of a de-grouping notice. Unless this decision is appealed, the matter will now return to the First-tier Tribunal for a substantive hearing in light of this decision.
From the weekly Business Tax Briefing published by Deloitte
088. VAT on compensation and early termination
Revenue and Customs Brief 2 (2022) covers the long-awaited amendments to HMRC’s guidance on compensation and early termination payments. The September 2020 version of this guidance has been withdrawn, and HMRC anticipates that fewer compensation payments will be treated as further consideration for a supply, and subject to VAT, than would have been the case under the earlier version.
In particular, HMRC now once again accepts that dilapidation payments payable by tenants to landlords will normally be treated as outside the scope of VAT. The guidance describes various factors that will help determine whether a payment is compensation or consideration. These include whether the event giving rise to the charge was reasonably expected, and whether the charge is covering the supplier’s additional costs or is clearly punitive. Any existing rulings that are inconsistent with the new guidance cannot be relied on from 1 April 2022. Businesses that have over-accounted for VAT by applying the September 2020 guidance should consider whether to submit a claim.
From the weekly Business Tax Briefing published by Deloitte
089. Double taxation and abuse of law
WebMindLicenses Kft (WML), which had few resources of its own, licensed its know-how to Lalib Lda in Portugal, which, with support from DuoDecad Kft (a Hungarian associate of WML) and other third-party providers, charged consumers for access to its websites.
In 2015, the Court of Justice of the European Union (CJEU) provided guidance on whether (applying abuse of law) WML should be treated as supplying services direct to consumers. Hungary also assessed DuoDecad on the basis that WML, as the true supplier, must also be DuoDecad’s real (domestic) customer.
In the Opinion of Advocate General (AG) Julianne Kokott, it was not right to do so. As a matter of contract, DuoDecad’s customer was Lalib, not WML. Redefining WML’s supplies as abusive did not require supplies by other entities in the supply chain such as DuoDecad to be redefined as well. Furthermore, it would breach the principle of fiscal neutrality if VAT was due both in Hungary and in Portugal (which did not accept that any abuse had occurred). In AG Kokott’s opinion, part of the role of the CJEU was to resolve such conflicts, even if it meant pronouncing on questions such as whether an abuse of law had, in fact, taken place.
From the weekly Business Tax Briefing published by Deloitte
090. Records required for bad debt relief claims
Complications can arise over how a recourse factoring business should allocate payments between debts it is collecting for its clients and its own fees. Regency Factors Plc claimed VAT bad debt relief (BDR) on the basis that it had not been paid in full for its services where it was unable to collect all of a client’s debt from a customer. HMRC disagreed, and in subsequent Tribunal proceedings the First-tier Tribunal and the Upper Tribunal reached different conclusions on how to identify the consideration received by Regency.
The Tribunals agreed, however, that Regency had failed to maintain an appropriate VAT BDR account and the Court of Appeal has now confirmed that Regency was not therefore entitled to relief. In its judgement, the requirement for businesses to maintain a BDR account was a legitimate feature of the BDR scheme, as it allowed HMRC to audit any claim easily. Taxpayers could not support a BDR claim simply by pointing to the existence of unsorted records that might allow it to create a BDR account at a later stage (although the Court accepted that HMRC might allow this on a discretionary basis).
The requirement for a BDR account did not make it impossible or excessively difficult for Regency to claim relief, and its appeal was dismissed.
From the weekly Business Tax Briefing published by Deloitte
091. VAT on employee incentive scheme vouchers
Providing services to employees free of charge is a deemed supply that is subject to VAT unless, in the Opinion of Advocate General (AG) Tamara Capeta, the services are necessary for business purposes. The services will be necessary if there is a link between the gift and a business activity, and the business retains control over the use of the gift. Providing free catering for a business meeting, or free transport to take builders to a remote site, could be for the purposes of a business.
GE Aircraft Engine Services Ltd gave retail vouchers to employees through its ‘Above and Beyond’ incentive scheme. In AG Capeta’s opinion, these incentives were not necessary for GE’s business, as they were linked to its business purpose only in a general way, and GE did not retain any control over the vouchers. A deemed supply could therefore arise. However, the AG also recognised that this would potentially lead to double taxation, with VAT charged on the issue of the voucher and on its redemption.
In this case, however, the vouchers appeared to be a ‘right to a future supply’ (equivalent to a multi-purpose voucher) rather than a ‘right as such’ to a supply (ie, a single-purpose voucher). On that basis, the transfer of vouchers by GE to employees was not an independent chargeable event and the need to consider a possible deemed supply did not arise. GE was not required to charge VAT on the gift of the vouchers.
From the weekly Business Tax Briefing published by Deloitte
092. VAT on break clause payments
In February 2021, Kuehne + Nagel Ltd (KNL) paid £112,500 to Ventgrove Ltd to exercise a break clause and terminate a 10-year lease on commercial premises in Aberdeen. The break clause required the payment of £112,500 “together with any VAT properly due thereon”. In the absence of any additional payment relating to VAT, Ventgrove considered that KNL had not validly exercised the break clause.
The Court of Session considered that HMRC would have expected VAT to be charged under revised guidance announced in Revenue & Customs Brief 12 (2020), but observed that this policy change had been put on hold in January 2021. HMRC had previously accepted that break clause payments should be treated as compensation that was outside the scope of VAT. The court noted that break clauses were distinguishable from Court of Justice of the European Union judgements on early termination payments mentioned in the revised guidance. However, regardless of whether the revised policy was correct, it was evident that HMRC did not, early in 2021, require VAT to be accounted for on the £112,500. Consequently, the court ruled that there was no VAT “properly due” on the £112,500, meaning that KNL had validly exercised the break clause.
From the weekly Business Tax Briefing published by Deloitte
Compliance and HMRC powers
093. Discovery: HMRC’s appeal allowed by Upper Tribunal
The Upper Tribunal (UT) has reversed the decision of the First-tier Tribunal (FTT) in Hargreaves v HMRC, allowing HMRC’s appeal. The taxpayer sold a large number of shares in May 2001. He completed his 2000/01 return on the basis that he was not resident and not ordinarily resident in the UK by reason of full-time work abroad. He made no mention of the disposal of the shares, as, assuming he was non-resident and not ordinarily resident in the UK throughout the tax year (and for a sufficient period thereafter to be outside the scope of the temporary non-residents regime), he was outside the scope of capital gains tax.
HMRC opened an enquiry into his tax return on 16 January 2004 and a discovery assessment was raised on 9 January 2007. The FTT held that the discovery assessment was ‘stale’ and thereby invalid. However, it also determined that the ‘negligence condition’ and the ‘information condition’ for making a valid discovery were satisfied, and that the taxpayer had not submitted the return in accordance with practice generally prevailing at the time so as to preclude HMRC from making the assessment (the ‘practice condition’).
Before the UT, both parties agreed that HMRC’s appeal on the ‘staleness’ point must be allowed, given the judgement of the Supreme Court in HMRC v Tooth, which was handed down after the FTT’s decision and which extinguished the concept of ‘staleness.’ The taxpayer argued that the FTT’s determinations on the negligence, information and practice conditions were either irrational or not available to it as a matter of law in the light of its factual findings. Although the UT found fault with the FTT’s conclusions in respect of the negligence condition, it upheld the FTT’s conclusions on the information and the practice conditions, which was sufficient for the assessment to be valid.
From the weekly Business Tax Briefing published by Deloitte
Tax avoidance
094. Accountant acting on taxpayer’s behalf found to be careless
The First-tier Tribunal (FTT) has upheld an HMRC finding of careless behaviour, as the accountant acting on the taxpayer’s behalf had been careless. He had not taken sufficient steps to assure himself that the marketed scheme worked. The discovery assessment was therefore valid.
The taxpayer had participated in a tax avoidance scheme generating losses and did not challenge HMRC’s conclusion that it did not work. He sought to overturn the assessment on the grounds that it was out of time. It was within the time limits for assessment of careless errors, but if he had taken reasonable care it was invalid.
The taxpayer had no specialist tax knowledge, but when entering into the scheme, and subsequently, he took advice from an accountant. The accountant’s view was that the scheme worked and he submitted the returns on that basis. He had, however, very little experience with marketed avoidance schemes and did not undertake research on the scheme’s merits himself, relying on the assurances of the promoters. He did not ensure that his client met the trading requirements set out in the counsel’s opinion obtained and claimed more fees than had been paid, by relying on an earlier document.
The FTT found that the accountant had been acting on the taxpayer’s behalf and had done so carelessly. He had not advised the taxpayer that he lacked expertise in the area, nor sought the advice of someone who had that expertise – he had simply copied the data provided by the scheme promoter into the return. The discovery assessment was therefore upheld.
Callen v HMRC [2022] UKFTT 40 (TC)
From the weekly Tax Update published by Smith & Williamson LLP
International
095. OECD publishes updated transfer pricing guidelines
The Organisation for Economic Co-operation and Development (OECD) has published its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022. The latest edition includes the revised guidance on the application of the transactional profit method and the guidance for tax administrations on the application of the approach to hard-to-value intangibles agreed in 2018, as well as the new transfer pricing guidance on financial transactions approved in 2020.
096. European Commission: shell companies: draft Directive
The European Commission has published a draft Directive aimed at preventing the misuse of so-called ‘shell entities’ for tax purposes in the EU. The draft Directive relates only to intra-EU situations; the Commission has already announced a new Directive to be published in 2022 to respond to the challenges linked to non-EU shell entities.
Under the proposal if, after consideration of various gateway tests, substance indicators and exemptions, etc, an EU company is deemed not to have at least minimum substance, it would be prevented from accessing the benefits of tax treaties and of the EU Parent/Subsidiary and Interest & Royalties Directives. The draft, once adopted as a Directive, would be required to be transposed by the Member States into their domestic legislation by 30 June 2023 and would apply as from 1 January 2024.
From the weekly Business Tax Briefing published by Deloitte
