Weekly Tax Update 13 January 2021

The latest tax update and VAT round up for the week.

Farming 281126528
Ami Jack
Published: 13 Jan 2021 Updated: 13 Apr 2023

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. General

1.1 Tax in the Brexit deal

The trade deal agreed between the UK and the EU provides for cooperation in VAT and social security contributions. It also includes a commitment by the UK and EU to continue to uphold international tax transparency and anti-tax avoidance measures. 

The Trade and Cooperation Agreement (TCA) sets out the framework for trade, information exchange and other areas of cooperation between the UK and the EU from 1 January 2021. The tax-related measures in it include the following:

  • confirmation that the UK and the EU will cooperate to combat VAT fraud;
  • provisions for cooperating to recover VAT and customs debts; and
  • a commitment to maintaining existing international tax transparency and anti-tax avoidance measures.

There are also provisions ensuring that cross-border workers and their employers will generally pay social security contributions in only one State. Individuals who move between the UK and the EU will usually be able to protect their contributions for state pensions.

The TCA specifically provides that it will not affect any legitimate UK domestic UK taxation policy.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/ 948119/EU-UK_Trade_and_Cooperation_Agreement_24.12.2020.pdf 


1.2 Significant post-Brexit changes to international tax reporting

The Government has announced that the sixth EU Directive on Administrative Cooperation (DAC6) will be replaced by the OECD’s tax reporting rules. This is a substantial reduction in the reporting burden faced by UK intermediaries. 

Prior to the UK/EU Trade and Cooperation Agreement, the UK implemented DAC6, which requires intermediaries to report on a broad range of cross-border arrangements. The Government announced unexpectedly on New Year’s Eve that DAC6 would be replaced by the much narrower OECD Mandatory Disclosure Rules (MDR). The MDR is equivalent to one of the five categories of reportable arrangement under DAC6, called Hallmark D. The MDR and Hallmark D only apply to arrangements that seek to undermine or circumvent the Common Reporting Standard. The Government intends to introduce the MDR into domestic legislation later in 2021. Until then, the legislation implementing DAC6 has been amended to exclude all requirements except Hallmark D.

The first reports under Hallmark D of DAC6 are due by 30 January 2021. HMRC has launched the online reporting portal and published guidance on the registration and reporting processes.




1.3  Changes to land transaction tax in the draft Welsh Budget

The Welsh Government plans to increase the higher residential rates of land transaction tax (LTT) by 1%. There will, however, be a reduction to LTT on non-residential property transactions. 

The draft Welsh Budget includes several measures to amend LTT. The 1% increase to higher residential rates will apply to all tax bands and be effective for property transactions completing on or after 22 December 2020. From that date, the zero-rate bands for non-residential property transactions, both freeholds and leases, will increase from £150,000 to £225,000. There is also a minor change to the calculation of the annual rent element of non-residential rents. The guidance confirms that the temporary increase in the nil rate band for residential property will end on 31 March 2021.


1.4  New Year honours for HMRC staff

Several officers of HMRC were honoured in the Queen’s New Year Honours List for 2021. 

Most notably, Simon York, Director of the Fraud Investigation Service was made a Commander of the British Empire for services to countering international tax fraud. Our congratulations to him and the others honoured.


2. Private client

2.1 UT allows appeal on domicile partial closure notice

The UT has found that partial closure notices (PCNs) cannot be issued without a calculation of the tax due, overturning the FTT decision. This means that taxpayers found by HMRC to have a UK domicile will not be able to appeal this decision pending determination of the tax at stake, so will have to supply details of overseas income and gains.

The FTT directed HMRC to issue a PCN on domicile to a taxpayer HMRC believed to be UK domiciled, finding that this could be issued without quantifying the tax due. The taxpayer had applied for a PCN after HMRC issued an information notice for details of his overseas income and gains, as he believed that the details were not reasonably required pending determination of his domicile. The PCN would simply refuse his claim to the remittance basis on the grounds that he was UK domiciled, and he could then appeal against it.

HMRC appealed, continuing their initial argument that a PCN or closure notice could not be validly issued without quantifying the tax due, for which it needed the details specified in the information notice issued. Domicile could not be entirely separated from the tax calculation. It also contended that a PCN could not be issued without the agreement of HMRC.

The UT allowed HMRC’s appeal, agreeing with an FTT decision in a separate case (Levy), that PCNs are subject to the same statutory restrictions as closure notices, and must contain a calculation of the tax due. It considered the background behind Parliament’s decision to introduce PCNs, dividing complex enquiries into separate aspects, but not splitting a single matter as here, and how the legislation had been adapted from the closure notice legislation, rather than created separately.

HMRC v Embiricos [2020] UKUT 370


2.2 HMRC loses appeal on transfer of assets abroad

The UT has agreed with the FTT that the transfer of assets abroad rules (TOAA) did not apply to the sale of UK shares to an offshore company as the taxpayer was not the transferor, and did not have control over the transfer. He organised receipt of the assets but not the disposal to an offshore company.

To facilitate the sale of a UK company (A) as a whole, a taxpayer, who owned 50%, agreed to purchase the other 50% from his business partner. The taxpayer was UK resident but non-UK domiciled. An offshore company (B) was established to both purchase those shares and take out a loan to fund the purchase, as a mechanism to reduce the financial risk to him. Shares in B were wholly owned by an offshore trust, and the beneficiaries were the taxpayer and his family

Two dividends were paid by A to B prior to the sale. HMRC assessed the taxpayer to tax on these under the TOAA rules, arguing that he had the power to enjoy the income and had procured the transfer. The FTT dismissed this argument, finding that he had no power to compel his business partner to sell his 50% of shares in A to B. Orchestrating the purchase side of the transaction did not mean that he had procured the transfer. After consideration of case law, the UT agreed and dismissed the appeal. However, one of the chief cases referred to, Fisher, is due to be appealed at the CA this year.

HMRC’s alternative argument that the £10 transferred by the taxpayer to his home country to establish the trust was a TOAA by him, and all other transactions were associated operations was dismissed, as it was by the FTT. The UT commented that payment of the dividends did not meet the test of being ‘by virtue or in consequence of’ the transfer of the £10.

The UT chose not to consider the last argument, that the TOAA rules contravene the EU rule on free movement of capital, as it was unnecessary given the finding that the taxpayer was not a transferor. The FTT had agreed with this on the taxpayer’s behalf.

HMRC v Rialas [2020] UKUT 367 (TCC)


2.3  UT dismisses HMRC appeal on definition of ordinary shares

The UT has upheld a taxpayer’s claim for Business Asset Disposal Relief, known at the time of the disposal as Entrepreneurs’ Relief (ER). It agreed with the FTT that cumulative compounding preference shares constituted ordinary share capital for the purposes of ER, as the right to a dividend was not at a fixed rate. 

The taxpayer’s shareholding was over the required 5% of shares in the company, but it was less than 5% if preference shares were excluded. The preference shares carried a right to a fixed cumulative dividend at a rate of 10% a year on the amount subscribed. If, however, the preference dividend was not paid, the outstanding amount was to be compounded and future dividends were to be paid at 10% on the aggregate of the subscription price and the accrued but unpaid dividends. The FTT decided that both the percentage and the amount to which it was applied had to be taken into account to identify the rate. As the amount to which the 10% was to be applied could vary, the rate was not fixed, and the preference shares fell within the definition of ordinary shares. HMRC appealed.

The UT has dismissed HMRC’s appeal, agreeing with the FTT that a fixed rate is a relationship between two variables, expressed as a ratio. A fixed rate requires the rate of dividend to be expressed as a fixed percentage or amount per share. The effect of compounding accrued but unpaid dividends meant that the actual rate of dividend paid was not 10%, but varied. As the shares had no fixed rate of dividend, the preference shares met the definition of ordinary share capital, and the taxpayer was entitled to ER.

HMRC v Warshaw [2020] UKUT 366 (TCC)


2.4  Review of third-party data use

The Office of Tax Simplification (OTS) will review smarter ways to use third party personal tax data, and report in Summer 2021. A call for evidence will be published shortly. 

The OTS project will look at the principles that should apply to using third party data, as well as possible sources, and how they can best be used. It will consider the key considerations, impacts and priorities that HMRC should focus on, any stages in which work might best proceed, and what realistic timescales would be.

The tax information to be considered includes interest; dividends and distributions; pension contributions; gift aid donations; data from investment managers; royalties. A previous report focussed on rental and self-employment income.


2.5  UT supports FTT choice of time apportionment of gain over valuation

The UT has agreed with the FTT that in a case where CGT taper relief (now repealed) only applied for part of the ownership period, the gain had to be time apportioned over the whole period. Valuations at the end of one period could not be used as an alternative method of calculation.  

Two taxpayers made large gains on a share sale in 2003. The shares had been held as non-business assets, but became business assets on 6 April 2000. Taper relief was only available for gains on business assets. The time periods were not in dispute, just the method of apportionment. The FTT found for HMRC that only a time apportionment was permitted under the former legislation, though the taxpayers had obtained fair valuations showing that the market value on 5 April 2000 was much lower than under a time apportionment method.

The taxpayers appealed, arguing that time apportioning the gain did not meet the test of a ‘just and reasonable’ apportionment in the legislation, and that although the legislation specified time apportionment, that did not mean that it had to be on a ‘straight line’ basis. The UT agreed with HMRC that the paragraph containing the just and reasonable provision did not override the time apportionment rule, and that there was no basis for an apportionment other than straight line.

If an asset was used seasonally for business purposes, and not otherwise, then a just and reasonable apportionment would not exclude time periods when it was not in use. Other than in such limited cases a straightforward time apportionment must be used.

Lee & Ors v HMRC [2020] UKUT 0363 (TCC)


3. Trusts, estates and IHT

3.1 List of cultural gifts in lieu of tax published

Arts Council England has published details of the cultural items received by the nation under the acceptance in lieu and cultural gifts schemes in 2019/20, including paintings, historic documents, and five antique pianos.

The acceptance in lieu scheme grants IHT reductions to taxpayers’ estates in exchange for transferring important cultural items or property to public ownership. Offers are assessed by a panel of experts against various criteria, and the tax reduction is based on a percentage of the gift’s agreed value. Items are allocated to public collections in the UK, such as museums and galleries.

The cultural gifts scheme has the same acceptance criteria, but offers tax benefits for donations to taxpayers during their lifetime, or companies. The tax reduction is a set percentage of the value of the gift, 30% for individuals and 20% for companies. It can be applied to IT and CGT for individuals, or CT for a corporate donor, and can be spread over up to five tax years.

In the tax year 2019/20, the acceptance in lieu scheme yielded 52 items, and the cultural gifts scheme 14, with total value of almost £40m. The artworks include works by Landseer, Gauguin, Manet, and Rembrandt, and other gifts include a Trafalgar sword and five antique pianos. Recipient institutions include the Courtauld Gallery and the National Museum of Scotland, as well as an arts centre in Stromness, Orkney.


4. PAYE and employment

4.1 NICs after Brexit for internationally mobile employees

HMRC has published guidance on how NICs will operate for individuals working between the UK, the EEA and Switzerland after Brexit. Generally, individuals will only pay into one social security system at a time. 

UK individuals working in the EU, Norway or Switzerland from 1 January 2021 will usually pay into the social security system of the country in which they are working. If, however, an individual is only temporarily working in the EEA or Switzerland, it may be possible to continue paying UK NICs instead. Individuals who pay into a non-UK social security system may still be able to pay voluntary UK NICs.

EU, Norwegian and Swiss individuals coming to work in the UK generally only have to pay into the UK social system. EEA and Swiss individuals may, however, pay into their home social security system instead if they are working in the UK only temporarily.

Specific rules and time limits apply in different jurisdictions. There are also ‘detached worker’ rules that EU member states may opt into by February 2021, which may affect the NIC position of workers. HMRC will update its guidance accordingly when more information is available.



5. Business tax

5.1 Repayments of business rates relief to be tax deductible

The Government intends to introduce legislation to confirm that repaid business rates relief is deductible for tax purposes. 

Several businesses have chosen to repay the business rates relief given during the pandemic. In its guidance, HMT has confirmed that these repayments will be treated as if they were business rates payments. They are therefore tax deductible, and will be treated as paid in the same period that the original payment would have related to. The guidance confirms that the Government intends to introduce legislation to clarify this point.


5.2 Guidance on interest, royalties and dividends from the EU

HMRC has published high-level guidance on withholding taxes incurred on payments received from the EU after Brexit. 

HMRC reminds businesses that some EU member states may deduct tax on payments made from 1 January 2021. The amount will depend on the terms of the double taxation agreement between the UK and the country of the payer. UK businesses may be able to claim relief or exemptions under the double taxation agreement.


6. VAT

6.1 VAT and Brexit

Significant changes to VAT in the UK came into effect when the UK withdrew from the EU on 31 December 2020. These were announced prior to Brexit; the trade agreement with the EU did not materially alter the anticipated post-Brexit VAT rules. 

The Trade and Cooperation Agreement between the UK and the EU provides for cooperation in the collection of VAT debts. It also commits the two parties to combating VAT fraud. Separately to the Agreement, many anticipated VAT changes have now come into effect. Broadly, all transactions involving the EU are now treated in the same way as transactions from non-EU jurisdictions. HMRC has updated its collection of VAT legislation with the legislation that came into effect on the end of the transition period. It has also issued numerous new pages of guidance for businesses, including several updated VAT notices.

UK-EU Trade and Cooperation Agreement:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/ 948093/TCA_SUMMARY_PDF.pdf 

Customs, VAT and excise UK transition legislation:


VAT on movement of goods between Northern Ireland and the EU:


Refunds of UK VAT for non-UK businesses or EU VAT for UK businesses:


The Margin and Global Accounting Scheme:


Ships, trains aircraft and associated services:


Motoring expenses:


6.2 VAT on transactions spanning Brexit

Supplies that straddled the end of the UK’s withdrawal from the EU may be subject to specific VAT rules. HMRC has issued new guidance explaining the VAT treatment of these supplies. 

Goods arriving in Great Britain after Brexit are subject to import VAT in the same way as goods arriving from the rest of the world. Generally, where the goods left the EU before the UK’s withdrawal but arrived in Great Britain afterwards, the transaction is subject to acquisition VAT. This applies only if the recipient is VAT registered.

The place of supply or liability of supplies may have changed as a result of Brexit. Where the supply of services spans the end of the transition period there may be issues with taxation at both the basic and actual tax points. In such cases, the basic tax point will apply.

The guidance contains several specific examples to illustrate the impact of different timing and VAT accounting. It also covers the application of the rules to fulfilment houses, financial services and call-off stock arrangements.


6.3  Zero rating comes into effect for women’s sanitary products

From 1 January 2021, women’s sanitary products will be zero-rated for VAT in the UK. 

The Government committed to this measure in Finance Act 2016 and confirmed it would come into effect in the 2020 Budget. In its press release, HMT notes that the zero-rating was made possible by the ‘end of the transition period and freedom from EU law mandating VAT on sanitary products’.



6.4  New consultation on value shifting

HMRC has proposed changes to the valuation of individual items within a bundle of goods to prevent businesses from artificially reducing their VAT liabilities. It is seeking views on the proposed measures and how they should be implemented into law. 

When a business supplies a bundle of goods that have different VAT liabilities, the law requires the total consideration to be apportioned between the elements of the supply. The law is not prescriptive, so it is possible to allocate a greater proportion of value to the non-standard rated items. This shift of value results in a lower VAT liability. The consultation proposes to prevent such value shifting by mandating how each item is valued. Actual market value apportionments would be required where the sale price of individual items is known. Where individual sale prices are not known, cost-based apportionments would be required.

The consultation does not consider the VAT treatment of single composite supplies. It closes on 30 March 2021.


7. Tax publications and webinars

7.1 Tax publications

The following Tax publications have been published.

7.2 Webinars

The following client webinars are coming up over the next week.


8. And finally

8.1 Reading between the lines

The decision in HMRC v Warshaw (see article 2.3) is a refreshingly right clarification of Business Asset Disposal Relief. What is fascinating about this case is to try to fathom HMRC’s thinking. What they were after, we suggest, was for the UT to interpret ‘fixed rate’ to mean ‘fixed economic return’. HMRC understandably didn’t like the obvious simple interpretation because it effectively enabled taxpayers to get a normal return on a loan and dress it up as an ordinary share. The problem is that the law doesn’t say that. ‘Purposive’, as we all know, really just means finding a meaning that, actually, the words don’t have but somehow ought to have had.

It is settled, then. Don’t interpret ‘fixed rate’ purposively. But do interpret ‘Business Asset Disposal Relief’ purposively; otherwise it doesn’t make sense.


Ref: NTAJ14012102


Organisations CourtsTaxes etc
ATT – Association of Tax TechniciansICAEW - The Institute of Chartered Accountants in England and WalesCA – Court of AppealATED – Annual Tax on Enveloped DwellingsNIC – National Insurance Contribution
CIOT – Chartered Institute of TaxationICAS - The Institute of Chartered Accountants of ScotlandCJEU - Court of Justice of the European UnionCGT – Capital Gains TaxPAYE – Pay As You Earn
EU – European UnionOECD - Organisation for Economic Co-operation and DevelopmentFTT – First-tier TribunalCT – Corporation TaxR&D – Research & Development
EC – European CommissionOTS – Office of Tax SimplificationHC – High CourtIHT – Inheritance TaxSDLT – Stamp Duty Land Tax
HMRC – HM Revenue & CustomsRS – Revenue ScotlandSC – Supreme CourtIT – Income TaxVAT – Value Added Tax
HMT – HM TreasuryUT – 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.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.