Weekly Tax Update 16 February 2022

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

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Ami Jack
Published: 16 Feb 2022 Updated: 17 Jun 2022

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 Introductory pack for tax enquiries brought in

HMRC has recently launched a new introductory pack sent to every taxpayer on the opening of an IT self-assessment check.

A copy of the pack has been shared with CIOT. It consists of a compliance check letter that explains what a compliance check is, and what the taxpayer needs to do, along with a notice of enquiry that sets out what information to send to HMRC, how to send it, and what actions HMRC may take afterwards. Factsheets will also be enclosed.


1.2 UK funds regime review: summary of responses

As part of its review of the UK funds regime, the Government requested input from stakeholders. A summary of these has now been published, along with decisions on what should be explored further.

The Government has published a summary of the responses it received to request for input into a review of the UK funds regime, published in January 2021. This review was announced at Budget 2020, with the overall aim of making the UK a more attractive location for funds. The input was wide ranging, and some of the suggestions that will be looked at further are as follows:

  • improving the tax efficiency of UK funds, including the genuine diversity of ownership conditions and solutions for multi-asset authorised funds;
  • further reforms for real estate investment trusts;
  • work will be done to permit authorised funds to distribute capital; and
  • the UK funds offering will be promoted abroad.

HMRC will also consult on the options to simplify the VAT treatment of fund management fees.


2. Private Client

2.1 Shares given to charity worth less than claimed

The FTT considered the appropriate valuation for shares given to a charity, and found that the valuation of HMRC’s expert witness was preferred. The tribunal considered how much weight to place on the value shares were traded at when only a few small trades had taken place.

Five taxpayers gave listed shares in the same company to various charities and claimed relief against income tax at their market value. HMRC contested the claims on the basis that the market value stated by the taxpayers was excessive. The company was AIM listed, and four very small trades were registered on the market. The taxpayers’ expert based his stated values on these, and the values given when new shares were issued. HMRC’s expert pointed out other factors, including the much lower value given in other company documents such as when acquiring another company, projected revenue, and the performance of similar companies.

For the taxpayers, it was argued that they had acted as do typical purchasers of small shares in companies. This was by valuing on the basis of the transactions rather than conducting a full analysis of the company’s financial background. This was rejected by the FTT. A prudent purchaser for valuation purposes is typically described as one who has informed himself as to all relevant facts. Following normal practice for valuation does not automatically mean that enough work has been done. Overall, the FTT found that the value of the shares was the midpoint of the upper and lower limits calculated by the HMRC expert.

Dwan & Ors v HMRC [2022] UKFTT 36 (TC)


2.2 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 FTT accepted that he was not trading, but 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, was 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 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 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 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)


2.3 Accountant acting on taxpayer’s behalf found to be careless

The 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)


2.4 Business disposal relief manual updated

HMRC has added a page to the business asset disposal relief (BADR) section of the CGT manual to cover a point of case law on the meaning of substantial, and updated other pages on the issue.

The new page, linked below, sets out the case law on when a disposal is of part of a business or not. One of the updated pages, also linked, now includes case law on the meaning of ‘substantial’ as applied to non-trading activity from a UT decision of 2021.



2.5 Scottish income tax rates frozen

The rates of Scottish income tax will remain at their current levels next tax year, following the passing of a resolution in the Scottish Parliament. Two of the thresholds will increase with inflation.

The Scottish Parliament has passed a resolution that keeps the rates of Scottish income tax the same for 2022/23 as in 2021/22. The higher and additional rate thresholds will also stay the same, but the thresholds for the starter and basic rates will increase with inflation. This confirms the Budget statement given in draft in December, the final vote on which is yet to come.


2.6 Taxpayers lose appeal on overseas gain calculation

The 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 CGT 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 OTS 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)


3. Trusts, estates and IHT

3.1 Trust registration rules approved

The regulations amending the trust registration rules have now been approved and will come into force on 9 March. They cover deferring the registration deadline for the trusts that will be required to register under the new rules to 1 September 2022, and expand the list of excluded trusts.

Having passed the House of Lords, the regulations will come into force on 9 March 2022. HMRC has stated that it will take a “proportionate approach” to any trusts that miss the 1 September 2022 registration deadline.



4. PAYE and employment

4.1 Report on the off-payroll working reforms published

A new report on the implementation of the off-payroll working rules (IR35) sets out the issues that arose, and how HMRC addressed them in the extension of the reforms and now. It notes the short introduction time and initial lack of guidance as particular problems.

The National Audit Office (NAO) has published its investigation into the implementation of IR35, after noting in its 2021 audits that several government departments and other bodies had recognised payments to HMRC relating to these rules. It looks at what HMRC did to assist those affected with the compliance work, the impact the new rules have had on public bodies, workers, and tax revenue, how HMRC assesses compliance, and how it is adapting its implementation.

The HMRC online tool for checking employment status (CEST) was described by some users who contributed to the report as difficult to use, as the questions could easily be interpreted incorrectly, and the technical guidance was not integrated with the tool. The appeals process for determinations was also an issue, as was the calculation method for historic non-compliance that assumes the personal allowance is used elsewhere. Although introducing the rules for public bodies first meant that some improvements had been made before the expansion to other companies, there are still many improvements that could be made.



5. Business Tax

5.1 Intangible assets found to be transferred at nil value.

The FTT has found that a business transferred from an LLP to a company, where the same individual was the majority partner and owned the company, was transferred for tax purposes at its market value of £1. No intangibles relief was therefore available by the company for the amount it paid for the business. The payment made to the individual through the LLP was not a distribution, nor was a chargeable gain realised on disposal.

A company, one of the appellants, acquired a business in 2008 from an LLP in which the other appellant (J) was the majority partner. J was also the sole shareholder of the holding company that owned the appellant company. He declared his share of the proceeds as a capital gain and the company claimed relief for goodwill under the intangibles regime on the consideration paid. HMRC argued that the valuation used was overstated and that the market value of the intangible assets transferred, which did not include right to use trademarks, was £1. No amortisation relief was therefore available for the company and the entire payment from the company to LLP of £8.25m should be taxed on J as a distribution, not a capital gain. The FTT was asked to decide the value of the assets transferred, and whether or not the payment should be taxed as a distribution.

The FTT agreed with HMRC that the value of the assets actually transferred was £1. The company already had the right to use the trademark. The valuation cannot make assumptions on the characteristics of a hypothetical purchaser; it should value only the assets transferred. In this case this was the product licence agreement and other defined assets without the right to use the trademark. The FTT concluded that the transfer is treated for all purposes of the Taxes Acts, including for the purposes of the intangible regime, as being at market value. The company was therefore not entitled to intangibles relief on the £8.25m which it paid to the LLP. The company’s appeal was dismissed.

The FTT found however that the payment was not chargeable to income tax on J as a distribution. It was made out of the assets of the company, but not in respect of shares, and the company had not received new consideration as the market value of the assets was £1. J’s appeal was not only allowed, the FTT also concluded that no CGT was payable as disposal proceeds.

Thirlby & Anor v HMRC [2022] UKFTT 39 (TC)


5.2 Theatre tax relief claim disallowed

The FTT has found that a company putting on shows within attractions such as theme parks was not entitled to theatre tax relief, as entrance to the show was given automatically to all those who purchased tickets to the attraction.

An events production company contracted to provide live performances at a theme park and a zoo. It was agreed that these were theatrical performances. Theatre tax relief is limited to shows put on for paying members of the general public, or educational purposes, the ‘commercial purpose condition’, which did not apply here. There was no separate fee for customers to view the shows, everyone with an entrance ticket to the attraction had the option of watching or not. The company’s fees did not vary with viewer numbers.

The appellants argued that the ticket price for the attraction was a composite fee including the fee for the option to watch the show. The FTT however dismissed the appeal, finding that the natural and ordinary meaning of paying members of the public did not include this scenario, as they had not paid specifically to see the show. If the show was cancelled the ticket price would not vary. A separate fee could have been charged, but here the customers would not agree that they were purchasing tickets to see a show.

SGA Productions Limited v HMRC [2022] UKFTT 46 (TC)


6. VAT

6.1 New HMRC brief on termination fees and compensation payments

A new Revenue & Customs Brief (RCB) has been released, setting out HMRC’s revised policy on the VAT treatment of early termination fees, compensation payments, and liquidated damages. This is effective from 1 April 2022, and replaces a brief that was suspended due to objections.

Following two CJEU judgments, HMRC released RCB 12(2020), setting out its view that all such fees, previously treated as outside the scope of VAT, should be taxed at the same rate of VAT as any consideration paid for a supply of goods or services made under the relevant contract. Effectively, this was implemented with retrospective effect. After representations from businesses and industry, HMRC suspended the change, from 1 January 2021, to consider the legal position in more detail.

HMRC has now released a new RCB 2(2022), with internal guidance, effective from 1 April 2022. In summary, HMRC accepts that, in limited circumstances, such as when dilapidation payments are made on the cessation of a property lease, these payments can qualify as outside the scope of VAT. Also, if the payment is set at an amount more than any agreed consideration, designed to act as a deterrent against breach or termination of contract, it may qualify as outside the scope of VAT, albeit this should be assessed on a case by case basis. Otherwise, any payment designed to ensure that a supplier receives the full amount originally due under a contract for a supply of goods or services, irrespective of how it is described, is consideration for a supply and, as such, is subject to VAT at the rate applicable to the supply itself.

The HMRC manual has been updated for this change.


7. Tax publications and webinars

7.1 Webinars

The following client webinars are coming up soon.

  • 9 March - S&W Sessions: Employment tax, forthcoming changes for 2022/23


8. And finally

8.1 Tick-tick

As tax advisers and HMRC alike rise from the wreckage of peak self-assessment season, how stands the score?

Well, not great, even considering the one month sort-of-extension.

Just 80% of returns in (almost 3,000 on Christmas Day), which though respectable is hardly a model of compliance. Is this situation really going to be improved by requiring quarterly reporting?



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