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. Private client
1.1 HMRC warns over commercial software error
The HMRC External Forum has issued a warning that some claims for CGT relief may have been made incorrectly, possibly due to software errors.
The issue is with claims for Business Asset Disposal Relief (BADR, formerly known as Entrepreneurs’ Relief) appearing on submitted returns as claims for Investors’ Relief (IR). As 2019/20 is the first tax year in which claims for Investors’ Relief have been possible, HMRC suspects that software errors are in play.
Claims for BADR made on returns should include the 3-letter code ERL in box 50 of the CGT pages (SA108), not INV in box 49 which is for IR.
The official statement reads:
‘HMRC has identified several returns where it appears that claims to ER have been submitted using the code ‘INV’ with gains showing in Box 49. The reasons for this vary but there may be issues with some software packages used to file returns.
If you have already filed a return that includes a claim to ER please check it to ensure that the correct code and box has been used. If you identify an error you can make an amendment and include a short note to explain the change.
For any future claims made on the return, ensure that your software is up-to-date and that any claims are made using the correct 3-letter code and box.’
1.2 One-off wealth tax recommended by independent body
The UK Wealth Tax Commission has published a detailed report on the principles, design, and delivery of a potential UK wealth tax. Their report recommends a one-off wealth tax, charged on total net assets with payment spread over five years, alongside a major structural reform of existing taxes. You can read our more detailed insight article here.
After conducting extensive research, the Commission has published its final report on a UK wealth tax. Key conclusions reached in the report include:
- an annual wealth tax is not recommended. It would only be justified if the aim was specifically to reduce inequality by redistributing wealth;
- existing taxes on wealth, including IHT, CGT and council tax, should instead be reformed to fix major structural flaws;
- in addition, a one-off wealth tax is recommended as an exceptional response to a particular crisis, in this case COVID-19. It would raise significant revenue in a fair and efficient way and would be very difficult to avoid.
The commission refrained from recommending a specific rate or threshold, as that is a matter for the Government, but did note that a 5% charge on every UK resident individual’s wealth above £500,000 would raise £260 billion over the five years allowed for payment. Regarding implementation, it recommends that the tax be announced with immediate effect, to prevent avoidance.
This report was not commissioned by the Government and there has been no suggestion that a wealth tax will be introduced under the current Government.
2. Business tax
2.1 UK group relief restriction incompatible with EU freedom of establishment
The FTT has ruled that the UK’s restriction on the surrender of losses of a UK permanent establishment (PE) is an unlawful restriction on the EU principle of freedom of establishment.
A UK PE or branch of a Dutch company incurred losses of approximately £36.5m over three years. These losses were deductible, and were mostly deducted, in the Netherlands. Under UK law, no group relief is available where any part of a UK PE’s losses are relievable in another jurisdiction. The UK companies in the same multinational group as the PE argued that that limit on group relief is an unlawful restriction on the freedom of establishment under EU law.
The question came down to two previous decisions of the CJEU: Phillips Electronics and NN A/S. In Philips Electronics, the CJEU had ruled that the same group relief provision was an unlawful restriction on the freedom of establishment. The facts of that case were very similar to the present case. Thus, if not overruled by a later decision, the FTT was bound to follow the Philips Electronics decision. The FTT found that NN A/S did not overrule Philips Electronics. The UK group relief restriction was therefore contrary to the freedom of establishment. The FTT ruled that it was to be disapplied.
VolkerRail Plant Limited and others v HMRC  UKFTT 476 (TC):
HMRC v Philips Electronics UK Limited C-18/11: http://curia.europa.eu/juris/liste.jsf?num=c-18/11
NN A/S v Skatteministeriet C-28/17: http://curia.europa.eu/juris/liste.jsf?num=C-28/17
2.2 New R&D requirement for CT returns
A new supplementary page in the CT return is to be introduced for R&D claims.
From 1 April 2021, companies submitting claims for R&D relief will be required to complete CT600L, a supplementary page to the Form CT600. It will apply to claims under the Small and Medium Size Enterprise R&D regime and the R&D Expenditure Credit regime. The existing R&D entries in the CT return will still be required.
2.3 Late filing of CT returns and COVID-19
HMRC has reiterated that where statutory account filing deadlines are delayed, a company may be able to file its CT return later without incurring a penalty.
In response to the pandemic, Companies House extended the deadline for filing statutory accounts due between 27 June 2020 and 5 April 2021. HMRC’s guidance states that CT returns may be filed late without incurring penalties when Companies House extends the filing deadlines. HMRC has confirmed to the ICAEW that if the CT filing deadline has not passed and a company expects not to file on time due to COVID-19, it can request a deferral of late filing penalties from HMRC. The request for deferral should be made to HMRC before the filing deadline, otherwise a late filing penalty may be automatically generated. This will be particularly relevant where a CT return cannot be filed on time because signed accounts are not available by the filing deadline.
2.4 Late filing of corporate interest restriction returns
Where CT return late filing penalties have been deferred for companies in a corporate interest restriction (CIR) group, HMRC will generally accept that the group has a reasonable excuse for filing an interest restriction return (IRR) late.
IRRs are due for filing 12 months after the end of a period of account. No penalty will be imposed for late filing, however, if the company has a reasonable excuse. HMRC’s policy on what amounts to a reasonable excuse has been clarified in respect of CIR groups. If a majority of the companies in a CIR group have obtained deferrals from HMRC for CT return late filing penalties, then HMRC will generally accept that there is a reasonable excuse for filing the IRR late. HMRC will consider all relevant facts and circumstances in each case; this is not an automatic treatment. HMRC has also reminded reporting companies of CIR groups to contact their Customer Compliance Manager (CCM) if they will be unable to file the IRR on time. If a group does not have a CCM, the details of the reasonable excuse for late filing should be included when the IRR is filed.
2.5 New HMRC powers to recover unlawful state aid
Clauses in a new Bill will enable HMRC to collect unlawful state aid relating to the Controlled Foreign Companies (CFC) regime.
The Taxation (Post-transition Period) Bill has been introduced to Parliament. It contains provisions to introduce the framework for the new VAT and customs rules once the UK transitions out of the EU, as expected. It also contains clauses to allow HMRC to raise additional CFC charges to recover state aid from companies for the periods 1 January 2013 to 31 December 2018. This is pursuant to the EC’s decision that the finance company exemption in the UK’s CFC rules amounted to unlawful state aid. That decision obliged the UK Government to recover from taxpayer beneficiaries the unlawful aid they received under that exemption. HMRC will be able to continue that recovery process under the clauses in the new Bill. The Bill sets out the procedures for issuing charging notices and appeals by taxpayers, and confirms that compound interest will apply to sums due for payment.
3.1 Call for evidence on VAT and the Sharing Economy
HMT is seeking views on how the Government should examine the Sharing Economy (SE) in the context of VAT.
HMT considers the SE to include digital platforms that facilitate the supply of services between unconnected parties, usually hiring out either labour or assets. This would include, for example, household handyman services and short-term property lets. The consultation on how VAT might apply to the SE is very broad. First, HMT is seeking views on whether or not the Government should even look into the SE in the context of VAT. It also requests input on the applicability of existing VAT rules and principles to the SE. These include the agent-principal rules and the place of supply rules. Suggestions of alternative rules that could be adopted are welcomed.
The consultation closes on 3 March 2021.
3.2 New guidance on VAT post-Brexit
HMRC has continued to issue more guidance on the changes to VAT that will apply from 1 January 2021. Two new policy papers and a new guidance page have been released, explaining the VAT treatment of goods and services.
Goods moved between Great Britain and the EU from 1 January 2021 will be imports and exports after the UK has withdrawn from the EU. The guidance summarises the key issues, such as the changes to margin schemes, removal of intra-EU simplifications and fiscal warehousing. For individuals and non-VAT registered businesses, goods sent between Great Britain and Northern Ireland will not, in most cases, be subject to VAT. The guidance explains when import VAT must be accounted for and how the VAT retail Export Scheme will apply.
A new policy paper summarises the changes to supplies of services. It explains the application of the use and enjoyment rules, and the treatment of business to consumer supplies of a professional, technical and intangible nature. It also includes details on the Tour Operators Margin Scheme (TOMS), selling digital services, supplying finance and insurance services, and the impact on international trains.
4. Tax publications and webinars
4.1 Tax publications
The following Tax publications have been published.
5. And finally
5.1 The value of wealth
Regular readers will know that And finally is the guardian angel standing over the crib of all helpless new-born taxes. We are getting excited early because although a long way from being carried to term, much less born, a new tax has been conceived: the one-off wealth tax.
Sadly, the would-be parents of the tax insist that it must only have the briefest of lives and we know that in its short life it will be truly hated by those whom it touches. What a brief, tragic existence!
Yes; life is indeed a tragedy to those who feel, but it is a comedy to those who think. It is diverting that a tax with intellectual rigour in its structure like IHT can be degraded into chaos like the residence nil rate band or a superficially rational one can turn out to be ridiculous, like VAT taxing Nesquik powder. How, then, will we enjoy the guaranteed absurdities of a wealth tax if it is killed in its infancy?
The answer is simple: become valuers. If anyone is cheering the Wealth Tax Commission on, they are. We would fill our boots for years. We would be harder to get hold of than an Ocado delivery slot. We would… just remind us again what OMV stands for?
|ATT – Association of Tax Technicians||ICAEW - The Institute of Chartered Accountants in England and Wales||CA – Court of Appeal||ATED – Annual Tax on Enveloped Dwellings||NIC – National Insurance Contribution|
|CIOT – Chartered Institute of Taxation||ICAS - The Institute of Chartered Accountants of Scotland||CJEU - Court of Justice of the European Union||CGT – Capital Gains Tax||PAYE – Pay As You Earn|
|EU – European Union||OECD - Organisation for Economic Co-operation and Development||FTT – First-tier Tribunal||CT – Corporation Tax||R&D – Research & Development|
|EC – European Commission||OTS – Office of Tax Simplification||HC – High Court||IHT – Inheritance Tax||SDLT – Stamp Duty Land Tax|
|HMRC – HM Revenue & Customs||RS – Revenue Scotland||SC – Supreme Court||IT – Income Tax||VAT – Value Added Tax|
|HMT – HM Treasury||UT – 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.