Tax Update provides you with a round-up of the latest tax developments. Covering matters relevant to individuals, trusts, estates and businesses, it keeps you up-to-date with tax issues that may impact you or your business. If you would like to discuss any aspect in more detail, please speak to your usual Smith & Williamson contact. Alternatively, Ami Jack can introduce you to relevant specialist tax advisors within our firm.
1.1 Budget 2021 set for March
The Permanent Secretary at HMT has confirmed that the next Budget will be held in March 2021.
The confirmation was made by Sir Tom Scholar during a Public Accounts Committee meeting. The precise date has not yet been announced.
1.2 Tax policy update and Finance Bill 2021
The Financial Secretary to the Treasury, Rt Hon. Jesse Norman MP, published a tax policy update on 12 November 2020. It included several additional draft clauses for Finance Bill 2021 and other general tax announcements.
The new draft clauses will implement measures announced in the 2020 Budget and are additional to the draft clauses announced in July 2020. The outcomes of the consultations informing these clauses have also been published. The draft clauses include:
- measures to prevent abuse of R&D relief for small and medium enterprises (see 4.3);
- technical amendments to the hybrid mismatch rules (see 4.2);
- changes to tackle Construction Industry Scheme abuse; and
- changes to leasing provisions as a result of the withdrawal of LIBOR.
The overall consultation on the draft clauses will close on 7 January 2021.
The general tax announcements include:
- an extension to the £1m limit on the Annual Investment Allowance (see 4.1);
- a summary of responses and next steps for raising standards in the market for tax advice (see 1.3);
- a new consultation on Making Tax Digital for CT (see 4.5);
- a delay to the introduction of notifying HMRC of uncertain tax positions by large businesses (see 4.4);
- a new consultation on tackling promoters of tax avoidance; and
- technical amendments to the off-payroll working rules.
1.3 Raising standards in the tax advice market
A summary of responses to this Call for Evidence has been published, along with the next steps. These include a consultation on making professional indemnity insurance compulsory for all tax advisers.
In March, the Treasury published a Call for Evidence on how to raise standards in the tax advice market. A particular area of concern was how so many taxpayers came to enter into loan charge schemes after taking advice, and had been left without a remedy. Evidence was requested on issues including the scope of the market, examples of regulation in other countries, and possible approaches to raising standards.
The responses broadly supported the HMRC standard for agents; so, HMT plans to raise awareness of it, and review HMRC powers to enforce it. In addition, the Government will consult on introducing a requirement for all tax advisers to hold professional indemnity insurance. The other two steps will be to work with the professional bodies to understand their role, and review options to tackle the high cost of claiming tax refunds.
The report also notes that: ‘The government is separately announcing details of plans to take further steps to deal with promoters of tax avoidance schemes.’
2. Private client
2.1 OTS report on CGT simplification published
The newly published Office of Tax Simplification (OTS) report on CGT makes a number of recommendations that it considers will reduce distortions in the tax system. These include aligning the rates of IT and CGT, with some allowance for inflationary gains, cutting the annual exempt amount (AEA), restricting the CGT uplift on death, abolishing Investors’ Relief (IR) and tightening the conditions for Business Asset Disposal Relief (BADR).
In July, the Chancellor asked the OTS to conduct a review of CGT in relation to individuals and smaller businesses. The OTS does not advise on policy, but this first part of the review considered areas where the current rules do not meet the original policy intent, or can distort taxpayer behaviour.
The key recommendations include:
- closely aligning the rates of CGT and IT, so that taxpayers do not prioritise a beneficial tax position over business and personal needs. The OTS suggests this should go hand in hand with reintroducing relief for inflationary gains, allowing more flexible use of capital losses, and addressing the issue of different taxation if investments are held personally or in a company;
- considering how the accumulation of retained earnings within smaller owner-managed companies and share-based rewards from employment should be taxed;
- reducing the AEA, and reforming the chattel exemption along with improving the online service to report capital gains in real time, and requiring investment managers to report client gains to HMRC;
- removing the CGT free uplift on death on assets to which an IHT relief or exemption applies. Alternatively, abolishing it altogether with all assets inherited at their historic base cost. Assets could be rebased to 2000, and gift holdover relief extended to a broader asset class;
- modifying BADR to be more focussed on retirement, possibly by increasing the minimum qualifying shareholding, increasing the holding period, and introducing an age limit; and
- abolishing IR, based on feedback that was it is not being used, and taxpayers had almost no interest in it.
Our full article on the report can be read at the link below.
2.2 Late application allowed due to adviser failur
The FTT has found that a taxpayer had a reasonable excuse for the lateness of his claim for pension protection. He had engaged a competent adviser, who had not informed him of the need to make an election, and when he realised he had missed the deadline there was no unreasonable delay in making the election.
The taxpayer had several pension plans, including a defined benefit pension. His adviser, who had full details of the plans, did not inform him that he was close to meeting the lifetime allowance, and incurring the lifetime allowance charge, as he had overlooked one element, though the taxpayer was in regular contact with him. The taxpayer had always used financial advisers to manage his affairs, and engaged a qualified adviser from a reputable firm, on a friend’s recommendation. The taxpayer realised the error when he received a letter from a pension provider. He complained to the adviser, and after going through their complaints process engaged another adviser, and made his late claim through them about a year after becoming aware that one was needed.
The FTT found that the taxpayer should be allowed to make a late election, as he had a reasonable excuse. He was entitled to rely on the adviser he had carefully selected, and had remedied the failure without unreasonable delay once he was aware of it.
Gibson v HMRC  UKFTT 439 (TC)
2.3 Settlement agreement amount found to be employment income
The FTT has found that the whole of a payment under a settlement agreement was taxable employment income. The payment had arisen from the taxpayer’s claim for unpaid overtime and allowances, so although the settlement agreement provided for some to be paid to lawyers and insurers, it did not change the character of the payment.
The taxpayer, along with a number of colleagues, took legal action against his employer over unpaid overtime and hardship allowances. The employer settled, so the taxpayer received a payment consisting of costs and a settlement. The costs were agreed to be tax free, but he filed a return on the basis that the settlement was also not income. HMRC raised discovery assessments covering the eight tax years to which the legal action had related.
The taxpayer appealed, stating that two of the three elements of the settlement were not earnings, as they had been used to pay the lawyers and insurers. HMRC argued that the entire payment had arisen from the employment, and the FTT agreed, dismissing the appeal. It found that the terms of the settlement agreement made it plain that the payment related to the claim for underpayment, so as the overtime and allowances would have been taxable earnings so was the settlement payment. Although some was diverted to pay lawyers and insurers, the settlement agreement just set out an order of priority of to whom to pay the amount, without changing its character as employment earnings.
Murphy v HMRC  UKFTT 461 (TC)
2.4 Arrangements found to be notifiable under DOTAS
The FTT has found that arrangements by a loan charge scheme operator were notifiable under DOTAS. The company concerned did not attend the hearing, but the judge made the finding based on HMRC’s case and the standardised documentation.
HMRC applied to the FTT for a declaration that arrangements were notifiable under the DOTAS regulations. The taxpayer did not attend the hearing, but the judge proceeded as he found that it had been notified.
The taxpayers involved in the arrangements became partners in an Isle of Man partnership. An Isle of Man company was the managing partner. The business of the partnership was to provide services to third parties under service agreements. A company engaged the partnership for each participant’s services as a consultant, but they often continued to work for the same party that they had been working for before entering into the arrangements. Each taxpayer had access to a loan facility through this company. The partnership received money from the end employers for services, channelled through the company, and paid it to the individuals as a loan or drawings.
On consideration of the documents and testimony from participants, who confirmed that they had understood they would not be paying back the loan, the FTT found that the arrangements met the criteria to be notifiable under DOTAS, and that the respondent was a promoter. The arrangements were a standardised tax product, designed to produce an income tax advantage as the main benefit.
HMRC v White Collar Financial Ltd  UKFTT 459 (TC)
3. Trust, estates and IHT
3.1 Estates and the TRS
Although complex estates must register with HMRC using the Trust Registration Service (TRS) to obtain a UTR, HMRC has now confirmed that executors do not need to use this service to tell HMRC when the administration period is over.
HMRC has confirmed to the ATT that when an estate is registered on the TRS, the executors are not obliged to use the service to inform HMRC that the administration period is over. Executors can inform HMRC by letter, or in a self-assessment return, and HMRC will update the service itself, although HMRC’s preference is for the TRS to be used to notify closure.
4. Business tax
4.1 Tax policy update: £1m Annual Investment Allowance extended by 12 months
The temporary £1m cap on the Annual Investment Allowance (AIA) has been extended to 1 January 2022.
The cap was due to revert to £200,000 on 1 January 2021. The measure is part of the Government’s plan to support the UK manufacturing sector, but it will apply to all businesses.
4.2 Finance Bill 2021: Hybrid and other mismatch rules
Several amendments will be made to the hybrid and other mismatch regime, some of which will be retrospective. The changes are intended to ensure that the regime operates as intended.
The numerous changes will amend definitions, adjust the scope of some provisions and prevent unwanted outcomes of some of the tests within the hybrid rules. Some provisions will be retrospective and have effect from 1 January 2017; others will take effect from Royal Assent of Finance Bill 2021. The measures follow an initial announcement in the 2020 Budget and a consultation period. The outcome of the consultation has now been published.
4.3 Finance Bill 2021: R&D relief for small and medium-sized enterprises
Draft legislation has been published for measures to prevent the abuse of R&D tax relief for small and medium enterprises (SMEs). These measures will apply to accounting periods beginning on or after 1 April 2021.
The new rules restrict the amount of payable R&D tax credit a company can receive. The cap is £20,000 plus 300% of its total PAYE and NIC liability for the period. There is an exemption from the cap where a company’s employees are creating or managing intellectual property and no more than 15% of the overall R&D expenditure is incurred on externally provided workers or on subcontracting to connected parties. The changes were first announced in the 2018 Budget, and two consultation periods were undertaken. The final consultation outcome has now been published.
4.4 Tax policy update: requirement to notify HMRC of uncertain tax positions delayed
The new requirement for large businesses to notify HMRC when they adopt an uncertain tax treatment will not take effect until April 2022.
The measure is aimed at reducing tax losses by enabling HMRC to identify where a business’s interpretation of tax law differs from HMRC’s interpretation. It will only apply to large businesses with turnover exceeding £200m or a balance sheet total of over £2bn. It was due to be introduced in April 2021. It has been delayed by 12 months following the recent consultation to allow more time for the policy and legislation to be developed. Businesses will also have more time to prepare for the new requirement.
4.5 Tax policy update: new consultation on Making Tax Digital for CT
HMRC is seeking views to inform the development of Making Tax Digital (MTD) for CT.
The proposed principles and design for MTD for CT would require businesses to use specific software to maintain digital business records and submit quarterly updates to HMRC. The software will track the company’s expected CT liability throughout the period. HMRC expects that digitising the CT compliance process will increase UK tax revenues by reducing the volume of errors, carelessness and deliberate non-compliance. The consultation document confirms that the introduction of MTD for CT is more than five years away.
The consultation closes on 5 March 2021.
4.6 Guidance on court-ordered restructuring plans and stamp duty
HMRC has expanded its guidance for applying for confirmation of the stamp duty treatment of court-ordered restructuring plans.
Restructuring plans are specific schemes that were introduced into insolvency law earlier in 2020. HMRC’s expanded guidance explains how businesses can obtain confirmation from HMRC on whether or not stamp duty will be charged on a court order sanctioning a restructuring plan.
4.7 UT finds a property development was not a trade
The UT has upheld a FTT decision that the development of a property did not amount to a trade. A company is not automatically carrying on a trade merely because it is not an investment company.
An offshore company acquired a UK property, but could not find a buyer when it wished to sell it several years later. The company redeveloped the property to make it more attractive to buyers and to achieve a higher return. It claimed property development ATED relief from the time it commenced the development activities. HMRC denied the relief on basis that the development did not amount to carrying on a trade.
The FTT ruled that there was insufficient evidence that the company had resolved to hold the property for a trading purpose. Its activities were merely to obtain a higher selling price, which did not necessarily mean that the property had ceased to be an investment asset.
The UT upheld this decision. It held that the FTT was correct to ask whether or not the company was focused on profit. The hope of the sale price exceeding the costs incurred does not necessarily mean that a transaction is a venture in the nature of a trade.
Hopscotch Limited v HMRC  UKUT 294 (TCC)
5. Tax publications and webinars
5.1 Tax publications
The following Tax publications have been published
6. And finally
6.1 The lion and the lamb
As the Office of Tax Simplification well knows from its review of IHT last year, there is no guarantee that any recommendations it put forward in its CGT review will be adopted. What more could be done, then, to grab the Government’s attention regarding tax reform?
Riding into the city astride a lion, holding a lamb you have just rescued from the jaws of death, of course.
Stay with us. Saint Mamas, the patron saint of tax avoiders, is said to have done just that in protest against economic double taxation in Cyprus in the 12th century. The Byzantine authorities arrested the holy man for his failure to pay tax on the donations he received from the people of Morfou. Mamas refused to pay on the basis that the donated income had already been subject to tax in the hands of the donors. When he was being taken to prison, a lion leaped out of the bushes, chasing a lamb. Mamas saved the lamb, calmed the lion and rode it into town. So impressed was the Judge that he exempted Mamas from tax for life; Mamas, in response, gave the lamb to the Judge.
The moral of the story? Well, we would not go so far as suggesting this as a sensible tactic for convincing the Government to reform tax relief. If, however, you do choose to take this approach, please don’t forget to give the lamb to the judge as thanks.
|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.