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 Finance Act receives Royal Assent
The Finance Bill received Royal Assent on 24 February 2022, becoming Finance Act 2022.
Several announcements made at the Autumn 2021 Budget have now come into effect, along with changes announced separately. In particular, the main tax rates and allowances for 2022-23 have now been formally set. The Act includes the legislation for abolishing basis periods, along with the three new taxes previously announced. These are residential property developer tax, public interest business protection tax, and the economic crime (anti-money laundering) levy.
1.2 New papers proposing tax simplification
The office for tax simplification (OTS) has published two companion notes to its everyday tax evaluation paper. These look at PAYE and aspects relating to agents. It has also indicated the scope of its forthcoming review of the taxation of income from property.
The evaluation paper on the operation of the PAYE system looks at areas that could be improved, including the single customer account. It addresses the impact of errors on taxpayers such as tax code issues when changing a job, or taking on additional work.
The update paper on simplification as it relates to agents and other intermediaries looks at the issues faced by agents in dealing with HMRC. This includes registering as an agent, agent input to HMRC’s development of new systems, and taxpayer authorisation.
Two scoping documents have also been published, setting out the scope for future reviews. One will be a review of the taxation of property income. It will look at simplification opportunities and administrative treatment of taxpayers. A call for evidence will come out shortly. The other review will be on the operation of the OTS itself, including its future priorities.
2. Private Client
2.1 Tax avoidance scheme fails at FTT
The FTT has found that an avoidance scheme that sought to exploit a provision in the UK-Mauritius double tax treaty was ineffective, as the place of effective management of the trusts did not shift to Mauritius, so the gains were subject to UK CGT.
Two taxpayers established a trust each, and the trustees made substantial capital gains in August 2020. The trusts were at first Jersey resident, but for a four month period, including August 2020, Mauritian resident trustees were appointed instead, before UK trustees were appointed. The aim of this arrangement was to give Mauritius taxing rights over the gains, as it did not charge CGT.
In a lengthy judgment, the FTT considered a previous CA decision in a similar case, and decided that, as in Smallwood, this scheme failed because the trusts were not truly Mauritian tax resident. Under the treaty, a tie breaker provision allows for residence in the place of effective management of a trust, as the body of trustees were a person within the meaning of the treaty, and during the period when Mauritian trustees were in position this place was the UK. The appeal was therefore dismissed.
Haworth & Ors v HMRC  UKFTT 34 (TC)
HMRC v Smallwood & Anor  EWCA Civ 778
2.2 HMRC automating PPI interest refunds
Due to the volume of claims, HMRC is trialling an automated process for refund claims for interest on PPI (payment protection insurance) refunds.
These claims are generally made on the normal repayment claim form (R40) which is submitted on paper. Those of these forms that are posted to the new address specifically established for automation, without a covering letter, will be subject to the new IT solution.
3. Trusts, estates and IHT
3.1 Employer bulletin: February 2022
Updates have been made to the Trust Registration Service (TRS) manual in line with feedback. These are clarifications rather than major changes.
Following discussions with professional bodies and those working in the area, HMRC has updated the TRS manual in line with the feedback. Updates include adding examples of what types of trust need to be registered, clarifying definitions, and adding a page on bank accounts for minors.
4. Business tax
4.1 UT dismisses taxpayer’s appeal on international royalties case
The UT has upheld the FTT decision that royalty income was found to arise from the right to exploit natural resources, even though it was acquired by a Canadian bank as satisfaction of a bad debt from an insolvent debtor.
The bank made a significant loan to enable the borrower to acquire the rights to an oil field in the North Sea. The borrower subsequently sold those rights, partly in exchange for an entitlement to ‘royalty’ payments from the oil field. The borrower went into receivership while it owed the bank CAD$185m. The Canadian courts assigned the bank the rights to the payments for nominal consideration. The bank declared that income in its Canadian tax return, but not in the UK. HMRC argued that the UK had primary taxing rights over the payments under the UK/Canadian Double Taxation Agreement (DTA).
The FTT had found that the payments amounted to income from immoveable property under Article 6 of the DTA, and that Article 6 covered both income from the grant of the right to exploit natural resources and income from subsequent dealings in that right. A decision that was upheld by the UT.
The UT also agreed that the payments were profits arising from exploration or exploitation rights as the bank had the rights to benefit from the oil field. It concluded that the payments were correctly chargeable to CT under the special ring fence trade rules for profits relating to natural resources. Finally, the UT rejected the taxpayers’ argument that losses arising on the original loan could be deducted from the payments.
Royal Bank of Canada v HMRC  UKUT 45 (TCC)
4.2 Purchase of own shares and multiple completion contracts
HMRC has clarified its position on whether or not a seller remains connected with the company where the transaction involves one contract with multiple completion dates.
One of the conditions for capital treatment to apply is that the seller must not be connected with the company immediately after the buyback of shares. Connected for these purposes include where a person directly or indirectly possesses more than 30% of the issued ordinary share capital, loan capital or voting power. HMRC’s view is that the word ‘possesses’ refers to legal not beneficial ownership.
When shares are subject to sale under a multiple completion contract, a seller may lose beneficial ownership to all the shares at the initial contract date. Legal ownership is, however, retained until the sale of each share completes. This will be the case even if the remaining ‘non-completed’ shares are converted into shares with no voting or economic rights. A seller will therefore remain connected with the company if more than 30% of the non-completed shares are retained, and capital treatment will not be available.
HMRC has clarified that it will not void any previously issued clearances where the connection test may not have been met due to retained legal ownership of the shares, but it will not grant clearance in the future.
4.3 Consultation opens on online sales tax
HMRC has launched a consultation on a proposal to introduce an online sales tax (OST). It is intended to be equivalent to the business rates paid by physical shops, redressing the balance between in-store retailers and online businesses.
At Autumn Budget 2021, the Government announced that it would consult on introducing an OST. This consultation was a recommendation from its business rates review report. If introduced, the tax raised would be used to reduce business rates for the retail sector.
The proposal sets out various options for an OST, along with likely effects on businesses and customers. Questions include what goods and services it should apply to, possible exemptions, avoidance risks, identifying UK customers, and impacts on consumers.
The consultation closes on 20 May 2022.
4.4 OECD consultation on Pillar One
The OECD is asking for public input on its draft rules for tax base determinations under Amount A of Pillar One of the base erosion and profit shifting (BEPS) project. This is part of the ongoing project to combat the practice of international companies shifting profits to lower-tax jurisdictions.
Under Pillar One of the planned tax reforms, profits will be taxed in the jurisdictions where the good or service is supplied. The purpose of the tax base determinations rules is to establish the profit or loss that will be used to reallocate a portion of the multinational enterprise’s profits to the market jurisdictions where it has nexus, using a revenue-based formula.
This consultation looks at the potential rules for the calculation of the profit or loss of a multinational enterprise caught by these rules. The starting point for the Amount A calculations will be the consolidated group financial accounts. Details are included on the book-to-tax adjustments and provisions for carry-forward of losses.
The OECD invites comments on the draft rules to be submitted by 4 March 2022.
5. Tax publications and webinars
5.1 Tax publications
The following Tax publications have been published.
The following client webinars are coming up soon.
- 9 March - S&W Sessions: Employment tax, forthcoming changes for 2022/23
- 23 March - Introducing robotics and real time consolidation: What's in it for me?
6. And finally
6.1 Hampden the Dauntless
Think 1 March is just Shrove Tuesday? Think again. As well as enjoying pancakes, those keen on tax history will be enjoying the anniversary of a rather controversial tax payment deadline: for Ship Money in 1628. Given that the King had only sent his writs out in the February it was rather harsher than modern day deadlines.
A later issue of this levy is principally remembered for the wonderful tax case that came out of it, R v Hampden. Although the King’s lawyers unsurprisingly won, Hampden’s challenge to non-Parliamentary taxation, arguing that the King did not have the power to impose his own levy, is an interesting part of the path to our current system of tax legislation. Not to mention winning him a mention in Gray’s Elegy Written in a Country Churchyard.
Lately, however, we cannot but feel that Parliament is enjoying its rightful power a bit too much.
And ingenious as the Ship Money was, we would encourage the Government to give up one thing for Lent: inventing new taxes. Can they make it through 40 days?
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.