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 Chancellor considers CGT reform
Mr Sunak has commissioned the Office of Tax Simplification (OTS) to review the UK’s CGT regime for individuals and smaller businesses. The review will look at simplifying the system to ensure it is fit for purpose. It will cover administrative and technical issues, as well as ‘areas where the present rules can distort behaviour or do not meet their policy intent’.
The OTS has opened a consultation on CGT in response. The deadlines are 10 August for comments on the principles of CGT, and 12 October for comments on the technical detail and practical operation. The first element is structured as an online survey, with the first page being a test on how much the respondent knows about CGT.
This call for evidence is very broad, and the scope includes the overall scope of the tax, the rates, the reliefs, exemptions, and allowances, the treatment of losses, and the annual exempt amount. It covers individuals, partnerships, and estates, as well as owner-managed and unincorporated businesses, including sale, set-up, and winding-up.
Some of the more specific areas mentioned for review include the practical operation of private residence relief, the boundary between IT and CGT in relation to employees, property sales, and gains on shares and securities.
1.2 ‘Tax after coronavirus’ inquiry by the Treasury Committee
The Treasury Select Committee has announced a new inquiry into the UK tax system. It will focus on the long-term pressures on the UK tax system, protecting the UK tax base and possible reforms in response to the pandemic.
The Committee notes that the economic downturn has provided an opportunity to examine the tax system and how it should operate after the pandemic. The inquiry will consider the tax system in its entirety, rather than focus on any specific aspect or tax regime. The questions posed by the inquiry cover issues such as the what level of taxation the economy can bear, options for tax simplification, and balancing the taxation of work, savings, pensions and wealth. The Committee is specifically considering the possibility of a windfall tax in the post-coronavirus period. It is also examining the role of tax reliefs and whether or not the current regime of tax reliefs promotes economic growth. Evidence is being sought from the public, and submissions close on 28 August 2020.
2. Private client
2.1 Temporary cut to land transaction tax
The Welsh Government has announced a reduction to land transaction tax (LTT), with effect from 27 July 2020. This follows similar announcements on SDLT and land and buildings transactions tax last week.
The starting threshold for LTT main residential rates will be temporarily increased from £180,000 to £250,000. This will reduce the LTT payable on purchases of Welsh residential property from 27 July 2020 to 31 March 2021. The Welsh Government has stated that this measure will ensure that only 20% of taxpayers liable to the main LTT rates will incur any tax.
2.2 HMRC wins lead SDLT avoidance case
The FTT has found that a property purchase under a SDLT sub-sale scheme did not meet the conditions required to disregard the acquisition. This is the lead decision for several other cases involving a similar scheme.
The taxpayer acquired a London flat for £5m, on which he claimed the SDLT liability was nil. He had used an SDLT avoidance scheme that involved a sub-sale to a company of which he was the Executive Chairman. This scheme has since been blocked by legislative amendments. Upon acquiring the flat, he immediately granted the company a call option over the property for nominal consideration. He argued that this arrangement fell within the SDLT sub-sale provisions. These provisions disregard the original purchase where the purchaser immediately grants to a third party an option over the purchased property that is completed or substantially performed simultaneously with the original purchase.
The FTT dismissed the appeal, agreeing with HMRC that the sub-sale was not completed or substantially performed simultaneously to the completion of the original sale. It held that the sub-sale could not have been substantially completed because the company had not taken possession of the property. Additionally, payment of the option grant price did not amount to substantial performance. SDLT was therefore payable in full on the original purchase. Furthermore, the anti-avoidance provisions applied to the transaction and also resulted in SDLT being payable on the full purchase price.
Oisin Fanning v HMRC  UKFTT 292 (TC)
3. Trusts, estates and IHT
3.1 HMRC responds to Trust Registration Service consultation
HMRC implemented the fifth EU Anti-Money Laundering Directive (5MLD) by significantly expanding the scope of the Trust Registration Service (TRS). HMRC consulted on the technical details until January, and has now published a summary of responses.
Some respondents suggested changes to the scope of the TRS. Trusts that will be subject to the reporting requirements include bare trusts, trusts holding any amount of assets without a minimum threshold, and some pension trusts. There were requests to take these out of scope. The Government has agreed to take some of these out of scope, including trusts with under £100 of assets, trusts imposed by statute, co-ownership trusts, and various other categories.
Another area of concern for respondents was the requirement to register non-UK trusts that have a UK business relationship. This requirement has now been limited to trusts with at least one UK trustee, and business relationships expected to last at least 12 months. Non-UK trusts that obtain UK land or property will be required to register, but will not be subject to some data sharing provisions.
Some other feedback, on the guidance and administrative details such as deadlines, will also be implemented.
4. PAYE and employment
4.1 HMRC succeeds in assessments for failure to operate PAYE
The FTT has upheld assessments issued by HMRC to a company that failed to operate PAYE correctly or keep records of employment. The taxpayer did not succeed in its argument that the missing NICs could be explained by unpaid work carried out by the business owner.
The taxpayer was a small company that manufactured and fitted double-glazed windows, doors and fittings. It had not operated PAYE correctly, had not maintained records of employee costs, had no written employment contracts and paid its employees in cash. HMRC imposed assessments for unpaid NICs on the basis of the limited information available and the presumption that the business would continue with the same level of turnover and employment over time. The taxpayer’s primary argument was that the assessments were too great because they did not take into account the high level of unpaid work a business owner carries out when starting a company. The FTT dismissed the appeal and upheld both the assessments and the penalties. It found that the unpaid work undertaken to develop a business could not, in this case, explain the underpaid amounts. The evidence indicated that manufacturing activities had been carried out, and the business owner had no experience in manufacturing. It was reasonable to assume he had employed staff for whom the company had not operated PAYE.
Planet Double Glazing Limited v HMRC  UKFTT 0280 (TC)
5. Business tax
5.1 Landmark decision in Apple case overturned
The General Court of the EU (General Court) has annulled the EC’s decision that Ireland granted illegal state aid to companies within the Apple group. The Irish Government is therefore not required to recover €13bn in tax from Apple.
In 2016, the EC decided that two tax rulings made by Ireland amounted to the grant of unlawful state aid to two Apple companies. These companies were incorporated in but not tax resident in Ireland. The rulings approved the methods that were used by the Apple companies to allocate their taxable profits. As a result, the companies were only subject to tax on the income generated by the Irish branches, rather than on the total trading income of the companies. The EC held that the two rulings constituted a selective economic advantage and unlawful state aid. The EC valued the tax advantages at approximately €13bn and demanded that the Irish Government recover this amount, plus interest, from the companies.
The General Court annulled the EC’s decision. It held that the EC had failed to prove that the total trading income of the companies represented the value of the activities carried out by the Irish branches and should therefore be taxable on them. It also ruled that the EC was wrong to declare that Ireland had, at its discretion, granted the taxpayer a selective economic advantage. An appeal against this decision may be made by the EC to the CJEU.
Ireland v Commission T-778/16
Apple Sales International and Apple Operations Europe v Commission T-892/16
5.2 Taxpayer wins a case on repair expenses
The FTT has allowed a taxpayer’s appeal that expenditure incurred on works carried out to a yard was revenue rather than capital in nature.
The taxpayer incurred expenditure restoring part of a lorry yard. The issue was whether the expenditure amounted to a replacement or a repair of the yard. A replacement would have been a capital expense deductible only on disposal, whereas a repair would have been deductible as a revenue expense in the year in which it was incurred.
HMRC argued that the works amounted to capital expenditure for three reasons. First, it provided an enduring advantage for the taxpayer. Second, the works were an improvement to the yard. Third, the work was of sufficient scale and importance to be considered capital expenditure. The FTT rejected these arguments. It held that there had not been a renewal of the entirety of the yard because the sub-surface had not been replaced. It added that there was also no improvement in the yard compared to its original condition; the building works merely returned the yard to its original condition and did not bring something new into existence. As a result, the expenditure incurred on restoring the yard should be treated as a revenue expense.
Steadfast Manufacturing & Storage Limited v HMRC  UKFTT 286 (TC)
6.1 EC announces new VAT proposals
The EC has issued a Tax Action Plan, which sets out 25 tax initiatives to support the recovery of the European economy. These include several measures for VAT reform.
The aim of the Tax Action Plan is to make taxation fairer, simpler and better adapted to modern technologies. It is one of three elements comprising the EU’s Tax Package for fair and simple taxation supporting the recovery strategy. The proposed changes to VAT include:
- the implementation of a single EU VAT registration system;
- further extensions to the VAT One Stop Shop;
- a VAT dispute resolution mechanism;
- updated VAT rules on financial services;
- a revised VAT scheme for travel agents; and
- adaptations of the VAT regime for the platform economy.
These measures are expected to be introduced from 2020/21 to 2022/23. The UK has not yet indicated whether or not it will adopt any similar changes.
7. Tax publications and webinars
7.1 COVID-19 hub
The following client webinars are coming up over the next few months.
- S&W Sessions: COVID-19 – effectively managing your workforce and remuneration strategy
8. And finally
8.1 What do you mean, ‘other’?
Regular readers will be unsurprised to hear that having revisited Paddington Bear last week, we are back Through the Looking Glass this week. If ever there was a Looking Glass tax case, it is the Apple decision (see article 5.1). Whatever you think of the whole issue, it is hard to deny that there is something paradoxical about a government not wanting to recover tax in the billions from a taxpayer. A taxpayer is encouraged to pay the right low amount of tax by an approving state and does so. If the government had misbehaved, its punishment was to collect those billions. Of course, it is not that easy, but it would be fun to know what Alice made of it.
It’s perhaps unfair to single out the BBC as commentator, but some remarks leapt off the page. ‘there was not enough evidence to show Apple had … minimised its tax bill.’ ‘What about other big tax avoidance cases?’
Hold on. Whatever else is happening, it isn’t tax avoidance. Apple paid what the state sought to collect. How is that avoidance? And whatever the rights and wrongs of the supranational case, taxpayers aren’t expected to police the tax collector.
Ireland v Commission T-778/16
Apple Sales International and Apple Operations Europe v Commission T-892/16
|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.