Weekly Tax Update 22 June 2021

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

Ami Jack
Published: 23 Jun 2021 Updated: 13 Apr 2023

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 HMRC agent update 85

HMRC has published Agent Update 85, which provides an overview of the recent issues of which tax agents should be aware, focusing on the new tax year.

The latest Agent Update summarises various recent issues and changes, including guidance on:

  • the remaining COVID-19 support measures;
  • how to claim the extended loss carry-back;
  • off-payroll working rules;
  • Making Tax Digital developments;
  • the agent dedicated line and agent forum; and
  • how to give feedback on HMRC manuals.


2. Private client

2.1 Mixed partnerships caught by anti-avoidance legislation

The UT has upheld an FTT finding that the profits of two mixed partnerships, which had been allocated to a company and transferred offshore, should have been reallocated to a UK individual. The FTT ruled that the structure was caught by the mixed partnership anti-avoidance rules.

The taxpayer, a successful investment adviser, had set up a highly profitable offshore equity fund. The fund was managed by a UK limited liability partnership (LLP). The trade executions were carried out by another UK LLP. A UK company was a member of both of these LLPs. Approximately £19m of profit was allocated to the company by the LLPs. The taxpayer was the sole director of the company. The company’s profits were paid into an offshore trust of which the taxpayer’s children were beneficiaries. The taxpayer was, at various times during the period in question, also an employee of the company and an employee and member of the LLPs. The FTT upheld HMRC’s reallocation of the profits to the taxpayer, agreeing that the profits were allocated to the company because of the taxpayer’s ability to enjoy them, rather than to reward the company’s services.

The taxpayer appealed on two grounds. First, that some of the profits reallocated related to a time when he was not a member of the LLP. The UT dismissed this, finding that there is no direct correlation between profit share and time spent as a member in an LLP, so the decision to reallocate the profits to him over the other member, the company, was valid. Second, that the taxpayer was working for the company and both LLPs in a single role, so as his activities were not separated the profits should be divided evenly, not all reallocated to him. This was also dismissed, as it was based on the FTT findings of fact on what the profit was attributable to, which there were no grounds to challenge.

Walewski v HMRC [2021] UKUT 133 (TCC)


2.2 Behaviour found to be careless, not deliberate

The FTT has upheld assessments for additional tax totalling almost £125,000 over seven years under the presumption of continuity, as the taxpayer had not proved that entries in his bank statements in one year had a non-trading origin. The penalties were reduced to carelessness, as the taxpayer had kept poor records but not intended to mislead HMRC.

On enquiring into a self-employed interpreter’s return for 2014/15, HMRC made an assessment that income was significantly underdeclared. It raised discovery assessments for that and the previous six years, on the assumption that there was a consistent under-declaration. The taxpayer accepted that the 2014/15 income was underdeclared, but argued that this was due to a computer virus that affected his records just before that return was filed. He appealed the assessments, and penalties for deliberate behaviour.

The FTT refused to alter the quantum of the assessments, as the taxpayer had failed to produce evidence that payments going into his bank account were not trading income, despite numerous opportunities. HMRC’s calculation for previous years held good, but the penalties were reduced from those for deliberate to those for careless behaviour. The errors had arisen from the taxpayer’s failure to take reasonable care to keep accurate records. rather than an intent to deceive.

Malcolm v HMRC [2021] UKFTT 207 (TC)


2.3 SDLT saving scheme for house purchase defeated at FTT

The FTT has found that taxpayers who purchased a house in a company, which was then distributed to them due to a reduction in share capital, were personally liable for SDLT on the purchase. The arrangements made meant that they had the power to call for conveyance, as well as the company.

The taxpayers, a married couple, subscribed for all the shares in a newly incorporated company. It used the funds to place a deposit on a house, then, on completion of the purchase, it reduced its share capital to £2, making a distribution in specie of the house to the taxpayers. The original subscription to the company was made by the taxpayers giving promissory notes payable on the day of completion of the house purchase. No SDLT returns were made, on the basis that there was no consideration paid for the transfer of the house to the taxpayers. HMRC assessed the taxpayers for SDLT as though they had purchased the house personally.

The FTT dismissed the taxpayers’ appeals, finding that the arrangement constituted a transaction under which a person other that the purchaser (the company) was entitled to call for conveyance. The distribution was contingent on the house purchase being completed. The consideration was the subscription to the company, slightly more than the amount the company paid for the house due to conveyancing costs.

Brown v HMRC [2021] UKFTT 208 (TC)


2.4 Building renovation not deductible from profits

A farming partnership has been denied relief on the costs of altering a run-down farmhouse to convert it to holiday accommodation. The costs were found to be capital in nature, not revenue, and not wholly and exclusively for the purposes of the trade.

A farming partnership, since dissolved, had assets including farm buildings, the largest of which was historically used as accommodation for the farm manager. Following the death of one manager, a partner took over his role, but did not occupy the property. As a listed building, the partnership was compelled to carry out expensive repairs, and secured a grant to fund these. It was in very poor condition, and the renovation was intended to provide holiday lets in the building to diversify the partnership business. The FTT found that the entire cost of the works was capital rather than revenue, as, although necessary the result was to change a barely habitable farmhouse into a luxury holiday home, which changed the overall character. The farm was not previously running a trade of holiday letting, so the expenses could not have been allowed as wholly and exclusively for the trade even if found to be revenue.

Messrs Elliot Balnakeil v HMRC [2021] UKFTT 193 (TC)


3. PAYE and employment

3.1 Spotlight 58: Disguised remuneration and tax avoidance using unfunded pension arrangements

HMRC has issued a new Spotlight, warning against using schemes involving unfunded pension obligations to pay directors indirectly.

HMRC is aware of tax avoidance schemes where a company gives a director the right to receive a future pension and claims a CT deduction. The obligation to pay the pension may then be transferred to a third party, often a relative or colleague of the director. The company pays the third party, or a nominee of the third party, for assuming the pension obligation. The nominee may even be the director. The outcome is that the company indirectly remunerates the director, and asserts that the payment is not immediately subject to IT or NICs while still claiming a CT deduction.

The Spotlight emphasises HMRC’s position that such schemes do not work, and that scheme users should expect to have these arrangements challenged. Anyone involved in these schemes is strongly advised to seek professional tax advice.


3.2 FTT denies refund of NICs on car allowances

The FTT agreed with HMRC that car allowances paid to staff in lieu of a company car were earnings, as the rate was set by job grade rather than business need, so NICs were fully chargeable as an employee benefit. As they were not strictly linked to expenditure on a car, they did not fall within an exemption for relevant motoring expenses (RME).

The company ran a scheme in which staff at set grades were entitled to choose between a company car, or to receive a ‘car allowance’ instead. The allowance was treated as chargeable to income tax on the employee, reduced by business mileage at the HMRC rate. Primary and secondary NICs were paid, but the company later attempted to reclaim secondary NICs following a separate case. It argued that whether or not the payments were earnings, an RME exemption applied.

The FTT heard evidence on which staff were entitled to these allowances, how the rates were set, and how the use of them was tracked. It found that the payments were earnings, rather than a reimbursement of business expenses, as the rates were not set by reference to business related need, but by job grade, and it was accepted that there was an element of bounty. It also found that the payments were not RME, as for a payment to qualify it must be made in respect of use by the employee, rather than expected or potential use.

Laing O'Rourke Services Ltd v HMRC [2021] UKFTT 211 (TC)


4. Business tax

4.1 HMRC wins a £125m foreign tax relief case

A UK company has lost an appeal against HMRC’s refusal of claims for relief against US tax. The FTT found that the UK/US tax treaty did not require the UK to provide relief, because the UK company was not US resident for the purposes of that treaty, nor did it carry on business in the US. 

HMRC had denied relief of approximately £125m for US tax suffered by a UK company. The company was deemed under US domestic law also to be US tax resident because its shares were ‘stapled’ to those of a US limited partnership. This was because more than half of the UK company’s shares could not be transferred separately from the shares of the US limited partnership. The company had failed to obtain relief using the mutual agreement procedures within the UK/US tax treaty.

The first question was whether or not the UK company was US resident under the tax treaty by virtue of the share stapling. The FTT ruled that it was not. The treaty provides a non-exhaustive list of factors that can determine residence, and allows additional factors to be considered. It was held that those additional factors must impose a worldwide liability to tax and provide a connection or attachment to the contracting state. The US deeming provision for stapled shares did not provide a connection or attachment to the US. The FTT went on to find that, based on the facts of the case, the UK company’s participation in the limited partnership did not amount to carrying on a business in the US. The tax treaty therefore did not require the UK Government to provide relief for the US tax incurred. The appeal was dismissed.

G E Financial v HMRC [2021] UKFTT 0210 (TC)


4.2 Three-year loss carry back claims for groups

New regulations have been issued that govern how groups can make claims under the extended three-year loss carry back rules. A loss carry-back allocation statement must be submitted for group company claims in excess of £200,000. 

The loss carry-back allocation statement sets out how losses, up to the £2m cap, are to be allocated between group members. The statement is to be submitted by a nominated company, and separate statements are needed for financial years 2020 and 2021. No statement is needed for claims of up to £200,000.

The regulations also disapply the usual time limits for amending a tax return where the amendment is a result of a claim under the three-year carry back loss rules. Past returns will be amended by relief claims even if the two-year deadline for amendments has passed.

SI 2021/704 The Corporation Tax (Carry Back of Losses: Temporary Extension) Regulations 2021


5. VAT

5.1 CA upholds UT ruling on production costs and catering supplies

The CA has ruled that the costs of producing performances at the Royal Opera House are not directly and immediately linked with the catering supplies at that venue. Input VAT on the production costs therefore cannot be recovered on that basis.  

The Royal Opera House produces opera and ballet performances, the tickets for which are exempt supplies. It also makes catering supplies, which are taxable. In this long-running case, it has argued that an element of input tax incurred on the production costs should be recoverable because there is a direct and immediate link between those costs and the catering supplies. The production costs, it argued, generate highly acclaimed performances, which attract the guests who use the restaurants and bars.

The FTT ruled in favour of the Royal Opera House. It found that there was a necessary economic link between the production expenditure and the catering supplies. The UT overturned the decision, finding that the commercial link between the production costs and the catering supplies did not amount to a direct and immediate link. The production costs were not used to make the catering supplies, nor were they a cost component of those supplies. The fact that the catering supplies would not have been made but for the production costs being incurred was sufficient only to establish an indirect link. The CA accepted the UT’s criticisms of the FTT’s approach, and found for HMRC for the same reasons as those given by the UT.

Royal Opera House Covent Garden Foundation v HMRC [2021] EWCA CIV 910 


5.2 VAT and private daycare services

Revenue and Customs Brief 9 (2021) explains how a recent CA decision supports HMRC’s position on the VAT liability of daycare services for vulnerable adults. Such services are not exempt from VAT unless provided by charities, public bodies or regulated by the relevant authority in the country concerned. 

The Brief follows the CA’s ruling in favour of HMRC in two joint cases, and the SC’s refusal of leave to appeal that decision. The outcome confirms HMRC’s position on the VAT treatment of daycare services provided by private bodies to vulnerable adults in England and Wales. Unless providers of these services are charities, public bodies or regulated by the relevant authority in the country concerned, they are not able to exempt their supply of services. There were other appeals standing behind these cases that will be affected by the decision.

The Brief states that providers of daycare services in England and Wales that are not charities and have not accounted for VAT on these supplies must do so with immediate effect. Separate rules apply in Northern Ireland and Scotland.



6. Tax publications and webinars

6.1 Tax publications

The following Tax publications have been published.

6.2 Webinars

The following client webinars are coming up over the next month.

  • 29 June 2021: S&W Sessions: How robots are changing the future of accounting and finance roles
  • 14 July 2021: S&W Sessions: Impacts to the R&D Incentive Landscape


7. And finally

7.1 Just the thing for a home office

A sad day for And finally, as HMRC announces the official retirement of the Stamp Duty press machines with effect from 19 July. HMRC, pushed by the pandemic to turn the last few processes requiring physical stamps electronic, has decided that this e-stamping thing works rather well, and the old warhorses must be put out to pasture. This is also, of course, the last time that s.22 of the Stamp Duties Management Act 1891, ‘As to discontinuance of dies’ can be invoked.

Redundant legislation aside, this leaves the question of what to do with hundred-year-old machines weighing 685kg each. HMRC is keeping three, but five are up for grabs for those with suitably reinforced flooring. Off we go to measure up.

‘Any organisations who may be interested in rehoming a decommissioned stamp press from HMRC, please contact stamp.presses@hmrc.gov.uk to find out more.’


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