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 Evelyn Partners contact. Alternatively, Ami Jack can introduce you to relevant specialist tax advisors within our firm.
1.1 HMRC agent update 97
HMRC has published agent update 97, which provides an overview of the recent issues of which tax agents should be aware. It includes updates on HMRC services, and forthcoming changes.
The latest agent update summarises various recent issues and changes, including:
- guidance for non-UK resident corporate landlords on format of accounts and other information to be filed online;
- a reminder that NIC thresholds rise on 6 July;
- improvements to CT letters;
- guidance on making a notification into the qualifying asset holding company regime;
- a note on how the CIS applies to property investment companies;
- guidance on self-assessment;
- guidance on MTD for VAT; and
- links to help and support for agents.
1.2 HMRC late payment interest rate to increase again
Following the Bank of England base rate rise, the rate of interest HMRC charges on late tax payments will be increased again. This will be the fifth increase in 2022 for non-quarterly instalment payments.
HMRC will increase yearly interest rates on overdue tax by 0.25%, following the Bank of England base rate increase from 1% to 1.25%. The rate applied to the main taxes will therefore become 3.75%. The rate of interest on repayments from HMRC will remain unchanged at 0.5%.
The change will apply from 27 June 2022 for quarterly instalment payments and 5 July 2022 for non-quarterly instalment payments.
1.3 New double tax treaty with Luxembourg
The text of an as-yet unratified new version of the UK-Luxembourg double tax treaty has been published. This includes significant changes to the position of Luxembourg investors with indirect interests in UK residential property. Currently, Luxembourg has taxing rights on disposals by Luxembourg tax residents of indirect holdings of UK property. When the treaty comes into force the UK will be able to tax the gains arising on these disposals.
The dividend withholding tax rate has been cut to 0% from 5%, as has the withholding tax rate on royalties.
This has not yet entered into force.
1.4 Professional bodies complain about HMRC service levels
Four professional bodies have sent a joint letter to HMRC regarding service levels
The CIOT, the ATT, the ICAEW, and the ICAS have, following many reports from members, sent a joint letter to HMRC about its poor service levels recently. It asks when various items of data, and responses to recommendations, will be published. It also points out that they are under pressure from their members to resolve the issues, and possibly to raise them more widely, for example with the media and the Government.
2. Private client
2.1 HMRC nudge letter on provisional roll-over relief
HMRC is writing to individuals who made provisional rollover relief claims in years up to and including 2017/18 but have not submitted a final claim within the required time limit.
When a provisional claim for rollover relief is filed, the claimant has until the third anniversary of 31 January following the end of the tax year of disposal to file a final claim, or the provisional claim expires.
The letters state that taxpayers will have 30 days to respond to HMRC with a final claim, if they reinvested the proceeds in the relevant time limits. If not, assessments for the deferred CGT will be raised.
There is a separate time limit for making a claim to rollover relief, and if the taxpayer subsequently makes a valid claim, the tax and interest will be repaid at that time.www.tax.org.uk/provisional-roll-over-relief-hmrc-nudge-letter
2.2 HMRC nudge letter on the remittance basis charge
HMRC is writing to non-dom taxpayers to explain the remittance basis charge (RBC) and request payment in cases it believes that it should have been paid.
In June 2022, non-UK domiciled taxpayers in HMRC’s ‘wealthy’ category will receive letters if HMRC has identified that they need to pay the RBC, or move to the arising basis. The letters will explain what they need to do to amend their 2020/21 tax return, and file a correct 2021/22 tax return. Amendments are required within 60 days, or HMRC may open an enquiry into the position. This follows a clarification in HMRC’s guidance on year counting, although the legislation remains unchanged.
2.3 HMRC nudge letter on provisional roll-over relief
The FTT has found that pension scheme members who took on the debts of the pension scheme did not make a pension contribution attracting tax relief.
The appellant, a scheme administrator for a number of registered pension schemes, had claimed relief at source for various individual member contributions to the pension schemes. Each member had given an IOU for a set amount of money to the scheme, which was regarded as the contribution, and they later transferred shares to the scheme to the value of the IOU to settle it.
The FTT agreed with HMRC that these were not pension contributions that attracted tax relief, as they were not monetary contributions. The judge stated that “the more logical construction is that Parliament’s intention was clearly that tax relief is only available in the tax year in which the taxpayer deprives himself or herself of either money or an asset which meets the criteria for an in specie contribution. The granting of an IOU deprives the taxpayer of nothing until it is honoured.”
Mattioli Woods PLC v HMRC  UKFTT 179 (TC)
2.4 Unauthorised transfer charge not upheld on scammed taxpayer
The FTT has ruled that an assessment applying an unauthorised payment charge for a pension withdrawal was invalid, as the taxpayer had not acted carelessly nor deliberately. She had been scammed out of her pension and was unaware that the loan was connected to the pension transfer.
The taxpayer, who was surviving by means of payday loans and pawning her belongings, took out a loan recommended by a financial adviser, who also recommended that she move her pension. She was unaware that the two were connected, but the outcome was the loss of her pension fund. HMRC argued that the loan she received, of which she had repaid well over half before becoming aware of the scam, was derived from her pension. An unauthorised payments charge was applied, along with a surcharge.
The FTT ruled that this was invalid, and allowed the taxpayer’s appeal. The loan was an unauthorised member payment, though the taxpayer did not know it, but the assessment was invalid. This was on the basis that the taxpayer had not acted carelessly nor deliberately, .and HMRC had issued a discovery assessment while the enquiry window was still open. Alternatively, the FTT also found that it would not have been just nor reasonable to apply the surcharge, although the unauthorised payment charge itself would have remained payable.
Curtis v HMRC  UKFTT 172 (TC)
2.5 Annexe found not to be separate dwelling
Multiple dwellings relief (MDR) has been denied on a property with an annex, as although it had been used for AirBnB lettings it was not suitable for use as a permanent separate residence.
The taxpayers, a married couple, bought a property and paid SDLT at the rate for the purchase of a single dwelling. They later filed an amendment on the basis that MDR was due, and appealed HMRC’s rejection. The annex they claimed as separate was over the garage, detached from the main house, with a separate lockable door and shower room. Systems such as the boiler, heating controls, and security alarms were separate from the main house. The previous owners had used it for longer term guests, and the taxpayers had stayed there when the main house was being renovated, then advertised it as a holiday let.
The FTT agreed with HMRC that no relief was due, as the annex was not suitable for use as a separate dwelling. It had no oven nor designated kitchen area, no separate postal address nor council tax bill. The kitchen area, consisting of a few appliances such as a microwave on the landing, with water needing to be fetched from the shower room, was not suitable for use as a long term home. It was just additional living space for the occupants of the main family home.
It was noted that suitability for occupants generally matters; it is not sufficient for the property to be suitable only for a particular type of occupant such as a relative or squatter.
Generally the assessment is multi factorial and there is no one size fits all and there is no exhaustive list of factors which can be applied to each and every case.
Dower & Anor v HMRC  UKFTT 170 (TC)
3. PAYE and employment
3.1 UK controlled foreign company state aid appeal dismissed
The EU General Court has upheld the EC decision that the UK’s controlled foreign company (CFC) rules did constitute illegal state aid. The case concerned the CFC rules in place in the UK between 2013 and 2018, specifically the group financing exemption.
In its original decision the EC found that the group financing exemption gave a selective advantage to some multinational companies when the financing income of a foreign group company was derived from decision-making functions in the UK. The EC ruled that the UK should recover tax from those companies that were unjustly advantaged by the exemption.
The UK Government and several affected businesses appealed the decision on a number of grounds. The EU General Court rejected all their arguments finding in favour of the EC.
3.2 New super-deduction guidance
HMRC has issued new guidance on the capital allowances super-deduction and special rate first year allowance.
The guidance covers:
- checking eligibility for the super-deduction or special rate first year allowance;
- working out how much can be claimed on qualifying plant and machinery costs; and
- how to calculate the balancing charge when disposing of an asset on which the super-deduction or special rate first year allowance has been claimed.
3.3 Loan interest payable disallowed due to unallowable purpose
The FTT has found that the main purpose of a loan relationship to which the taxpayer was party was to obtain a UK tax advantage. The loan therefore had an unallowable purpose, and no deduction was allowed for the resulting interest expenses.
The taxpayer, a UK incorporated company, was a member of a multinational group with its ultimate parent company in the US. It was set up to acquire a US group worth $1.1bn. The transaction involved a series of steps that sought to maximise group interest deductions whilst minimising taxable credit interest. Overall, the funding arrangements provided a deduction for third party interest in the US, and group interest in the UK with no taxable credits in the US, UK, or Cayman Islands where a finance company had also been set up. HMRC denied relief for over £40m of loan interest debits claimed by the taxpayer on the grounds that the loan had an unallowable purpose.
In reaching its decision, the FTT considered whether or not the main purpose of the loan arrangement was to obtain a tax advantage, and if it was, what proportion of the interest payment was attributable to that unallowable purpose. The FTT found that the presence of free-standing loan relationship deficits that were surrendered by way of group relief to UK members of the group, without any corresponding taxable receipts, did mean that the taxpayer had secured a tax advantage by being party to the loan relationship. Evidence, including reports and internal emails, showed the sole purpose of the funding arrangement was to obtain a UK tax advantage. The UK and Cayman Island companies had no employees or tangible assets, which further evidenced the lack of genuine commerciality in the loan agreements. As the main purpose for the taxpayer being party to the loan relationship was to obtain a UK tax advantage, no part of the loan had an allowable purpose and so it was correct that the interest payments be disallowed in full. The taxpayer’s appeal was dismissed.
JTI Acquisition Company (2011) Limited vs HMRC  UKFTT 166 (TC)
4. PAYE and employment
4.1 Delay to UK implementation of the global minimum tax rate
Following responses to its consultation on the implementation of the agreed global minimum tax rate, the UK Government has announced that the UK Pillar 2 legislation will first apply to accounting periods beginning on or after 31 December 2023, rather than 1 April 2023.
As part of the package agreed by the OECD to manage the taxation of multinational companies, the UK along with 135 other countries is due to introduce a global minimum tax rate in 2023. The Government had planned to implement the new rules from 1 April 2023 but following the recent consultation this has been delayed until 31 December 2023. This is to provide sufficient lead-in time for the final policy decisions to be agreed with OECD, and for businesses to take appropriate steps. The original implementation date would have been ahead of many other countries and would have put UK businesses at a competitive and administrative disadvantage.
A formal response to the consultation along with draft legislation is expected over the summer.
4.2 HMRC advises longer processing times on R&D tax credit claims
HMRC has announced that following an increase in irregular claims it is enhancing its extensive compliance checks into R&D tax credit claims. As a result of the increased checks the standard processing times will increase.
To combat abuse of the R&D tax credit system HMRC is carrying out enhanced checks on all R&D tax credit claims, which will increase processing times. HMRC now aims to either pay the tax credit or contact the claimant company regarding their claim within 40 days but hopes to return to the normal 28 days processing time as soon as it is able. HMRC has also requested that the following guidelines are followed:
- ensure that all entries on the R&D section of the CT return are completed in full;
- submit additional information alongside the claim to help HMRC process the claim quicker; and
- review the latest guidance on completing the return.
HMRC ask claimants not to contact the R&D helpline to check progress of claims and has requested that agents use the company’s online account to check the status of the claim. Claims submitted incorrectly, inflated, or fraudulently may incur a penalty.
4.3 Film co-production company eligible for Seed Enterprise Investment Scheme
The FTT has overruled an HMRC decision to refuse to issue Seed Enterprise Investment Scheme (SEIS) compliance certificates on shares issued by a film co-production company. It found that the taxpayer did have the intention to grow and develop its trade, and that its business activities were sufficient to constitute a qualifying business activity for the purposes of SEIS relief.
The taxpayer, a film production company, sought authority to issue SEIS certificates in relation to two investments. HMRC rejected the application on the basis that it failed to meet three conditions, a decision that the taxpayer appealed.
The first condition under consideration was the risk to capital condition. As with many film production companies the taxpayer was investing in only one film at a time. The FTT found that this did not mean that the taxpayer had no intention to grow and develop the trade, and that it was not unreasonable for the taxpayer to assume that a successful low budget production would result in the opportunity to secure a larger budget for a future production.
The second was whether or not the taxpayer was carrying on a qualifying trade. Based on the documentary evidence available, the FTT concluded that the taxpayer’s trade was the co-production of films. Many film and television productions are co-produced particularly for films requiring multiple locations and special effects. The FTT was therefore satisfied that the activities of co-production were sufficient to constitute a discrete trading activity.
The final consideration was whether or not disqualifying arrangements were used to artificially increase the SEIS relief available. In this instance the film rights were held by another entity, and only assigned or licensed to a production company at the point when the film title was viable to move to the pre-production phase. A special purpose vehicle was set up for each film. HMRC argued that special purpose vehicles would artificially increase the level of relief available compared to the rights and production sitting within one company. The FTT considered the development of intellectual property and the production of the films to be separate business activities requiring discrete skills and resources and so it was not artificial to split them into separate entities. In addition, the company initially holding the film rights did not issue any shares with the benefit of SEIS and so the FTT was satisfied that there were no disqualifying arrangements.
Having examined these three areas, the FTT found that HMRC were wrong to refuse to issue the compliance certificates.
Cry Me a River Ltd v HMRC  UKFTT 00182 (TC)
4.4 Deduction for amortisation of goodwill disallowed
A deduction for amortisation in respect of goodwill recognised on incorporation of a sole trade business has been denied by the FTT. There was no acquisition of new goodwill from an unconnected third party.
Two individuals formed a partnership to run an estate agency business in 1999. The partnership ended in 2010 when one of the partners retired, but the business continued as a sole trader. The retiring partner was paid £450k to transfer his legal ownership in the partnership property to the sole trader. The business was subsequently incorporated in 2013 and £900k of goodwill was recognised in the company accounts. Half of the goodwill was attributed to the shareholder’s original share of the partnership business. This was treated as pre-2002 goodwill with no tax deduction for amortisation. The other half was treated as an acquisition of goodwill and a tax deduction was claimed.
HMRC denied the deduction on the basis that the goodwill is inseparable from the business to which it relates, and as the business had not changed, and the shareholder of the appellant company had been involved throughout, then at no point had the goodwill been acquired from an unrelated party. The legislation deems that all goodwill will have been created pre-2002 if any one of the related parties was carrying on the business prior to that date. HMRC also argued that, although not recognised as a separate legal entity, it was the partnership that owned the goodwill and not the individual partners.
The FTT first considered who owned the goodwill prior to the dissolution of the partnership. It found that the partners did not own the underlying assets of the partnership, they had a beneficial interest in the partnership, including the goodwill. The FTT also considered what it was that was transferred on retirement, and found, as supported by the partnership agreement, it was the beneficial interest in the partnership that was transferred, not the underlying assets. The FTT concluded that as the goodwill was not acquired from the retiring partner, and as the goodwill was not created, or acquired from an unconnected third-party post April 2002, no deduction was available.
Beadnall Copley Ltd v HMRC  UKFTT 00183 (TC)
5.VAT and other indirect taxes
5.1 HMRC changes the tests for determining what is a business activity
HMRC issued a Business Brief setting out its revised tests for determining what constitutes a business activity for VAT purposes
As a result of numerous tribunal decisions concerning business and non-business cases, HMRC has replaced the previous test that applied. Historically, HMRC relied on the principles laid down in the Lord Fisher and Morrison’s Academy Houses Association cases, which were established over 40 years ago.
In light of recent decisions, the Business Brief confirms that HMRC will no longer rely on the principles established in the previous two test cases in determining whether or not an activity is business. It will instead rely on the following two-stage test:
- The activity results in a supply of goods or services for consideration; and
- The supply is made for the purpose of obtaining income therefrom (remuneration).
Businesses can no longer rely on the previous tests to decide whether an activity is business or not.
Customs & Excise Commissioners v Lord Fisher  STC 238
Customs & Excise Commissioners v Morrison’s Academy Boarding Houses Association  STC 1
5.2 VAT disallowed on purchase of cars
Where a taxpayer fails to provide sufficient evidence that the purchase of a car is intended only for business use, input tax cannot be claimed on the basis that it will not be considered business expenditure.
The FTT has ruled that where a taxpayer claims input VAT on the purchase of a vehicle, VAT is not recoverable unless it can be proven that the vehicle is unavailable for private use. An exception to this rule is where the vehicle is registered as a taxi or for private hire.
The FTT considered whether or not the taxpayer met the conditions for recovering VAT on the purchase of a car. The taxpayer was registered for VAT and carried out trade in camping, weddings and events. The taxpayer reclaimed VAT in relation to the purchase of two luxury vehicles on the basis that they would be used for business purposes, as well as some items of clothing and a personalised number plate.
The FTT found that there was not sufficient evidence to prove that the vehicle could not be used for personal use, which was the key test in recovering the VAT. Additionally, the FTT found that the clothing and personalised number plate were not for business purposes and therefore dismissed the appeal entirely.
Maddison and Ben Firth T/A Church Farm v HMRC  TC08496
6. And finally
6.1 A bit of a rattle
The Lee case this week (item 1.1 above) took us straight back Through the Looking-Glass. It reminded us of nothing so much as Tweedledee and Tweedledum agreeing to have their battle. For Tweedledum said Tweedledee had spoiled his nice new private residence relief. Tweedledee said we must pretend that owning land is owning a dwelling, but Tweedledum said we must pretend that we haven’t owned the land. Whose complete fiction will prevail? Only in our beloved tax world do we find such absurdities. Alice might think them both obviously wrong, but we know one of them has to win and we all have to pretend the winner was right. Fiction indeed; but, sadly, with money at stake.
Tweedledee, though, also tells Alice that she is in someone else’s dream. You can see his point. Sometimes, tax is just like that.
Lee & Anor v HMRC  UKFTT 175 (TC)
Approval code: NTAJ14062239
|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|