Weekly Tax Update 26 August 2020

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

Accounts 724599511
Ami Jack
Published: 26 Aug 2020 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 Tax Update and the Summer Bank Holiday

Tax Update will be taking a break next week, the next issue will be on 8 September.

2. Private client

2.1 Loan to company not an approved charitable investment

The FTT has found that funds loaned by a charity to the company that had donated them were non-charitable expenditure. It dismissed most of HMRC’s arguments, but held that as the funds had circled back to the company, allowing it two tax deductions, the motive for the arrangements was the avoidance of tax by the company.

A company made several donations to a small charity over two years. In 2006, it offered the charity further funds, but the charity did not have an immediate use for them. The company director suggested that it still make the donation, but the charity could loan the funds back to it. It offered to pay yearly interest of 24% as it could loan the funds on at a higher rate. The company and charity were closely linked, one of the two trustees being a company employee (later director), and the main company director occasionally also stood in for the trustee.

The FTT agreed with HMRC that the loan was non-charitable expenditure, and therefore the charity should have paid tax on the interest, though it differed from HMRC on the reasons. No independent advice had been taken, nor credit checks undertaken on the company, but the FTT found this was understandable given the close links. The key point was that funds had moved in a circle, and the company had received two tax deductions, one on the gift to the charity and one on the interest. The motive for the transactions was found to be the avoidance of tax by the company, and this was therefore non-charitable expenditure.

The FTT however reduced the quantum of the HMRC assessments, finding that the expenditure had been wrongly assessed. It commented that HMRC had relied heavily on its own guidance rather than the legislation when assessing whether or not the loan was non-charitable expenditure.

Reb Moishe Foundation v HMRC [2020] UKFTT 303 (TC)


2.2 CGT 30-day reporting: functionality increased

The online reporting system for disposals of residential property can now be used to report more than one disposal in a tax year.

When the system was introduced in April, only the first property disposal per tax year could be reported online, with paper forms required for subsequent disposals. This has now been fixed so that subsequent disposals can now be reported online, but it is still not possible to amend a return online.

The system now also allows personal representatives and those with power of attorney to file property returns online.



2.3  SC makes final decision in long-running pension case

The SC has agreed with the CA that a taxpayer’s omission to take funds from her pension, allowing them to pass to the beneficiaries of her Will, was a transfer of value for IHT.  The SC also overturned the CA decision on the transfer of the pension fund shortly before death. The SC found that this should be considered on its own, and was not a transfer of value as such.

Mrs Staveley had built up a company with her husband. When they divorced, she was granted a pension policy from the company, under which a lump sum would have been payable on her death to her estate and IHT would have arisen. She was terminally ill. Shortly before her death she transferred the pension to a personal pension plan (PPP), to ensure that none of the pension funds could revert to her ex-husband on her death. She did not take any pension benefits from the PPP. On her death, a lump sum was paid to her two sons, in line with her statement of wishes, free of IHT.

The courts have considered whether or not the pension transfer, failure to draw benefits, or both, were transfers of value for IHT. The CA held that both were, reversing the decision of the UT, and the executors appealed both issues to the SC.

The omission to take any benefits from the policy before death was found to be a transfer of value by the CA. The SC agreed with this, as the purpose of this decision was to benefit her sons, as shown by the statement of wishes. The discretion of the scheme administrator was not sufficient to break the link between the choice not to draw benefits and the increase in the sons’ inheritance.

The CA had found that the transfer to the pension scheme was not intended to confer gratuitous benefit, but that an associated operation was, and, as such, the transfer to the pension scheme was a transfer of value. The SC reversed this decision, finding that the transfer should be considered on its own, rather than linking this to the omission to take benefits. The sons could have benefited both before or after the transfer, depending on the decision made by the pension trustees, and her principal motivation was to remove her former husband from potential benefit.

One dissenting judgment held that both the transfer and omission were transfers of value, in line with the CA position.

HMRC v Parry & Ors [2020] UKSC 35


2.4  Making tax digital for IT

HMRC has released a list of questions and answers that arose during a making tax digital (MTD) for income tax webinar. 

MTD is due to be extended to sole traders and landlords from 2023. It will be mandatory for all sole traders and landlords with turnover exceeding £10,000 to use MTD for IT from the first accounting period beginning on or after 6 April 2023. MTD for IT is currently only available on a voluntary basis to some businesses.

Key points noted in the Q&A include:

  • HMRC will not provide any software, but some software developers will provide free software for taxpayers with simple affairs. Software developers are currently in discussion with HMRC to create their own products; the COVID-19 support measures will not be factored into the current trial, as there is insufficient time to build them into the systems;
  • HMRC expects to announce an increase in eligibility criteria for voluntary registration shortly; and
  • those who have been granted an MTD exemption for VAT, generally where it is not reasonable or practical for them to use computers or the interest, will automatically be granted one for IT.


3. PAYE and employment

3.1 Bonus not termination payment

The FTT has found that a bonus was employment earnings, not a termination payment, although entitlement to it was preserved in an agreement reached on termination of employment. The agreement did not alter its character.

The taxpayer was informed that his contract of employment would be terminated. He later agreed with his employer that it would instead end by mutual agreement, and they signed a compromise agreement. This preserved his entitlement to a bonus payment. He declared this as a termination payment, holding that his entitlement to it stemmed from the compromise agreement.

HMRC contended that the bonus was not a termination payment, as it had been earned some time before his departure. The FTT agreed with this, under the compromise agreement it was confirmed that the bonus would vest on the agreed schedule, which did not alter its character as employment earnings. Had his employment been terminated for cause, as was originally planned, he would have lost the bonus entitlement, but the compromise agreement did not alter its character by preserving it.

Lucas v HMRC [2020] UKFTT 329 (TC)


4. Business tax

4.1 UT rules on calculation of business profits

The UT has set aside an FTT decision on the recalculation of business profits for a gold bullion dealer. The methodology used produced a gross margin greater than the maximum profit margin accepted by the FTT for its activities.

The taxpayer carried on a trade as a jeweller and bullion dealer. The company experienced substantial growth over the period of eight years to 2014 when it focused its activities on purchasing scrap gold for smelting. The taxpayer acknowledged that its record keeping processes had not coped well with the increase in scale of its business. HMRC disputed £9m of cost of sales in 2011, as there were 23 days for which no or incomplete receipts and invoices could be found. HMRC also applied a ‘presumption of continuity’ to support an add back of cost of sales in other accounting periods. The FTT recalculated business profits using a daily average of amounts of cash purchases to determine the cost of sales for those missing days, but declined the presumption of continuity for any period other than 2010. HMRC and the taxpayer both appealed the FTT decision.

The taxpayer argued that the amount added-back by the FTT was excessive, as this resulted in a greater gross margin on its activities than accepted by the FTT. The UT agreed that the FTT’s method of reconstructing the amounts paid in expenses on the missing days could not be justified. The taxpayer’s appeal was allowed. The case was remitted back to the FTT to reconsider the extent of the taxpayer’s taxable profits for 2010 and 2011.

The UT dismissed HMRC’s appeal to apply the presumption of continuity to 2007 to 2009. Although there were weaknesses in the taxpayer’s record keeping in the earlier periods, it did not result in an under declaration of tax until the taxpayer’s business increased dramatically in 2010 and 2011. It was the sudden increase in turnover and the consequent reliance on hand-written IOUs in 2010 and 2011 that led to expenses being overstated.

Stirling Jewellers (Dudley) Ltd v HMRC [2020] UKUT 245 (TCC)


5. Tax publications and webinars

5.1 Tax publications

6. And finally

6.1 The importance of being digital

Article 2.4 highlights an issue looming on the horizon: the forthcoming introduction of making tax digital for income tax. Most, will, we hope, make the switch easily, but we do have a few qualms. For one thing, we have every sympathy with those taxpayers who prefer paper records.  Historically, a good clerk would have been perfectly capable of keeping a paper ledger, accurate to the last farthing. Why then must we switch to computers?

Perhaps look to 4.1, where a company, possessing in 2010 a turnover of £50million, did not possess a computer. Result: a £4million hole in the carbon copy accounts, despite honest efforts to keep them accurate, and needing the UT to sort it out.

Reader, there are worse fates than going digital.

Ref: NTGH60820103


Organisations CourtsTaxes etc
ATT – Association of Tax TechniciansICAEW - The Institute of Chartered Accountants in England and WalesCA – Court of AppealATED – Annual Tax on Enveloped DwellingsNIC – National Insurance Contribution
CIOT – Chartered Institute of TaxationICAS - The Institute of Chartered Accountants of ScotlandCJEU - Court of Justice of the European UnionCGT – Capital Gains TaxPAYE – Pay As You Earn
EU – European UnionOECD - Organisation for Economic Co-operation and DevelopmentFTT – First-tier TribunalCT – Corporation TaxR&D – Research & Development
EC – European CommissionOTS – Office of Tax SimplificationHC – High CourtIHT – Inheritance TaxSDLT – Stamp Duty Land Tax
HMRC – HM Revenue & CustomsRS – Revenue ScotlandSC – Supreme CourtIT – Income TaxVAT – Value Added Tax
HMT – HM TreasuryUT – 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.