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 Temporary closure of HMRC phonelines
The HMRC helplines for CT and VAT will be closed on three Fridays in December. This is to free up staff to deal with the post backlog. This is a trial, which may lead to further closures next year.
The CT and VAT helplines will be closed on 3, 10, and 17 December 2021, with the exception of the bereavement line. HMRC has previously stated that it is working through a large backlog of correspondence that has built up over the past year.
This is a trial, and HMRC will make an announcement in the first week of January on whether or not further measures are needed.
2. Private client
2.1 Tax administration and maintenance day
Last week, the Government published a command paper on tax administration and maintenance, along with consultations, calls for evidence, and other documents related to tax policy development and the administration, maintenance and reform of the tax system.
The more significant announcements are included in separate articles below. Other points to note include:
- the Government has decided not to change the timing of tax payments for individuals this Parliament, but will conduct a pilot on calculating tax liability in-year. A summary of responses to the call for evidence on timely payment has been published;
- a call for evidence on self-assessment registration for sole traders and landlords has been published, including the suggestion that registration may be required at an earlier date;
- the Government has no current plans to explore changing the tax year;
- the existing concession that removes trustees and personal representatives from income tax where the only source of income is savings interest and the tax liability is less than £100, will be formalised. The precise form and level of the change will be confirmed following consultation;
- a new HMRC stakeholder forum will explore ideas on how to tackle offshore tax non-compliance; and
- further work will be undertaken on the use of third-party data and pre-population
2.2 Tax day: minor changes to CGT
The Government has responded to the Office of Tax Simplification (OTS) review of CGT, adopting five recommendations, including an extension to the window for no gain no loss transfers between separating couples. Some other recommendations are under consideration.
As part of the tax and administration announcements, the Government has responded to the OTS review of CGT. It has adopted five technical suggestions from the second report, on technical and administrative issues, and five others are being considered. These include that:
- the window for no gain no loss transfers between separating spouses will be extended. This will be consulted on to determine the details;
- the Government will look into moving CGT online accounts into a single digital account;
- other recommendations that remain under consideration include the proposal to treat holdings of the same shares in separate portfolios as separate pools, and improving the process for private residence relief nominations.
2.3 HMRC ‘nudge’ letters: capital gains on residential property disposals
HMRC has announced a new campaign of ‘nudge’ letters, sent to taxpayers that HMRC believes may have made errors in declaring residential property disposals. The letters aim to get them to correct errors without further intervention from HMRC, such as an enquiry, and signpost them to guidance.
These letters will be sent to taxpayers who included a claim for employment expenses in their 2019/20 self-assessment returns. They will set out the conditions for claiming expenses against employment income, and ask taxpayers to check that their claims were correct. If they identify an error they are asked to correct it by 31 January 2022 by amending their return.
The letters were to be sent in November 2021, with agents copied in where a taxpayer was represented. They include links to further guidance, and remind taxpayers about the need to retain records of expense claim.
2.4 HMRC ‘nudge’ letters: claims to carry back gift aid
HMRC has announced a new campaign of ‘nudge’ letters, sent to taxpayers that HMRC believes have made invalid claims to carry back gift aid relief. The letters aim to get them to correct errors without further intervention from HMRC, such as an enquiry, and signpost them to guidance.
The letters will be sent to taxpayers who included a new or amended claim for gift aid carry back when amending their return. These claims can only be made on an original return, filed on time, and not by amendment. The taxpayers will be asked to amend their tax return to return the claim to the original figure, if it was amended, or remove the claim if it was new. They are asked to do so within 2 months of the letter being issued. If the claim is not corrected HMRC will issue an assessment or open an enquiry.
2.5 HMRC educational letter: foreign tax credit relief
HMRC will be sending educational letters to taxpayers on foreign tax credit relief on employment income. The letters explain the rules with the aim of ensuring correct returns are submitted in future years.
The letters will be sent to taxpayers who claimed relief for foreign tax paid on their employment income in their 2019/20 tax return. The letter sets out the conditions for making such a claim, and asks them to bear these in mind when considering claims on a 2020/21 tax return.
2.6 CA rules on date right to acquire shares arose
The CA has upheld a UT finding that an employment related share option conferred the right to acquire securities at the date of grant, before the taxpayer became non-resident. It also agreed that some restricted shares he had also been granted were acquired by reason of his employment, as a share for share exchange before the restrictions were lifted did not break the link.
The taxpayer was employed by a company in Bermuda and was granted share options by reason of his employment. These vested in three tranches and he exercised them later. The FTT found that he became non-UK resident before the third tranche vested, which was not challenged further. HMRC disputed the date on which he acquired the right to acquire shares. Any rights acquired when resident would be subject to UK tax.
The UT found, on an analysis of the scheme documentation, that the grant of the option was the date on which the right was acquired, so all three tranches were subject to UK tax. This overturned the FTT finding that the right was acquired on the vesting date, which it had justified by finding that the vesting of the options was conditional on the taxpayer’s continued employment. The CA agreed with the UT, considering the case law, and finding that HMRC was right in stating that a right to acquire securities does not have to be immediately exercisable to fall within the statute, but that the employee just has ‘a contractual or other legal right, upon whatever terms, to acquire securities’.
The taxpayer was also granted restricted shares, in 2002. These were subject to a share for share exchange before restrictions were lifted in 2005. He contended that he acquired them as a shareholder, as when they were exchanged all shareholders were granted shares in the new company, whether or not they were employees. Both the UT and FTT found that he acquired these as a director or employee, so they were subject to IT, as the share for share exchange did not break the link between the acquisition of the shares and his employment. The CA also dismissed his appeal.
Charman v HMRC  EWCA Civ 1804
3. Trusts, estates and IHT
3.1 Tax administration and maintenance day: no plans for IHT reform
The Government has responded to the Office of Tax Simplification (OTS) report on the technical design of IHT, stating that it has decided not to proceed with any changes at the moment.
As part of the announcements on Tax administration and maintenance day, the Government has responded to the OTS report on the technical design of IHT. This was the second part of its review of IHT, which was commissioned by the then Chancellor in January 2018.
The response reads:
‘It is clear from recent reports on this subject … that there are a wide range of views about how to reform IHT. … Any potential changes to reliefs and the regime for lifetime gifts must be considered in this wider context. As you acknowledged, the report also raised wider questions about policy issues. As a result, after careful consideration of your recommendations, the Government has decided not to proceed with any changes at the moment, but will bear your very valuable work in mind if the Government considers reform of IHT in the future’.
3.2 Some closed trusts must be registered
HMRC has confirmed that non-taxable trusts that became liable to register when the trust register was expanded must be registered with the trust registration service (TRS). This includes trusts that were wound up before the IT system was updated to allow registration, but after the date the register was expanded.
The trust register was expanded to include some non-taxable trusts on 6 October 2020, but due to delays with the HMRC IT system it was not possible for anyone to register non-taxable trusts until 1 September 2021.
In response to a query, HMRC has informed the professional bodies that trusts that became liable to register on 6 October 2020, but were wound up before 1 September 2021, are not exempt from registration. A record should be opened on the TRS, then closed, by the normal deadline of 1 September 2022.
4. Business tax
4.1 Tax administration and maintenance day: Research and Development consultations
The outcome of the consultation into Research and Development (R&D) tax reliefs has been included in the annex to a newly published policy paper on R&D tax reliefs. This provides further detail on the reforms announced in the Autumn Budget and the associated next steps.
The Government announced in the Autumn Budget that it intended to reform R&D tax reliefs by expanding qualifying expenditure to include data and cloud costs, refocussing R&D relief on innovation carried out in the UK, and improving compliance. The details of these measures have now been published and include:
- two new categories of qualifying expenditure: licence payments for datasets and cloud computing costs attributable to computation, data processing and software;
- a restriction on relief for R&D activities subcontracted to third parties. Relief will only be available where that third party performs the work in the UK. In addition,
- expenditure incurred on payment for externally provided workers will only be available if those workers are paid through a UK payroll; and
new requirements for advance notification and digital submission of all claims to improve compliance.
Draft legislation will be published for consultation in the summer of 2022, to take effect from April 2023.
The Government has also published a report on businesses experience of making R&D tax claims.
4.2 Tax administration and maintenance day: transfer pricing documentation
The outcome of the consultation into transfer pricing documentation has been published. Large businesses will be required to maintain a master file and local file, and a supporting summary audit trail from April 2023. The Government has no plans to introduce an International Dealings Schedule.
The Government has announced that from April 2023 new legislation will be introduced requiring businesses within the scope of country-by-country reporting to maintain, and provide on request, master file and local file documentation. In response to concerns raised on the requirement to include a detailed evidence log in UK local files, a more limited requirement in the form of a supporting summary audit trail will be introduced. This will be an additional legislative requirement, which will be accompanied by supporting guidance. The Government intends to consult on the draft legislation, and provide further practical guidance on maintaining appropriate documentation, in 2022.
There are no plans to introduce, or consult further, on the introduction of an international dealings schedule but this issue will be kept under review.
4.3 Tax administration and maintenance day: calls for evidence and consultations
Several further business tax announcements published on tax administration and maintenance day are noted below.
The following consultations and calls for evidence have now opened:
- the umbrella company market, the role they play in the labour market and how they interact with tax and employment rights systems. This consultation closes on 22 February 2022;
- modernising tax debt collection from non-paying businesses, considering how HMRC can modernise its collection of tax debts to reflect the changing nature of the economy and new practices including those who conduct their business in the UK without a presence or physical assets here. This consultation closes on 22 February 2022;
- implementation of the OECD’s Mandatory Disclosure Rules for Common Reporting Standards, which are intended to apply at a global level. The regulations require information on reportable transactions and structures to be disclosed to HMRC. This consultation closes on 8 February 2022;
A summary of responses on the consultations for Simplifying the VAT Land Exemption, Making Tax Digital for CT, reform of the taxation of securitisation companies and the review of tax administration for large business have also been published.
5. Indirect taxes
5.1 The UT issues ruling in respect of consultancy services provided to students
The taxpayer lost its appeal regarding the VAT treatment of services provided to foreign students
The taxpayer provided career coaching and support services to foreign students studying in the UK. The VAT treatment of these supplies had been considered by the FTT, which found that the taxpayer’s supplies were not considered to be educational and that from July 2016 onwards, those supplies were made to the parents of the students, rather than the students themselves. Prior to July 2016, the FTT determined that the supplies were made to the students, not the parents.
In making this determination, the FTT found that HMRC’s argument that visas held by the students, allowing them to study in the UK, meant that their usual place of residence was the UK; however, the FTT also found that the taxpayer had failed to establish the usual place of residence for pre-July 2016. The result was that the FTT found that pre-July 2016 supplies should be subject to UK VAT.
The basis of the taxpayer’s appeal to the UT was in relation to the pre-July 2016 supplies to the students only. The UT considered whether or not the student’s usual place of residence should be the UK, where they were living when at university, or at their overseas addresses.
The UT considered the evidence of the students’ usual place of residence presented by the taxpayer and found that, whilst the FTT had failed to consider the evidence presented by the taxpayer sufficiently, the taxpayer had still failed to demonstrate that all of its students pre-July 2016 resided outside the UK.
The UT found that the FTT had erred in law and therefore unmade its original decision; however, the result was unchanged, which resulted in the taxpayer’s appeal being dismissed.
Mandarin Consulting Limited v Revenue and Customs  UKUT 292 (TCC)
5.2 Tax administration and maintenance day: consultation on SDLT published
One of the consultations published on tax administration and maintenance day is on SDLT. The Government is considering options to reform the rules on mixed use property and multiple dwellings relief (MDR), and the interaction between the two.
The Government is considering options to reform the rules on mixed use property, and multiple dwellings relief (MDR), as it has concerns that the current system is resulting in incorrect or abusive claims.
Mixed use property transactions cover a wide variety of purchases, as the majority of the property could be either residential or commercial. The calculation for SDLT on mixed use property may be changed to an apportionment basis, where residential rates apply to the proportion of the property purchase classed as residential, and non-residential rates for the rest.
For MDR, the consultation notes that an industry of SDLT reclaim agents has emerged, who contact taxpayers after submission of an SDLT return to discuss whether or not to amend the return to claim MDR. The concern is that unreasonable claims are being made where in fact there is only one dwelling. There have been a number of recent FTT cases on this topic. Options for reform include making MDR only apply where dwellings are purchased for a qualifying business use, whether that it all the dwellings in one transaction, or if there is a mixed transaction then only allowing it on the dwellings in the transaction that meet those criteria. Another option would be to restrict MDR to purchases where dwellings of a significantly lower value than the main dwelling are included, for example annexes, as a ‘subsidiary dwelling’ rule.
The consultation will close on 22 February 2022.
5.3 Decision on validity of discovery assessment upheld by UT
The UT has found that a discovery assessment for SDLT was valid as, on the facts, the taxpayers had not made an adequate disclosure in the SDLT return. The officer who found that SDLT had been underpaid made a valid discovery.
The taxpayers had entered into an SDLT avoidance scheme, where the consideration declared on the SDLT return was artificially reduced by means of a sub-sale. HMRC issued a discovery assessment for SDLT on the value of the non-reduced consideration. The validity of the scheme was not considered by the UT, but the taxpayer sought to overturn the FTT finding that the discovery assessment was valid.
The UT dismissed the appeal, concluding that the FTT was entitled to find that the disclosure, in the form of the SDLT return and disclosure note, made by the taxpayers was insufficient to show a hypothetical HMRC officer that tax had been underpaid. It gave some detail, but failed to explain the steps involved in the scheme, that a named pre-planned avoidance scheme had been used, and to explain why the total amount should not be taxed. This meant that when an HMRC officer later identified the insufficiency of tax, a discovery had been made and a valid discovery assessment could be issued.
The UT also refused to take into account an HMRC technical news publication that mentioned a similar scheme, and whether or not it meant that a hypothetical officer should have been able to identify the scheme from the original disclosure. This was not argued before the FTT, and the UT decided that it would be unfair to HMRC to admit this evidence on appeal.
Carter & Anor v HMRC  UKUT 0300 (TCC)
6. Tax publications and webinars
6.1 Tax publications
The following Tax publications have been published.
The following client webinars are coming up over the next week.
• 14 December 2021: Professional Practices Autumn Webinar Series
7. And finally
7.1 Counting down the days, counting up the tax take
Advent, that time of spiritual preparation and daily morning chocolate, as the Holy family travels to Bethlehem, for a decree had come that all the world should be taxed.
And, had we but known it, we could have celebrated with a much more suitable Advent calendar. Forget chocolate – now you can get a tax Advent calendar. In aid of the Tax Advisers’ Charitable trust, those more efficient than your author are counting down the days with an Advent tax every day, including Pitt’s clock tax of 1797.
Old time has a flown, and it now seems rather too far into Advent to change our calendars. Bother. Still; we can lay in a stock for next year.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.