Monthly Tax Review. Gabelle MTR Ltd. A Periodic Update for Professional Advisers

Transcription

1 Monthly Tax Review Gabelle MTR Ltd A Periodic Update for Professional Advisers

2 CONTENTS 1. CAPITAL GAINS TAX 1.1 Legislating Extra Statutory Concession D33 2. INHERITANCE TAX 2.1 Strengthening the Tax Avoidance Disclosure Regimes 2.2 Tackling Offshore Tax Evasion 2.3 HMRC Trusts & Estates Newsletter 2.4 Amendments to their EBT Guidance in the Inheritance Tax Manual 3. STAMP TAX Nothing to report. 4. PERSONAL INCOME TAX 4.1 Ponzi-scheme Interest Taxable (Rusling) 4.2 Pensions: Updated Individual Protection 2014 Guidance 4.3 VCTs: Nominee Information Regulations made 9.3 Strict Liability Criminal Offence for Offshore Evaders 10. ADMINISTRATION 10.1 New LDF Restrictions 10.2 Contractor Loan Schemes Settlement Opportunity 10.3 Time is running out to use the EBT Settlement Opportunity 11. EUROPEAN AND INTERNATIONAL 11.1 Transfer of Assets Abroad (Fisher) 11.2 HMRC U-turn on Taxable Remittances and Loans 11.3 Common Reporting Standard Consultation 11.4 FATCA Update 12. RESIDUE 12.1 Controversy over QCs who give 'Deliberately Misleading' Tax Advice APPENDIX 5. BUSINESS 5.1 Main Object Test (Lloyds TSB) 5.2 Goodwill and Termination Payments (Devaraj) 5.3 Updated Definition of Deemed Contractor for CIS Purposes 5.4 Creative Industry Tax Reliefs brought into Effect 5.5 HMRC Help Sheet Company Purchase of Own Shares 6. EMPLOYMENT 6.1 Tax on Termination Payment (Moorthy) 6.2 Employee not Liable for PAYE underdeduction (Sparrey) 6.3 HMRC launches Consultation on Travel and Subsistence Payments 6.4 OTS Final Report on Employee Benefits and Expenses 7. NATIONAL INSURANCE 7.1. Does a Liability to Class 2 NICs arise on Income from Property? 8. VAT & CUSTOMS DUTIES 8.1 Recovering Input Tax on Professional Services (Airtours) 9. COMPLIANCE 9.1 Terminal Illness not a Reasonable Excuse (Roper) 9.2 Penalty Reduced for "Special Circumstances" (Dalziel Steelfixing) 1

3 1. CAPITAL GAINS TAX 1.1 Legislating Extra Statutory Concession D33 HMRC are seeking views on introducing legislation to replace the long-standing Extra Statutory Concession D33. ESC D33 covers a number of circumstances where a capital sum is received from a right of action. The concession was amended in January 2014 so that only the first 500,000 of a capital sum where there is no underlying asset was exempt, and exemption for amounts in excess of this had to be made in writing to HMRC. This consultation seeks views on introducing a limit of 1,000,000 with amounts in excess of this liable to Capital Gains Tax (CGT). It also seeks views on legislating the relief given by ESC D33 for personal compensation or damages and indemnities. The closing date for responses is 15 September (HMRC Consultations ) Additional commentary Adviser Q&A: HMRC s consultation on legislating ESC D33 Following the House of Lords decision in the case of HM Commissioners of Inland Revenue ex parte Wilkinson (2005 UKHL 30) HMRC have been reviewing all its concessions, and is consulting on the enactment of ESC D33 through primary legislation. Why was ESC D33 introduced? ESC D33 was introduced following the decision in the case of Zim Properties Ltd v Proctor (58 TC 371). In this case Zim Properties were selling a property, but the transaction failed to complete because the solicitors did not complete the paperwork correctly. The company received a sum of money from the solicitors in settlement of an action for negligence. The company argued that the amount received should be treated as if it were a part disposal of the property, whereas the Revenue contended that the amount received derived from the right of action (a chose in action) which was an asset separate from the property which the company wanted to sell. The High Court found that as the property was unaffected by the action there was no part disposal, and agreed with the Revenue, holding that the company s right to sue the solicitors was the source of the damages. This decision meant that in most situations there would be no base cost attributable to the chose in action and none of the reliefs that might have been available on a part disposal of any underlying asset. ESC D33 was introduced to address these issues, although most of the text of the concession is, as we will see, a resume of the legal position of various types of compensation. D33, in many respects, is not really a concession at all. What is the basic position arising from Zim and how is this treated post-d33? Paragraphs 2 to 7 of D33 set out how the chargeable gain on receipt of a capital sum for a right of action should be calculated following the decision in Zim Properties, and do not propose any concessionary treatment. New legislation is not required, and this section of D33 ( the strict position ) will simply form part of HMRC guidance. Paragraphs 8 to 10 set out an alternative to the strict position set out in paragraphs 2 to 7 where there is an underlying asset. Instead of following the principle that any proceeds relate to the chose in action, where the proceeds can be related to an underlying asset the capital gains computation can operate on the basis of a part disposal of the underlying asset. This is essentially what the company was arguing in Zim Properties, meaning, paradoxically, the Revenue are permitting a treatment they were seeking to deny through the courts. As a result, part of the base cost of the underlying asset can be deducted from the proceeds from the chose in action. Furthermore, any reliefs or exemptions that can be attributed to the underlying asset will be available on the disposal of the chose in action. This treatment largely follows the decision in Pennine Raceway Ltd v Kirklees Metropolitan Council (No 2) (1989 STC 122) where it was held that compensation received from the Council following the revocation of planning permission was derived from the company s licence to conduct drag racing rather than from the right to sue the council. This meant that part of the cost of the licence could be deducted from the proceeds from the chose in action. 2

4 HMRC take the view in the consultation document that as D33 reflects the position following Pennine Raceway, there is no need to introduce legislation to permit this treatment. What changes are proposed in the consultation document? Paragraph 11 looks at, for example, compensation for poor professional advice or for mis-selling of financial products. Prior to January 2014 any gain on the disposal of such rights was, by concession entirely exempt from CGT. In January 2014 the concession automatically applied to compensation up to 500,000. If compensation was received above that limit the taxpayer has to submit a claim in writing to HMRC. HMRC take the view that it would not be practical to legislate for this amended concession, so are proposing an absolute limit of 1m exemption. Compensation above that amount will be subject to CGT. They have sought views as to whether 1m is the right level, and whether anyone is aware of situations where taxing the excess above 1m would cause hardship. The consultation is limited, therefore, to the quantum of the exemption, and whether 1m is a fair and reasonable limit. How is personal compensation treated? Paragraph 12 looks at the position with personal compensation or damages. TCGA 1992, s 51(2) exempts compensation from CGT if it is paid to the individual personally for any wrong or injury suffered. By concession this is extended to cover payments to relatives or personal representatives for compensation for emotional stress caused by the death of another person or for loss of financial support. The legislation also exempts personal compensation paid to an individual for any wrong or injury suffered by someone in their profession or vocation, for example in relation to unfair discrimination, libel or slander, or breaches of contractual duties or torts. By concession this is extended to cover any wrong or injury suffered by an individual in their trade or employment, and HMRC are seeking views on whether this concessionary treatment should be legislated by extending s 51. This may seem an odd question for consultation as it seems inconceivable that any respondent would object to the extension in statute. 3 What is the position with regard to payments under warranty? Paragraph 13 looks at the position regarding payments made under a warranty or indemnity. The principle in Zim Properties is not regarded as applying where the payment under a warranty or indemnity is made under the terms of the sale agreement. The consultation highlights one particular issue with regard to s 49(1)(c), under which no allowance is to be made in a CGT computation for any contingent liability in respect of a warranty or representation made on a disposal by way of sale or lease of any property other than land. If after the sale, a payment is made to the purchaser under a warranty or representation, there will be an adjustment to the CGT computation. However, s 49(1)(c) does not apply to payments made under an indemnity. HMRC have proposed that this section should be extended to include indemnities. (Paul Howard s article in Tax Journal ) 2. INHERITANCE TAX 2.1 Strengthening the Tax Avoidance Disclosure Regimes Extracts from the Consultation Document 2.36 Inheritance Tax (IHT) was brought into DOTAS with effect from 6th April 2011 to detect a specific type of IHT avoidance involving the use of trusts. Arrangements must be disclosed if they involve property becoming held on relevant property trusts and a main benefit is the avoidance or reduction of an IHT entry charge when property is transferred into such trusts There have been few disclosures under this hallmark. HMRC s understanding is that this is in part because of the narrow scope of the existing hallmark and also because promoters claim that their schemes are substantially the same as pre- April 2011 schemes and as such are outside of the current DOTAS requirements The Government is considering how to update the IHT provisions in DOTAS to ensure the regime operates more effectively, delivers its policy objectives, provides meaningful information to HMRC and supports Accelerated Payments consistently by requiring disclosure of schemes designed to avoid IHT during a person s lifetime or on their death.

5 The proposed changes 2.41 These changes would result in the need to disclose IHT schemes sold to clients and implemented after the changes proposed in this consultation take effect. This includes: schemes newly devised after the change; new variants of pre-existing schemes; and existing schemes identified by the revised hallmark which continue to be sold, where any person enters into the first transaction with a view to implementing the scheme after the change Disclosure would not be required in relation to any scheme where the relevant steps included within a scheme had already commenced before the change. In line with the general DOTAS policy HMRC s interest would essentially be in those schemes where a person makes a firm approach to another person with a view to making a scheme available for implementation by that person or others in this case after the changes to DOTAS had been made A key element of any change would be to ensure that any new disclosure requirements applicable to IHT remain tightly targeted, describe the avoidance which HMRC are interested in, and do not catch IHT planning that involves the straightforward use of reliefs and exemptions. The Government welcomes comments on how the right balance might be achieved and on the proposals described below. The first proposal is to amend the existing hallmark so that arrangements designed to avoid or reduce an immediate charge to IHT are caught, rather than the much narrower focus on the entry charge related to transfers into relevant property trusts. The second proposal is to introduce a requirement to disclose arrangements which, although not giving rise to an immediate charge to IHT, are intended to reduce or avoid that tax on death. This would include, for example, arrangements that sought to circumvent the reservation of benefit rules, or the rules for deducting liabilities introduced by Finance Act The Government has passed antiavoidance legislation to tackle these and other areas and arrangements that seek to get around such legislation should be reportable under DOTAS. 4 The third proposal is to extend the application of some of the general DOTAS hallmarks, such as the confidentiality and premium fee hallmarks, to include IHT. This would help ensure that anything particularly innovative or where a promoter seeks to design their way around the detail of the extended IHT hallmark would also fall to be disclosed. But this is not intended to catch arrangements that fall outside of the IHT hallmark where they involve the straightforward use of reliefs and exemptions. A targeted hallmark 2.44 The changes described above are those that the Government believes are needed to ensure that HMRC have a much greater flow of information about the use of avoidance arrangements in IHT. Arrangements are defined for DOTAS as including any scheme, transaction or series of transactions. However, the Government recognises that reliefs and exemptions are used legitimately in many arrangements by the vast majority of people. The Government wants to ensure that the hallmark is appropriately targeted without inadvertently putting an information requirement under DOTAS on situations where a relief is being used in the way that the legislation intended it to work, or for normal family arrangements that take place after death. So that the application of DOTAS to IHT does not pick up what would be regarded as acceptable tax planning, it is proposed, as a further safeguard, that only arrangements which an informed observer could reasonably conclude are an IHT avoidance scheme or arrangement would be disclosable. Straightforward use of the existing generous IHT reliefs and exemptions would not be disclosable For example, the spouse and civil partner exemption is designed to ensure that transfers between spouses and civil partners are exempt from IHT, recognising the unique legal commitment entered into. The exemption means that, for example, on the death of the first spouse the survivor does not have to sell the family home in which they have both been living. Where an individual person uses a standard Will to make use of the exemption in a straightforward way, the Government would not want sight of this transaction under DOTAS Equally, arrangements which are permitted by the fundamental structure of inheritance tax would not necessarily have to be disclosed. For example, where after the death of his first wife the deceased remarried, he may wish to ensure that the assets from his first marriage pass to the children of that

6 marriage. He can achieve this by leaving that part of his estate on revocable interest in possession trusts for his second wife, with remainders to his children. If the life interest is brought to an end whilst the second wife is still alive, she will be treated as making a potentially exempt transfer which will be an exempt transfer on her surviving seven years. The assets pass down a generation free of inheritance tax because of the structure of the tax. However, if the surviving spouse s interest in possession was terminated after the first spouse s death but in a way that circumvented the reservation of benefit rules so that the surviving spouse obtained continuing access to the property she shared with the deceased, such a scheme would be disclosable Similarly, business property relief and agricultural property relief are designed to ensure that businesses do not have to be broken up and sold to pay IHT and to encourage entrepreneurs to invest in businesses and take the associated risks. Investing in AIM shares with the intention of qualifying for business property relief having owned them for two years and then giving them into a trust which immediately sold them would not be disclosable. This is simply the natural consequence of a relief which does not require the donee to hold the business property for any minimum period. However, doing so, but in such a way that what is effectively a double deduction is obtained by circumventing the liability provisions in Finance Act 2103, would be disclosable Likewise, leaving 10% or more of an estate to charity which would result in IHT being charged at the lower rate of 36% on the remaining estate would not trigger any disclosure requirement. However, a gift to a charity which circumvented the anti-avoidance provisions relating to the charity exemption and did not give the full economic benefit of the gift to charity on a permanent basis would be disclosable whenever devised if first implemented after the change in the DOTAS requirements Arrangements would not necessarily have to be disclosed even though they may involve a mixture of exemptions, reliefs and transfers. For example, a farmer may transfer his farm to a relevant property trust and could be eligible for annual exemption and agricultural and business property relief depending on circumstances. If there was nothing more to the arrangements, an informed observer would see this as acceptable tax planning which would not need to be disclosed HMRC appreciate that this is a complex area and that promoters, advisers and individuals will want some degree of certainty about whether a particular arrangement or transaction would be disclosable. While it will not be possible to provide a list of which arrangements would be caught or give any form of advanced clearance, HMRC would be willing to work with interested parties to provide greater clarity in guidance as to when disclosure would be required. The section of the DOTAS guidance relating to the new Employment Income hallmark introduced towards the end of 2013 includes a number of examples to demonstrate how that hallmark is intended to operate and that approach could also be applied to IHT. The IHT hallmark under DOTAS and Accelerated Payment 2.56 There is of course a link between a scheme being disclosed under DOTAS and HMRC giving an Accelerated Payment notice. Such notices can be given where there is an open enquiry or appeal in respect of the tax advantage purported to arise through implementation of a scheme disclosed under DOTAS. The way in which Accelerated Payments interacts with IHT would be different for lifetime charges than it would be for charges following death For lifetime IHT charges an Accelerated Payment notice could be given during the scheme user s lifetime where a chargeable event has occurred in relation to a scheme disclosed under DOTAS and an IHT return has been delivered to HMRC bringing the tax within the rules for giving an Accelerated Payment notice For IHT chargeable following death no Accelerated Payment notice could be issued until after the person had died and an IHT account had been delivered, irrespective of when the scheme was made available by the promoter or implemented by the user It is not the case that all inheritance tax disclosures would automatically trigger an Accelerated Payment notice but the requirement to disclose would enable HMRC to consider whether they wished to challenge the scheme. Q7 To what extent do the proposals strike the right balance between ensuring that IHT avoidance is brought within DOTAS but that legitimate estate planning is not disclosable? If not, how might this balance be best achieved?

7 Q8 Does the proposed approach ensure so far as possible that legitimate claiming of reliefs and exemptions does not have to be disclosed? If not, what alternative proposals would achieve that aim? (HMRC Consultations reported on ngthening-the-tax-avoidance-disclosure-regimes) 2.2 Tackling Offshore Tax Evasion Extracts from Consultation Document Extending the scope of the offshore penalties regime to Inheritance Tax 2.8 IHT is, alongside IT and CGT, one of the most significant tax regimes evaded through the use of offshore territories and complex structures. A sample analysis of 700 offshore disclosures concluded since the Liechtenstein Disclosure Facility started shows that approximately two-thirds included IHT implications Inaccuracies in IHT accounts and other documents are subject to a penalty based on the potential lost revenue and the behaviour of the person liable to complete the IHT account or document. A penalty would also be in point if an IHT account is not filed under section 245 of the Inheritance Tax Act Inheritance Tax due following a death 2.14 As with other personal taxes, the opportunity to evade IHT arises due to the increased opportunity to hide assets held overseas from HMRC. Generally, personal representatives of the deceased are accountable, as they are required to complete and return an IHT account for the deceased s estate. Offshore penalties apply in respect of IT and CGT payable, however any IHT also payable does not yet attract a higher penalty, despite the assets concerned being hidden offshore IHT is due six months after the end of the month in which the death occurs (when the transfer of assets is deemed to have taken place) and the IHT account is due to be filed within 12 months. There may be several people with an interest in, and the opportunity to, exploit offshore secrecy to evade tax. In the case of a death estate, offshore secrecy may have been taken advantage of by the deceased, the personal representatives, or the beneficiaries. Q1 Do you consider it appropriate to extend the offshore penalties regime in the case of offshore 6 assets which are part of the death estate and liable to IHT? If you do not, please say why. Q2 Do you consider it appropriate to extend the offshore penalties regime in the case of transfers of assets into offshore structures which give rise to IHT? If you do not, please say why. Calculating offshore penalties for Inheritance Tax 2.22 The level of offshore penalty for failure to declare IT and CGT is based on the territory where the income or gains arise, and whether the UK has an information sharing agreement with that territory, as well as the quality of the arrangement Typically, Double Taxation Agreements and Tax Information Exchange Agreements provide for information exchange for the purposes of IT (and CGT) only, although newer treaties have started to cover all taxes. Similarly, data received annually under the European Union Savings Directive provides for information exchange, but on savings income only, not account balances. While such factors make it easier to find out about income and gains arising offshore they do not necessarily apply directly in the case of obtaining asset values for IHT purposes. However, the comprehensive information due to be exchanged under the Common Reporting Standard will include account balances too, which are more appropriate for IHT matters as this will include non-interest-bearing accounts Offshore penalties for IHT could be linked to a new table of designated territories, based on the newer treaties or include those that specifically cover IHT too. However, for simplicity and to remain consistent with the other taxes, our preference is to retain one table for all the personal taxes covered IT, CGT and IHT despite the lack of alignment with provisions to obtain asset values. Q3 Do you agree that offshore penalties for IHT should be calculated using the same classification for territories as applies for IT and CGT? If you do not, what factors should a new classification take into account and why? 2.25 The category of offshore penalty for IT and CGT depends on where the income or gain arises. For IHT, we would need to consider the location of assets. There are, depending on the unpaid liability giving rise to a penalty, choices about which location needs to be taken into account.

8 2.26 For a death estate, it would appear reasonable to consider the location of assets outside of the UK at the date of death. Q4 Do you agree with our view about the location of assets in relation to a death event? If you do not, what could constitute a better approach? 2.27 For a transfer, the penalty could be based upon either the initial or the final location of the assets. Our preference is to base the penalty on the destination of the assets, which would mean that both transfers out of the UK and those keeping assets out of the UK (moving them from one non-uk territory to another) fall within the remit of this option. Q5 Do you agree with our view about the location of assets in relation to transfers of value? If you do not, what could constitute a better approach? 2.28 In further developing this approach, we will need to consider the definition of the destination, and in particular whether it should refer to the actual location of any assets, or the location or place of establishment of any entity (such as a bank, company or trust) to which ownership is transferred. (HMRC Consultations reported on ploads/attachment_data/file/345236/140819_tackl ing_offshore_tax_evasion_- _Strengthening_civil_deterrents.pdf) 2.3 HMRC Trusts & Estates Newsletter Extracts from the Newsletter Finance Act 2014 The Finance Act 2014 contains a number of changes to the Inheritance Tax legislation. 1. Deduction of liabilities 2. Relevant property trusts filing and payment date Where a relevant property trust is subject to IHT, the date for filing the return and paying the tax has been changed to 6 months after the end of the month in which the charge arose. The change in the filing date will affect all relevant property trusts; the change in the payment date will affect relevant property trusts where the charge to IHT arises between 5 April and 30 September, as previously, the payment date was 30 April in the following year. This change applies to chargeable events arising on or after 6 April The IHT Manual has been updated accordingly. 3. Retained income Income from a trust fund that has been retained as income by the trustees for more than five years instead of being distributed to the beneficiaries or added to the capital of the trust is now to be treated as relevant property and subject to IHT for the purposes of the ten-year charge. There will be no reduction in the rate of tax that is charged by reference to when the income arose. Any such income should be added to the trust capital and returned in the appropriate asset box on form IHT100. This applies to ten-year anniversary charges arising on or after 6 April It is not necessary, for this purpose, for the trustees to keep highly detailed records of movements on the income account. Unless a specific part of income has been distributed, HMRC will assume that income is distributed on a first in; first out basis, so that to arrive at any balance that should be treated as relevant property, trustees may take the balance on the income account immediately before the ten charge year arises and deduct from it the income that has arisen during the five preceding years. Any remaining balance should then be treated as relevant property. Where trust accounts are not made up to the anniversary of the trust, HMRC will generally be content to follow the trustees reasonable approach to allocating income to the five year period immediately before the ten year charge. 4. Employee Ownership Trusts Transfers to a trust that meet the conditions to qualify as an Employee Ownership Trust (EOT) for Capital Gains Tax & Income Tax purposes are exempt from IHT. Such trusts will usually meet the conditions to qualify as an Employee Benefit Trusts (EBT) and be exempt from IHT under the existing EBT rules. However, the rules applying to EOTs are stricter and may mean that some trusts would not meet the normal HMRC Trusts & Estates conditions of s.86. To make sure that transfers to an EOT are exempt from IHT, new sections 13A, 28A & 75A have been added to the IHTA. Consequential amendments have been made to sections 29A, 72, 86 & 144. The new provisions apply to transfers made on or after 6 April

9 Heritage Property Conditional Exemption - Archives and Undertakings Undertakings In cases where Conditional Exemption under IHTA84/s31(1)(a) and s31(1) (aa) is being claimed we ask for undertakings from the new owner. In some cases, we have found that the way the access requirements are shown on the undertaking can cause problems. For example, currently the undertaking should contain acceptable proposals for open public access. But these access arrangements may need to be frequently updated, unless the objects or collections are on long term loan to a museum or gallery, or are in a property that is regularly open to the public. The terms of the undertaking usually need to be updated to reflect these changes every time they are made. To avoid this we will be using a more generic form of access provision in all current and future cases. The portion of the undertaking relating to access will contain the following text: (i.) Open public access will be provided to... on a minimum of.. days a year or comparable multiples thereof every two or three years and by appointment at all other reasonable times. We will notify HM Revenue & Customs in October of the proposed access arrangements, as appropriate, for the coming year to allow them to be advertised as set out at 3(d) below. (ii.) We understand that the provision of access without the necessity of a prior appointment, which includes taking steps for advertising of that access and the prompt notification of those steps to HMRC, is a statutory requirement under Section 31 of the 1984 Act and failure to secure public access without prior appointment will constitute non-observance of this undertaking in a material respect. In that event, a claim to Inheritance Tax will arise under Section 32 of the 1984 Act. (iii.) When not on display the will be available either to an individual who would like to view any of the objects in connection with research or study, whether or not as part of an academic course, or to curators of appropriate public collections in the United Kingdom on loan for special exhibitions. (iv.) To provide images of the paintings on request to curators of public exhibitions or directing them to a place where such image is available, and in either event notifying them that the paintings are available in accordance with but subject to the 8 foregoing provisions of this paragraph 3(c). Any such images shall be provided without prejudice to any subsisting whether in the paintings or in the images themselves. Archives In cases where the statutory requirements to preserve and provide open public access to archives are met by keeping them in a record office or library regularly open to the public, applicants for Conditional Exemption might be asked to provide a financial contribution. This is to meet the costs of preserving and cataloguing the material concerned, to ensure it is identifiable and retrievable and in a fit condition for members of the public to view. Amendments to Trusts & Estates manuals (Reported in HMRC Newsletter August Amendments to their EBT Guidance in the Inheritance Tax Manual On 14 August 2014, HMRC published amendments to its Inheritance Tax Manual (IHTM) including amendments to the section dealing with employee benefit trusts (EBTs). Noteworthy changes include: The addition of new pages dealing with employeeownership trusts (EOTs) (see IHTM42995 onwards). These explain the conditions for inheritance tax relief for transfers to an EOT. For more information, see Practice note, Companies owned by employeeownership trusts. Updated guidance on the "all or most" test in section 86 of the Inheritance Tax Act 1984, and its application in group situations (see IHTM42929 and IHTM42961). Of particular interest is the new guidance on what can be treated as a "body carrying on a trade, profession or undertaking". This notes that a trust established for the benefit of a particular subsidiary employing a small percentage of the group's employees should be viewed "critically to see whether the subsidiary itself can be regarded as a body carrying on a trade ". Updated guidance on the establishment of subtrusts by deed (see IHTM42971) and new guidance about allocation of trust property otherwise than on sub-trusts (see IHTM42978). This discusses whether or not book entries or other "informal" allocations of trust property will mean that the trust continues to satisfy the requirements of section 86. (Practical Law Private Client )

10 3. STAMP TAX Nothing to report. 4. PERSONAL INCOME TAX 4.1 Ponzi-scheme Interest Taxable (Rusling) The First-tier Tribunal has held that interest on loans advanced to a fraudulent borrower was taxable, where both the principal and interest were re-advanced to the borrower in a cycle that ultimately ended with the appellant making a partial loss. While the arrangements arose out of the same "Ponzi-style" scheme as the one in John Mazurkiewicz v HMRC [2011] UKFTT 807 (TC) the tribunal distinguished Mazurkiewicz on the facts. The facts Repayment of the loans was in the form of postdated cheques, which were paid into and cleared in the appellant's bank account. (Some post-dated cheques were reinvested without encashment, but these were ignored by HMRC.) In contrast with Mazurkiewicz, in the present case, in each of the tax years in question there were short periods when receipts exceeded the principal advanced. For this reason, the tribunal ruled that when there was a positive balance, the taxpayer must have received that positive balance as interest. It rejected the argument that the positive balances were not payments of interest because they were excessive (Cairns v MacDiarmid [1982] 56 TC 556), holding that annual amounts in excess of 20% were not excessive. Likewise, it rejected the argument that, in reality, the transactions were not lending transactions but fictitious transactions that were part of a fraud. The tribunal noted that, initially at least, the lending was intended to fund the borrower's business. Further, it considered the taxpayer to be an "astute businessman" who saw the investment as a means of achieving a better return than he could achieve in the market. Why it matters The decision illustrates the importance of considering the reality of the transactions and, while the existence of fraudulent activity may taint transactions, it is necessary in all cases to consider the facts. (Robert Rusling v HMRC, First-tier Tribunal (2014) TC 3813, reported in Practical Law Tax ) Additional commentary The result of the decision is undoubtedly harsh. The taxpayer had to pay tax on interest he had not received. Clearly, his carelessness in not disclosing rolled over interest payments weighed heavily against him. As pointed out by the judge, when in doubt, a taxpayer should disclose. (Reported in Tax Journal ) 4.2 Pensions: Updated Individual Protection 2014 Guidance HMRC have updated their guidance note on individual protection 2014 to reflect the opening of the window for registration on 18 August The guidance now reflects the new application process which is entirely online, with the form being made available through HMRC's website. The online application must be received by HMRC by 5 April The note was first published in December (Reported in Practical Law Tax ) 4.3 VCTs: Nominee Information Regulations made Regulations ensuring that, if a nominee subscribes for shares in a venture capital trust (VCT), HMRC is able to identify the beneficial owner of the shares were made on 21 July 2014 and come into force on 12 August The regulations require the VCT, the beneficial owner and the nominee to provide information to, and make records available for inspection by, HMRC. This measure supplements the Finance Act 2014 change to the VCT rules, effective from 17 July 2014, that allows individual investors to subscribe for VCT shares through a nominee. (Reported in Practical Law Tax ) 5. BUSINESS 5.1 Main Object Test (Lloyds TSB) The Court of Appeal has found that a commercial transaction could have, as one of its main objects, the obtaining of capital allowances. 9

11 The facts Lloyds Equipment leasing (LEL) had claimed 25% writing-down capital allowance (CAA 2001 s 123) which HMRC had denied in respect of expenditure incurred on two merchant vessels of which it was the owner and lessor under a financing arrangement. Those vessels were used for the shipping of liquefied natural gas. There was no dispute that the boats were used for a qualifying purpose, however, the issue was whether the main object, or one of the main objects of any of the transactions in question was to obtain a writing-down allowance. If it was, the claim would fail under s 123(4) which excludes a transaction where the object of the letting of a ship on charter was to obtain capital allowances, determined without regard to s 109 (writing-down allowance at 10%). The Court of Appeal (agreeing with both the FTT and the UT) found that s 123(4) must be given its ordinary meaning; ascertaining the object of the transaction without reference to s 109. However, the Court of Appeal found that the FTT s assessment of whether or not obtaining the capital allowances was a main object was virtually unreasoned. In particular, the fact that each transaction served a genuine commercial purpose, did not necessarily mean that the obtaining of capital allowances was not a main object of the transactions. The appeal was therefore remitted to the FTT. Why it matters The court of Appeal commented that it did not regard CAA 2001 s 123(4) as a cleverly drafted piece of legislation as it made the availability of capital allowances dependent on the subjective intention of a party to a transaction. This was a recipe for dispute and litigation, as evidenced by this case. The case also highlights the difficult distinction between the main object and a main object of a transaction. (Lloyds TSB Equipment Leasing No 1 Ltd v HMRC, EWCA Civ 1062 reported in Tax Journal ) Additional commentary Discussion of this topic increasingly seems to involve loose references to rules of thumb. Taxpayers wishing to resist an HMRC challenge can do no better than to stick rigorously to the words of the legislation and published HMRC policy. (Rupert Shiers in Tax Journal ) 5.2 Goodwill and Termination Payments (Devaraj) The FTT held that a payment made for goodwill was not deductible from a termination payment. The facts HMRC had disallowed the deduction of a sum paid for goodwill on the acquisition of a post office from a payment made by Post Office Ltd on the closure of that post office. The post office was compulsorily closed under Post Office Ltd s network reinvention progamme. It was accepted that the payment by Post Office Ltd was employment income, so that the first 30,000 was exempt from income tax (ITEPA 2003 s 403(1)). The FTT therefore observed that any set-off must be of an income nature. The only deductions allowable are set out in ITEPA 2003 s 336(1) and refer to expenses incurred wholly, exclusively and necessarily in the performance of the duties of employment. However, the payment made by Mr Devaraj had been to the vendor (and not to Post Office Limited) for the trading connections of the business; this was therefore a capital transaction. Furthermore, the closure of the post office was a permanent cessation which gave rise to a disposal for CGT purposes, producing a capital loss available for carry forward. The taxpayer argued that the payment for goodwill had been of a revenue nature, but the FTT noted that this had been an afterthought. Goodwill could not in any event be amortised in the accounts of a sole trader (contrary to the position for companies). 10

12 Why it matters This was an unusual case in that an office holder received a payment akin to a termination payment in circumstances where he had been a sole trader. This caused a dichotomy between the termination payment (subject to income tax) and the payment made on acquisition of the goodwill (subject to CGT). (Sabaratnam Devaraj v HMRC, First-tier Tribunal (2014) TC 3834, reported in Tax Journal ) 5.3 Updated Definition of Deemed Contractor for CIS Purposes Under the Construction Industry Scheme, some businesses, public bodies and other concerns are deemed to be contractors. Sections FA04 /s59(1)(b) - (l) define those persons or bodies deemed to be contractors within CIS and include the following: businesses which do not include construction operations but which spend above a certain amount on construction operations. public bodies and other specified bodies which spend above a certain amount on construction operations. Examples of who HMRC consider to be deemed contractors is now included in CISR (HMRC website Manual Updates ) 5.4 Creative Industry Tax Reliefs brought into Effect Theatre tax relief The order bringing into effect corporation tax relief for theatrical productions was made on 22 August The relief, which takes the form of an additional corporation tax deduction for qualifying expenditure and a payable tax credit on qualifying production costs (25% for qualifying touring productions and 20% for other qualifying productions), takes effect from 1. Legislation for the relief is in Schedule 4 to the Finance Act 2014, which inserted a new Part 15C into the Corporation Tax Act Draft provisions introducing the relief and a consultation response document were published in June (Reported in Practical Law Tax ) 11 Video games The order bringing into effect corporation tax relief for video games development was made on 22 July The relief, which takes the form of a 25% repayable tax credit on qualifying production costs, takes effect from 1 April Legislation for the relief is in Schedule 17 to the Finance Act 2013, which inserted a new Part 15B into the Corporation Tax Act Schedule 18 to the Finance Act 2013 makes consequential amendments. Provisions introducing the relief were released in draft in December The relief was subject to EC state aid approval, which was received in March To achieve that approval, section 34 of the Finance Act 2014 amends the legislation so that, among other things, instead of being limited to UK expenditure, the relief also applies to EEA expenditure and a cap of 1 million per game applies. (Reported in Practical Law Tax ) 5.5 HMRC Help Sheet Company Purchase of Own Shares On 22 August HMRC published new guidance on advance clearance applications in relation to purchase of own shares by unquoted trading companies. Most payments made by a company to its shareholders in respect of their shares will be qualifying distributions and may be subject to Income Tax. This help sheet provides information to help you understand, where a company makes a purchase of its own shares, the conditions that must be met before the payment can be treated as an exempt distribution. It also provides details of how a company can make a clearance application in connection with the purchase of own shares legislation. It provides a guide to straightforward situations, but is not intended to cover all cases. Further guidance can be found in the Company Taxation Manual which explains the rules in more detail at CTM17500 onwards, and in HM Revenue & Custom s Statement of Practice SP2/82. The legislation is contained in sections Corporation Tax Act (CTA) (HMRC website What s New? )

13 6. EMPLOYMENT 6.1 Tax on Termination Payment (Moorthy) This case concerned the tax treatment of a payment to Mr Moorthy from his former employer following the termination of his employment. The facts Mr Moorthy was born in 1952 and began working for Kent County Council in In 1999 his employment was transferred to Babtie Group Limited which was itself taken over by Jacobs Engineering (UK) Limited ( Jacobs ) in Mr Moorthy s employment was transferred to Jacobs in March In February 2009 Mr Moorthy together with other members of the executive management team were told that there would be a restructuring, as a result of which there would be fewer executive posts. Mr Moorthy was unsuccessful in reapplying for a role and was made redundant in March He had a twelve month notice period and was put on garden leave until March 2010, shortly after which he received statutory redundancy pay of 10,640, from which no tax was deducted. Later, in March 2009, he commenced proceedings in the employment tribunal claiming that he had suffered discrimination on the grounds of age. In January 2011 the parties engaged in mediation, as a result of which a compromise agreement was signed, whereby Jacobs paid Mr Moorthy an ex gratia sum of 200,000 by way of compensation for loss of office and employment. The payment was without admission of liability by Jacobs and was in full and final settlement of Mr Moorthy s claims. Jacobs paid the first 30,000 without deduction of tax, and the balance subject to income tax at 20%. When Mr Moorthy completed his tax return he claimed that the entire payment should be tax free, requesting a refund of 34,000. This was blocked by HMRC s system. Mr Moorthy s advisers then entered into correspondence with HMRC. In order to bring the matter to a conclusion HMRC proposed that, even though they did not believe there was any discrimination, they were prepared to accept that 30,000 of the payment (in addition to the statutory 30,000 exemption for compensation for loss of office) should be free of tax. Mr Moorthy appealed this decision and asked for a statutory review. The Review Officer concluded that there was no discrimination, and that the whole of 12 the payment except for the first 30,000 should be subject to income tax. However, although he did not agree that the additional 30,000 offered by way of concession should be tax free, he did not wish to disturb the offer made by HMRC. Mr Moorthy appealed to the Tribunal. Mr Moorthy s adviser argued that the payment was not taxable because it was made (a) on account of discrimination and (b) to protect Jacobs reputation. HMRC argued that the payment had been received directly or indirectly in consideration or in consequence of, or otherwise in connection with the termination of Mr Moorthy s employment. It was therefore taxable under ITEPA 2003, s 401, except for the first 30,000 which is exempted by s406. The FTT started by looking at the wording of the statute, highlighting that s401 is very widely drawn. Not only does it catch payments made directly in consideration of a termination, but it also includes payments which are not even in consideration or in consequence of a termination but otherwise in connection with a termination. Despite Mr Moorthy s arguments, the tribunal had no hesitation in finding that the 200,000 in its entirety was made directly or indirectly in consideration or in consequence of, or otherwise in connection with the termination of Mr Moorthy s employment. Moreover, the tribunal picked up on the point that Mr Moorthy had already received 10,640 in respect of statutory redundancy pay, which means that only the balance of 19,360 could be set against the 200,000. In addition, Jacobs should have deducted income tax at 20% under PAYE from the difference, so Mr Moorthy should be entitled to a credit for the 2,128 that should have been deducted. However, Mr Moorthy was worse off than he would have been had he accepted HMRC s settlement offer. The tribunal considered their position with regard to the additional 30,000 offered by HMRC as a concession. As this was not a concession in the sense of a general or public concession the tribunal concluded that they had no jurisdiction to take this concession into account. Even if they were wrong in this view, they would find that the granting of the further 30,000 was, in any event,

14 an unlawful concession, and would not be able to take it into account for that reason. The Tribunal s conclusion was that Mr Moorthy was taxable on 200,000 less the balance of 19,360 from the 30,000 exempt amount. He would be entitled to an additional credit in respect of the PAYE of 2,128 that should have been deducted. The decision increased Mr Moorthy s assessment over and above the figures included in the original closure notice issued by HMRC. However, at the beginning of the hearing the FTT alerted Mr Moorthy to the possibility that he would end up worse off, and to the fact that Jacobs and HMRC failed to take into account the previous year s statutory redundancy payment. It would have been possible for Mr Moorthy to withdraw his appeal during the hearing, but he chose not to take this route. Why it matters The lesson to be learned from this case is to know when to strike a deal with HMRC, and when to take heed of indications that by continuing with a tribunal hearing the outcome could be worse than what HMRC is offering to settle. If HMRC offer a concession that is not a general or public concession, this should be considered very carefully as it will not be upheld by a Tribunal unless there is some basis in law. (Krishna Moorthy v HMRC First-tier Tribunal (2014) TC 3952, reported at Gabelle website na-moorthy-v-hmrc-termination-payments/) 6.2 Employee not Liable for PAYE underdeduction (Sparrey) The First-tier Tribunal has held than an employee was not liable for amounts that his employer underdeducted under PAYE because his employer did not take reasonable care to comply with the PAYE rules. The facts In this case, the employee's new employer failed to make sufficient deductions from its payments to him because his P45 did not detail his income from his previous employment. The employee did, however, provide his employer with payslips from his previous employment. 13 Following correspondence between HMRC and the employer's payroll agent, HMRC made a regulation 72 direction, such that under-deducted PAYE amounts be recovered from the employee. HMRC can make this direction if it is satisfied that the employer took reasonable care and the failure to deduct was an error made in good faith. The tribunal allowed the employee's appeal against the direction. The employer could not abandon payroll matters to its agent with neither enquiry nor liaison. There was no evidence of HMRC asking about such enquiry or liaison and HMRC appeared to have taken the view that if the agent had taken reasonable care, so had the employer. The tribunal found it surprising that, as an agent dealing with tax affairs routinely, the agent did not query whether an employee starting employment mid-tax year had received no previous payments that year. The employee provided payslips to his new employer so this was information that the new employer would have had if its agent had checked his previous pay position. Why it matters While the decision turns on its facts, it shows what taking reasonable care entails and that HMRC must make appropriate enquiries before being able to consider absolving an employer of responsibility for its PAYE under-deduction. (Ted Sparrey v HMRC, First-tier Tribunal (2014) TC 3940, reported in Practical Law Tax ) 6.3 HMRC launches Consultation on Travel and Subsistence Payments On 31 July 2014, HM Treasury launched a consultation on the tax treatment of travel and subsistence payments. The government intends to start from scratch and introduce new legislation that takes account of modern-day working practices. However, any new relief system will not apply to private travel or ordinary commuting. The consultation will be conducted in two stages: In the first stage, which runs until October 2014, the government will seek to improve its understanding of the commercial realities of travel and subsistence payments by discussing with interested parties the circumstances in which such payments are made and factors that influence decisions to make these payments. It is intended that this stage of the consultation will formulate the framework, rather than the detail, of the new