A regular tax bulletin for all ICPA members Issue 1 July 2011

Transcription

1 A regular tax bulletin for all ICPA members Issue 1 July 2011 TAXUPDATE Taxing times and how to manage them Welcome to the first issue of Tax Update, a tax digest brought to you by the ICPA in association with Mark McLaughlin Associates Welcome to the very first issue of our new bi-monthly magazine venture, Tax Update. We have commissioned Mark McLaughlin (CTA Fellow) to compile the publication for us and write on the taxation issues that affect us all. Mark is long-time supporter of the ICPA and is well known to ICPA members through his articles in our magazine Accounting Practice and countless other publications including Taxation, Tolleys Practical Tax and, of course, for his work as the editor of the Bloomsbury Professional s Core Tax Annuals, which are provided to ICPA members as part of their subscription. You can find out more about Mark at I hope that you will find reading this magazine to be both informative and stimulating; I know I have. We are all aware of the recent HMRC Consultation relating to us Agents and as we all know tax is an ever-changing (some say changing too fast and too often), always challenging subject. The only way to maintain standards is to keep learning and to keep up-to-date; some call this CPE, some call this CPD and some call this common sense. Tax Update will help keep us all current. Tony Margaritelli, ICPA Playing with fire Mark McLaughlin runs the rule over HMRC s consultation document on High Risk Avoidance Schemes, and highlights its various Spotlights and Signposts The present Government, like its predecessor, seems determined to stamp out what it regards as aggressive tax avoidance schemes. One is reminded of the past Labour Government s former Paymaster General, Dawn Primarolo, who once famously warned tax avoidance scheme users: Those who play with fire can expect to get their fingers burnt. HIGH RISK SCHEMES HMRC recently published the consultation document High Risk Tax Avoidance Schemes. There seems to be concern that some HMRC customers are using...contrived arrangements to seek tax advantages in circumstances where they are not intended to be available, and which HMRC believes do not deliver to users the tax advantages advertised by those who promote them. In particular, HMRC is opposed to scheme users enjoying a cashflow advantage by retaining the tax saved by the avoidance scheme until HMRC has successfully challenged it through the tribunal or courts. The Government therefore wants to introduce a power to place high risk avoidance schemes on a list. Under the proposals, users of listed schemes would be subject to an additional charge (at a presently undetermined rate) when the tax underpaid as a result of using the scheme was paid, if the scheme is successfully challenged. Scheme users could prevent this additional charge arising by paying the disputed tax upfront. The Government intends that only the most contrived and aggressive schemes would be listed, i.e. those where there is a reasonable certainty that they do not work. That is all well and good, but who would be judge and jury when deciding whether a tax avoidance scheme should be listed? HMRC, of course! This is a potential problem with this proposal In my view. There will undoubtedly be fears among many tax advisers and their clients that HMRC will adopt a scattergun approach to thwart any tax avoidance arrangements of which it disapproves. And with the relationship and sense of trust between agents and HMRC arguably at an all-time low, who can blame them? The consultation is open until 31 August 2011, so there is time to have your say. In fact, it is no secret that HMRC is taking a tougher line against continued on page 2

2 tax avoidance generally. Indeed, there is a degree of openness about the type of tax planning arrangements that HMRC regards as unacceptable, or which are not considered to work as intended. HMRC has an Anti-avoidance Group section on its website, which sets out HMRC s strategy against tax avoidance, (see IN THE SPOTLIGHT HMRC s proposals for high risk schemes involve targeting precisely the type of tax avoidance schemes which are highlighted in its Spotlights. Part of HMRC s process of informing taxpayers and agents about their approach to certain forms of tax planning is to publish these Spotlights in the above anti-avoidance section of its website. Spotlights are broadly schemes or arrangements which are discouraged on the basis that HMRC is...likely to challenge them, and which in HMRC s view...are not likely to deliver the tax savings advertised. There are presently 11 spotlights: 1 Goodwill companies acquiring businesses carried on prior to 1 April 2002 by a related party. 2 VAT artificial leasing. 3 Pensions schemes artificial surplus. 4 Contrived employment liabilities and losses. 5 Using trusts and similar entities to reward employees PAYE and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax. 6 Employer-Financed Retirement Benefits Scheme ( EFRBS ). 7 Certain schemes that seek to generate Gift Aid and Gift of Shares tax relief claims. 8 Schemes seeking to obtain sideways loss relief by generating trade losses for individuals. 9 Gift Aid with no real gift. 10 Stamp duty land tax avoidance. 11 Avoiding income tax on pay. HMRC publishes additional spotlights periodically (Spotlight 11 was added on March 2011, for example), so it is important to check this area of HMRC s website on a regular basis for any updates. Of course, HMRC s technical analysis of spotlighted anti-avoidance schemes is only their view, and just because HMRC considers an arrangement to be ineffective does not necessarily make it so. However, some schemes (e.g. 1 and 4 above) have subsequently been the subject of legislation to counter them. In addition, it should not be assumed that schemes not included in the list of spotlights are effective or accepted. HMRC warns: A scheme that has not featured in Spotlights may still be challenged. SIGNPOSTS TO TROUBLE? The Anti-Avoidance Group section of HMRC s website also lists a number of Signposts. These are broadly transactions and arrangements which have been identified as unacceptable in the past. The full list of avoidance signposts can be viewed at but examples of such transactions or arrangements broadly include those which: Have little or no economic substance. Exhibit little or no business, commercial or non-tax driver. Involve contrived, artificial, transitory, pre-ordained or commercially unnecessary steps or transactions. Examples of transactions or arrangements which HMRC considers to display signposts are listed on its website. Whilst it does not automatically follow that tax planning which HMRC treats as high risk will be ineffective, taxpayers and their advisers need to think carefully in advance about the potential implications in terms of additional tax, interest and penalties if HMRC successfully challenges any such scheme or arrangement used. CONCLUSION There will probably always be some clients who are willing to take a gamble on using tax avoidance schemes which are perceived as aggressive. The various anti-avoidance initiatives by the Government and HMRC suggest that those clients will need thicker skins and deeper pockets in the future. Disclaimer The information contained in this publication is for general guidance only. You should neither act, nor refrain from acting, on the basis of any such information. Professional advice should be taken based on particular circumstances, as the application of laws and regulations will vary. Please be aware that laws and regulations are also subject to frequent change. Whilst every effort has been made to ensure that the information contained in this publication is correct, neither the author nor his firm shall be liable in damages (including, without limitation, damages for loss of business or loss of profits) arising in contract, tort or otherwise from any information contained in it, or from any action or decision taken as a result of using any such information.

3 Ending an association? Mark McLaughlin looks at the proposed relaxation of the attribution rules for associated companies for corporation tax purposes The associated company rules are changing in Finance Act The rules are essentially an anti-avoidance measure, to prevent the creation of multiple, closely controlled companies to split a wider economic whole and take advantage of the small companies corporation tax rate. That rate reduced to 20% from 1 April 2011, but the main rate reduced to 26% from the same date and is gradually reducing to 23%. Whilst the associated company rules therefore assume less importance than in previous years, they remain a significant issue for many business owners. Before considering the new rules and their effect, it is necessary to point out what the amendments will not do. The associated company rules will broadly continue to apply where companies are under common control, as defined. A participator s own rights and powers are always taken into account for those purposes. In addition, an individual may still control one company through his shareholding, and control another company (even if all the shares are owned by say, his wife, by making a loan which entitles him to the greater part of his wife s company assets on a winding up. Companies can still be associated in such circumstances. Group companies will also generally be associated. ATTRIBUTIONS OF RIGHTS Legislation in Finance Bill 2011 (which has not received Royal Assent at the time of writing) amends the rules which automatically attribute to a person the rights and powers of associates in determining whether companies are under common control, and hence associated (CTA 2010, s 451 (4), (5)). The changes replace CTA 2010, s 27. The old section 27 attributes the rights of business partners where the tax planning arrangements between the parties have secured a relevant tax advantage. The new legislation switches off the automatic attribution of an associate s rights and powers if there is no substantial commercial interdependence between the companies. A long standing Extra Statutory Concession (ESC C9 Associated Companies ) disregards the rights of relatives other than spouses and minor children, in respect of companies where there is no substantial commercial interdependence between them. However, the new rules are more generous than ESC C9, in that they apply to all associates, including business partners. SUBSTANTIAL COMMERCIAL INTERDEPENDENCE What is Substantial Commercial Interdependence? Draft secondary legislation ( The Corporation Tax Act 2010 (factors determining Substantial Commercial Interdependence) Order 2011 ) provides that the answer depends on the degree to which the companies are financially, economically or commercially interdependent. Companies are treated as associated if caught by any one (or more) of these links, which are broadly defined in the legislation. Unfortunately, the statutory definitions of the links are not very precise. For example, under the draft legislation companies are economically interdependent if they seek to realise the same economic objective, or if the activities of one company benefit the other, or if the companies have common customers. The brevity and lack of clarity in the legislation means companies and their advisers will look to HMRC for guidance in many cases. HMRC has produced quite detailed guidance on the substantial commercial interdependence rules, which replaces previous guidance in the Company Tax Manual. HMRC s Marginal Small Companies Relief Toolkit will presumably also be amended to reflect the legislative changes. Of course, HMRC manuals and toolkits do not carry the force of law, and are therefore a poor substitute for clear tax law. HMRC published the draft HMRC guidance with the draft secondary legislation on 9th December The guidance (which will appear in the Company Taxation Manual at CTM03750 and following) includes a number of examples of situations in which companies are (or are not) financially, economically and organisationally interdependent. However, in practice circumstances will obviously vary from case to case, so the examples are only illustrative of HMRC s approach. ELECTION The new attribution rules for associated companies purposes apply to accounting periods ending from 1 April However, this is subject to an option for companies to elect for the amended legislation to apply only to accounting periods starting from 1 April In its draft guidance on the new rules, HMRC states that although the new rules will benefit the vast majority of companies, it is theoretically possible that a small number of companies (i.e. those separately controlled by business partners) may be retrospectively disadvantaged by the change. Those companies may be associated by the Finance Act 2011 rules, but not under the previous rules (i.e. where no tax planning arrangements exist between the two companies). HMRC provide the following example: Mrs Y & Mrs Z are partners in a law firm. Mrs Y owns 100% of the shares in a holiday cottage letting business Company A. Mrs Z owns 100% of the shares in a photography business Company B. Company B has struggled in recent years and survives solely because of a sizeable loan provided to it by Company A. No tax planning arrangements exist between Company A and Company B so the two companies would previously not have been associated but the loan between the two makes them substantially commercially interdependent and thus associated under the new rules. Note that non-retrospective treatment is not automatic. It must be claimed by making an election. The election must be made within a year of the end of the accounting period to which it relates.

4 ANOTHER EMPLOYER HEADACHE! Mark McLaughlin looks at the agency income tax legislation and some recent case law The IR35 rules on services provided through intermediaries is well known to many taxpayers and tax advisers. The most common scenario is probably the personal service company. However, there is potentially an additional line of HMRC challenge to IR35, which is rather less well known. This is the agency workers legislation (ITEPA 2003, ss 44-47). OUTLINE The agency rules broadly apply where: The worker (X) personally provides services under a contract with an agency (Y) to a client (Z). The worker is (or could be) subject to supervision, direction or control; and The worker s remuneration under the employment contract does not otherwise constitute employment income. If caught by the agency rules, worker X s services to client Z are treated for income tax purposes as an employment held with agency Y and all remuneration under the agency contract is treated as employment income. There are also provisions for National Insurance contributions (NICs) purposes, which can result in the deemed employment income being liable to Class 1 NICs. There are certain excluded services under the agency rules, which apply to entertainers, fashion models and others, and (among other things) to services provide wholly in the worker s own home (ITEPA 2003, s 47). However, the agency rules are otherwise quite broad in scope and, of course, can apply to business other than recognised employment agencies. There is anecdotal evidence that HMRC are seeking to apply the rules in an increasing number of cases. In Talentcore Ltd t/a Team Spirits v Revenue and Customs [2010] UKFTT 148 (TC), the company appealed against PAYE and NIC assessments. The point at issue was whether the agency legislation applied. The appellant supplied individual consultants to cosmetic companies at duty free shops at airports. DECISION There was no contract between the appellant and the consultants. The appellant was free to offer work or not, and the consultants were free to accept or decline the work when offered. The tribunal considered the agency legislation and case law, and held as follows: There must be an obligation on the worker to provide personal services. In Talentcore s case, the tribunal s view was that the temporary and ad hoc nature of the appellant s bookings prevented there being an obligation to provide personal services within the relevant legislation. A full right of substitution (i.e. where a person need never turn up) is not a contract of service, but more limited rights do not prevent it. In Talentcore s case, the tribunal found that there was an unfettered right of substitution.

5 The agency legislation requires that the worker must be subject to, or to the right of, supervision, direction or control as to the manner in which he renders service. The tribunal considered that the legislation is vague about who must (or have the right to) exercise such rights, but noted that it normally seemed to be the client. In this case, the cosmetic company (and/or World Duty Free, which runs the duty free shops) had the necessary rights, but in practice there was little or no exercise of them. The tribunal allowed the taxpayer s appeal, on the basis that there was no obligation to render or provide personal services within the agency legislation. It is understood that HMRC have appealed the decision to the Upper Tribunal, and that the case was due to be heard in July The decision is awaited at the time of writing. CONDITIONS Businesses involved in the supply of labour only (e.g. some construction firms) need to be aware of the agency rules and the circumstances in which they apply, with a view to ensuring that they are not treated as an agency for income tax and NIC purposes, where possible. In addition to the legislation itself, HMRC guidance on agency and temporary workers is contained in its Employment Status Manual at ESM2001 onwards. It confirms that the agency rules can apply to any worker who provides services through any third party (i.e. which need not be an employment agency). The contract between the worker and the agency will not usually be a contract of employment. HMRC sums up the conditions for the agency provisions to apply as follows (ESM2003): 1 The person contracting with the agency must be an individual. 2 The individual renders, or is under an obligation to render, personal service to another person - the client. 3 The individual is subject to, or to the right of, supervision, direction or control as to the manner of rendering such service. 4 The individual is supplied to the client by or through a third person ( the agency ) (a) (for tax purposes) renders those services under the terms of an agency contract between the individual and the agency, or, (b) (for NIC purposes) either earnings for such service are paid by or through the agency in accordance with arrangements made with the agency; or payments, other than to the individual, are made by way of fees, commission or a similar nature which relate to the continued employment of the individual; 5 Remuneration would not, apart from Pt 2, Ch 7 ITEPA 2003, be chargeable as employment income. With regard to the personal services requirement (condition 2, above), if the agency contract contains a substitution clause, HMRC accepts that the contract will not be an agency contract for tax purposes. However, the right of substitution must be genuine, and HMRC may look at the nature of the right, i.e. whether the right is a limited or unfettered right of substitution (ESM2011). The agency provisions potentially apply to professional workers in HMRC s view, in addition to tradesmen (e.g. labour-only construction workers) and others (ESM2014). However, HMRC acknowledges that a professional worker who is not subject to, or to the right of, supervision, direction or control over the manner in which the services are rendered, will not be within the agency legislation. HMRC guidance also confirms that the agency legislation does not apply where the contract for the supply of services is between the agency and a one man service company, provided the contract is genuinely with the company (e.g. the company s name has not been substituted in a contract obviously drafted for an individual) (ESM2017). Of course, the IR35 legislation will need to be considered in the case of personal service companies instead. ANOTHER RECENT CASE The agency rules represent a genuine threat to many small personal services business. In another recent case to reach the tribunal (Serpol Ltd v Revenue & Customs [2011] UKFTT 174 (TC)), HMRC raised an income tax determination and NIC decision on the basis that the appellant company was acting as an agency by supplying certain workers to Bedfordshire Police and as such the workers fell within the agency legislation. The company appealed. The tribunal held on the particular facts of the case that certain categories of worker were required to carry out their duties as prescribed by the nature of the services and so fell within the agency legislation when carrying out those duties. However, other categories of worker (i.e. whose duties involved taking witness statements) were held to be excluded from the agency provisions, as their duties were not prescribed by the nature of the services, but took place where it was convenient for the witnesses, which could be anywhere at a time selected by the witness. Those workers whose projects allowed them to work from home were also held to be excluded from the agency legislation when carrying out such projects. The company s appeal was therefore allowed in part. It may prove difficult to demonstrate that the agency legislation does not apply. In practice, potentially affected businesses can help their cause by ensuring that a worker is not being supplied, either as a matter of fact or based on contracts or other documentation between the parties.

6 Jointly held property Mark McLaughlin looks at the tax rules for jointly held property, and highlights a recent tax case The tax legislation includes specific rules on income from assets held jointly by spouses (or civil partners) who live together. The rules provide a potential tax planning opportunity for spouses who are liable to income tax at different rates. The broad effect of the legislation (in ITA 2007, s 836) is that income from jointly held assets is taxable on both spouses in equal shares. This general rule is subject to certain exceptions. For example, an automatic 50:50 income split does not apply to partnership income (see below), or from distributions in respect of close company shares or securities. The 50:50 rule can be useful. For example, if Mr A is a 50% taxpayer who owns a residential property for letting, he may wish to consider transferring (say) a 5% beneficial interest in the property to Mrs A, who is a basic rate taxpayer. The rental income would then be divided and taxed equally on Mr and Mrs A, even though the property is beneficially owned 95:5. JOINT DECLARATION A further exception to the automatic 50:50 income split can apply if the spouses beneficially own the asset (and they are beneficially entitled to the income) other than in equal shares. Both spouses may make a declaration to HMRC (on form 17) to be taxed in accordance with their unequal shares (ITA 2007, s 837). A declaration of trust generally records the beneficial entitlement of both spouses (nb by contrast, if property is owned as tenants-incommon, each owner will already hold a distinct share of the beneficial ownership). The declaration on form 17 must be submitted to the HMRC within 60 days, and takes effect in respect of income arising from the date of the declaration. The jointly held property rules were recently considered in Lorber (Decision No. 1) v Revenue and Customs [2011] UKFTT 101 (TC), in respect of bank and building society accounts held jointly between spouses. In that case, the tax returns of the husband (P) include no entries for interest credited to the accounts. P argued that none of the income should be taxed on him as the accounts and interest all belonged to his wife (S). He said that he managed his wife s savings and has appeared as a joint accounts holder. P s PAYE coding notices originally were originally compiled on the basis that he received 50% of the relevant interest. However, P rang HMRC and stated that the interest belonged to S, whereupon HMRC issued a revised coding that eliminated the interest. A subsequent HMRC enquiry revealed that all the income had been returned as S s. P stated that the funds in joint names were S s savings, and that he had gifted his savings to his wife. HMRC pointed out that P had unrestricted drawing rights on all the accounts and joint deposits. No declaration (on Form 17 or otherwise) had been submitted to HMRC, and no agreement had been made with HMRC that the interest should be treated wholly as S s income. The tribunal held that P had drawing rights on the entire income. In addition, the change in the notice of coding did not prove an agreement with HMRC to treat the joint accounts as S s and not P s. HMRC had no alternative than to amend the code, whether or not they agreed that the income was S s and not P s. The amendments to P s self-assessments and additional assessments were upheld, and P s appeal was dismissed. It is unfortunate that the taxpayer in the above case was unaware of a declaration under (what is now) ITA 2007, s 837. He said that had he known that a declaration would have cured the problem, he would have made one. NON-SPOUSE JOINT OWNERSHIP It should be noted that there are no provisions which automatically tax income from property in joint names on a 50:50 basis, in the same way as spouses (or civil partners). The legislation in ITA 2007, s 836 does not apply to unmarried couples (or couples not in a civil partnership). The beneficial ownership of property and entitlement to income are subject to the facts, and to any agreement between the parties. This means that property may be beneficially owned in different proportions to income entitlement. HMRC s Property Income Manual (at PIM1030) states: Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed. Thus (say) an unmarried couple (A and B) who beneficially own a property in equal proportions could agree that A is beneficially entitled to 75% of the rental income, and B is entitled to 25%. However, from a practical perspective it would be sensible to agree the division of rental profits in writing, before the start of the tax year in question. In addition, the correct shares of rental profits should be paid into separate bank accounts for each individual. PARTNERSHIPS A partnership business also provides an opportunity for profits to be divided in different proportions to beneficial ownership. HMRC s guidance (at PIM1030) acknowledges that taxpayers may jointly own properties which are let out as part of a partnership business, but states that it will rarely be the case that individuals are in a partnership running an investment business of letting property. HMRC considers that the existence of a partnership depends on the amount of business activity involved (e.g. the degree of commercial organisation, the extent of additional services provided, etc), but that merely holding property jointly does not constitute a partnership. In the case of partnerships involving spouses or civil partners, there is a statutory exception from the 50:50 rule mentioned above (ITA 2007, s 836(3), Exception C) in respect of income to which Part 9 of ITTOIA 2005 applies (partnerships). In that case, the income is divided according to the terms of the partnership agreement. As in most other areas of tax, the importance of keeping proper documentation (e.g. a partnership agreement, notes of meetings to agree profit shares, etc) cannot be overstated, particularly in cases where the partners rental business profit shares differ from their beneficial entitlement to the partnership s assets. Tax Update is produced for the ICPA by Armstrong Media ( ). Written by Mark Mclaughlin of Mark Mclaughlin Associates ( ). Published in February, April, July and October. For details contact The ICPA, Imperial House, 1a Standen Avenue, Hornchurch, Essex RM12 6AA. Tel: /Fax: info@icpa.org.uk/web: