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V o l u m e 34

Part 21

November (1) 2013

Practical TAX Newsletter

It’s Good to Give! Ken Voller reviews recent changes to gift aid.

CONTENTS n this time of austerity budgeting and economic stress, charities have been finding it difficult to maintain the levels of funding they require to satisfy the aims and objectives for which they were created. To try and counteract part of that issue, there have been three recent initiatives put into place:

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gift aid on goods; gift aid on small cash donations; and an online system for reclaiming gift aid.

Retail gift aid

ownership of the goods offered by the donor, but sets up an arrangement with the donor whereby the charity undertakes to sell the goods on behalf of the donor, and then offers the donor an opportunity to gift the proceeds from the sale to the charity. Accordingly, the charity is acting as an agent for the owner of the goods and four basic rules must be applied: 1. the goods themselves must remain the property of the donor until they are sold; 2. the owner retains the right to keep all of the net proceeds from sale, but can choose to donate all or part of the proceeds if they wish; 3. the potential donor, ie, the owner of the goods, needs to be contacted after the sale of the goods and offered the proceeds; and 4. the donor must then make a gift aid declaration for whatever donation is made.

The basic rule for gift aid is that gifts can only consist of donations of money. For these purposes, money includes cash, cheques, direct debit or standing order payments, postal order and credit league debit card payments, and telegraphic transfer. Gifts of goods do not qualify for gift aid relief. However, many potential donors may want to gift goods, perhaps because they no longer want them, rather than cash, which they do not have spare to give to Within 3 above, the charity can their charity of choice. Although there make a charge for commission for are some larger charities that welcome the sale. However, this means that such donations, in the charity is many instances, providing a Gifts of goods particularly for service in return do not qualify for smaller charities and for payment. gift aid relief. Community Amateur That service is a Sports Clubs taxable trading (CASCs), it is money that is needed for activity and any profit is potentially the charity rather than the goods. liable to taxation. To recognise this dilemma and The actual operation of the retail overcome the issue, the Retail Gift Aid gift aid scheme is not particularly Scheme was introduced to help charities onerous, but there are three ways of with this. operating the scheme: the “Standard Effectively, the charity does not take Method”, “Method A” and “Method

Gift Aid Ken Voller reviews recent changes

page 161 Brief secondments to the UK Amanda Sullivan reviews the PAYE arrangements

page 163 Newsfile Autumn statement Tax gap Rural fuel discounts Patent box RTI research Code of practice for banks Tax agent strategy Proposed legislation Consultations HMRC guidance Employer advice HMRC manuals International Tax

page 165 Points of law Accommodation had dual purpose VAT refund must be paid Legal costs not deductible Rental income split 50:50 House was business asset Capital allowances due Evidence not sufficient

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B”. Methods A and B are for those as, imaginatively, the Gift Aid Small charities that have shops and either Donations Scheme (GASDS)! operate the shop themselves (A) or Although the charity/CASC still has to use a separate entity to operate the operate the basic gift aid rules in order shop (B). These two methods only to reclaim repayment of the gift aid became available from 6 April 2013, amounts from HMRC, this scheme also although the standard method has enables a top payment of up to £1,250 been available since 2006. relating to small cash donations received For smaller charities the standard in a particular tax year. The top up is method is most likely to be appropriate, calculated in the same way as usual gift and detailed guidance can be found aid relief, i.e. with a basic rate of income at section 3.51 of the HMRC guidance tax of 20%, meaning that the top-up notes for charities (www.lexisurl.com/ payment will be equal to one-fifth of the retailGA). grossed up payment or a quarter of the The HMRC guidance is well written, actual donation received. complete and concise. To ensure that Small cash donations equate to £20 charities comply or less and, for with the rules and these purposes, Charities are now scheme, HMRC also cash can only required to make all provides template be in bank gift aid claims to letters. I would urge notes or coins. HMRC electronically. charities to read this Effectively, guidance carefully donations in before embarking on a Retail Gift Aid denominations of up to £20 can be Scheme. accepted, although there are some Charities are reminded throughout the anti-avoidance rules to ensure that guidance that they have a responsibility charities do not try to separate larger to ensure that potential donors are fully donations, that will not qualify, into aware of how gift aid itself works, and smaller donations. that the doner must be a UK taxpayer The way GASDS operates is to match with an income or capital gains tax and claim £10 of GASDS donations to liability at least equal to the amount of £1 of gift aid donations that the charity is tax to be reclaimed by the charity on the already claiming on. There are also rules ultimate donation made. as to when a claim can be made based on gift aid claims made in previous Gift aid on small cash years, and whether there have been any donations gaps in claims and/or the charity has Some aspects of the operation of gift incurred penalties for previous claims. aid for charities can be cumbersome to There is a helpful flowchart provided administer. In addition, many donors by HMRC (www.lexisurl.com/GAflow) do not apply for, or qualify for, gift which helps a charity to decide whether aid in respect of donations made to the claim can be made. charities. For example, when cash is The matching rule means that for dropped into charity boxes in the high every £1 gift aid declaration made, the street the charity will have no idea charity can reclaim GASDS relief on £10 whether the donor is a UK taxpayer. of the small donations received, subject Another example might be a charitable to an overriding limit of £5,000 of small event where, at some point during donations. the event, there is a collection for the HMRC has provided several examples charity. in its guidance notes (www.lexisurl.com/ Again, in part recognition of the GAexs) which demonstrate the matching above, and the fact that charities are rules quite well. These also make the potentially losing out on the able to point that small increases in gift aid reclaim gift aid relief from HMRC, income can have significant potential another new scheme was set up with benefits in terms of obtaining top ups effect from 6 April 2013. This is known from HMRC.

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Example Charity A has gift aid income of £200 and small cash donations income of £5,300 in the 2013/14, a total of £5,500. The income on which gift aid is claimed is £200. Under the matching rule, a GASDS top-up payment can be claimed on up to ten times the amount of gift aid income: £200 × 10 = £2,000. Maximum GASDS top-up payments can be claimed by the charity on small cash donations income of £2,000. The charity can therefore claim on total donations of £2,200, made up of £200 under gift aid and £2,000 under the GASDS. In total, Charity A will receive a payment of £550, made up of £50 under gift aid and £500 under the GASDS. It is too early to say how much use of GASDS will be made by charities but this seems a welcome form of relief to organisations that need as much support as possible.

Online system for reclaiming gift aid The final change is that charities are now required to make all gift aid claims to HMRC electronically. This may not be of particular benefit to charities, although it has been promoted with the idea that gift aid repayments will be “quicker and easier”. Whilst the greater drive towards online systems and “digital by default” is not necessarily a problem and, indeed, HMRC spell out the main benefits for utilising an online system (faster and more accurate claims, acknowledgement of receipt of the claim, easier gift aid records, etc), I am concerned that the online system was only introduced in April 2013 but became compulsory from 1 October 2013! Having dealt with HMRC online systems for many years (self-assessment, CT self-assessment, PAYE, VAT and RTI) I am reluctant to say whether the charity’s online system is better or worse than the paper system until it has bedded in for a period of time, perhaps after a number

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of years. This may be one change that would be worth revisiting in the future to see if the benefits envisaged have borne fruit. I am also minded that HMRC recently lost three adjoined cases at the First-tier Tribunal where the judge held that the insistence by HMRC for online

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filing was discriminatory. This was only a First-tier Tribunal case, and related to VAT, but I expect HMRC to revisit all its guidance for the online filing

requirements to ensure that everything TPT is entirely correct. Ken Voller

Ken Voller FFTA ATT (Fellow) is a tax and business adviser and can be contacted by telephone on 0845 130 6380 or by e-mail at ken@tax-business.co.uk.

The Short Term Business Visitor Arrangement Amanda Sullivan outlines the latest HMRC guidance. Background

STBV danger areas

The short term business visitor arrangement (STBV) for UK PAYE employers is in the HMRC PAYE Manual at PAYE82000. This confirms that an STBV only applies to earnings expected to be exempt from UK income tax under the terms of a double tax treaty. The benefit to the employer of using an STBV is that the usual PAYE procedures are not applied to the employee’s earnings for the UK work period. The employee does not have to complete UK arrival form P86(Expat) or departure form P85, and tax treaty relief for their UK earnings does not require a self-assessment tax return. The risk of an STBV to the employer relates to the inclusion in the arrangement of an employee who is not entitled to tax treaty exemption for their earnings. This may happen for a number of reasons, including the employer’s ignorance of the extent of the employee’s UK visits. Where an employee is liable to UK income tax on their UK earnings rather than exempt under a tax treaty, the employer pays all of the income tax which should have been deducted under PAYE, together with late-payment interest. Unless the employer has arranged to recover the unpaid tax from the employee it must be grossed-up for tax purposes.

There are other traps for employers in the STBV arrangement conditions. One issue queried recently at the joint forum on expatriate tax and NIC (the joint forum) is the tax treaty requirement that the employer is not UK-resident. The factors that determine employer residence are indicated in each tax treaty. However, the Organisation for Economic Co-operation and Development (OECD) recognises the right of treaty countries to take the economic employer (and not the legal employer) into account when deciding where an individual’s employer is resident for the purposes of a treaty claim. This means that the inclusion of an employee in an STBV requires knowledge of HMRC’s latest views on employer residence.

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Economic employer The main information source for HMRC’s views on employer residence is its Double Taxation Relief Manual at DT1920 to DT1924. Paragraph DT1922 indicates that HMRC applies the principle of substance over form, so that the place of residence of any economic employer (rather than the company which holds the contract of employment) is taken into account for a double tax treaty claim. Despite this general HMRC stance,

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para DT1922 accepts that a UK company at which an employee works will not be regarded as their economic employer if either of the following applies: (a) the employee continues to work in the business of the non-resident company when working at the UK company under a contract for services between the two companies (and not under a contract of service with the UK company); or (b) the employee does not have a formal employment contract with the UK company, and is in the UK for less than 60 days in the tax year which is not part of a more substantial period of UK presence.

HMRC guidance At the July 2013 meeting of the joint forum, HMRC commented on the situation where an employee assigned to work for a separate foreign legal entity continues to hold an employment contract with the UK company. The individual then returns to the UK as a short term business visitor working for, and at the expense of, the foreign entity. HMRC confirmed that applying the UK’s principle of substance over form means that a legal contract of employment with a UK service company does not prevent a foreign entity that is the economic employer from being the employer for treaty purposes. However, the foreign branch of a UK employer cannot be the economic employer for tax treaty purposes because it is not a separate legal entity.

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In October 2013 HMRC outlined the credit relief against any UK liability on meaning of an entity in this context. that income. HMRC indicated that the identity of the employer for the purposes of a EXAMPLE 2 double tax arrangement is a question The employer is a UK-resident company of fact which must be determined first. with a foreign branch and a non-resident Once decided, the employer’s identity employee undertakes duties in the UK will affect the outcome of the tests in for a few days. the employment income article of the As the employer is UK-resident, relevant treaty. If the employer for treaty exemption cannot be claimed in the UK purposes is the non-resident foreign for the earnings for the UK workdays. entity that is the economic employer, The informal HMRC “60 day rule” at the non-resident employer condition is (b) above does not apply because the met and exemption from UK tax can employer is a UK-resident company, potentially apply to the earnings for the not the foreign branch for which the duties that the individual performs in the employee works. UK for their foreign economic employer. The UK will have primary taxing It was confirmed that HMRC’s rights over the employee’s earnings for definition of an entity is something their UK workdays and double tax relief capable of independent existence, such for any UK income tax payable on the that it can be one of the parties to an earnings must be claimed in the other employment contract in its own right. country. The law system (i.e. UK or foreign) used to determine this point will depend on EXAMPLE 3 the facts of the particular case. The employer is a foreign-resident HMRC contrasted this position company with a UK branch and a UKwith that of a branch, which is not a resident employee undertakes duties at separate entity to the company but the foreign company for a few days. merely a location from which the As the employer is resident in the company’s business other country, the An STBV arrangement is conducted. This employee cannot applies to earnings that means that the claim exemption are exempt under the foreign branch of a there for the terms of a double tax treaty. UK company cannot earnings for their be a non-resident foreign workdays. foreign employer for the purposes of Where the other country taxes the the employment income article in any earnings for the employee’s foreign double tax agreement that follows the workdays, HMRC will allow foreign tax OECD model convention. credit relief against any UK liability on HMRC provided the following that income. examples to illustrate its views on branches in the context of a treaty claim EXAMPLE 4 for the exemption of earnings. The employer is a foreign-resident company with a UK branch and a nonEXAMPLE 1 resident employee undertakes duties at The employer is a UK-resident company the UK branch for a few days. with a foreign branch and a UK-resident If the costs of the UK workdays employee undertakes duties at the can be attributed to the UK branch, foreign branch for a few days. exemption cannot be claimed in the If the costs of the foreign workdays UK for the earnings for those duties. can be attributed to the foreign branch, The UK will have primary taxing rights exemption cannot be claimed in the over the employee’s earnings for their other country for the earnings for those UK workdays and double tax relief for duties. Where the other country taxes any UK income tax payable on the the earnings for the employee’s foreign earnings must be claimed in the other workdays, HMRC will allow foreign tax country. However, the “60 day rule” may

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apply, even if the employment costs are recharged to the UK branch.

STBV compliance As part of their STBV agreement, the employer must put in place an internal reporting system that enables them to keep as accurate a record as possible of the employees who visit the UK on business. HMRC requires this reporting system to meet the following minimum requirements: (1) each employee must periodically report days which they spend in the UK on business to the central point which controls the arrangement; (2) no employee should spend more than 30 days intermittently in the UK in any 12-month period without reporting to the central control point; and (3) all records required to be kept by the employer under the arrangement must be retained by the UK company for production to HMRC on request. HMRC will enquire into any failure by the employer to monitor employees’ UK visits. In this connection, employers should obtain and analyse the employees’ business travel bookings, expenses claims, the details entered in visitors’ books on site and at offices, together with payroll and other internal records. Where it becomes clear that any of the employees included in an STBV arrangement do not satisfy all of the relevant conditions, HMRC can insist that the PAYE regulations are operated correctly for all the employees included in the scheme (and this will be backdated to the start of their UK work TPT periods). Amanda Sullivan Amanda Sullivan is the author of Tolley’s Expatriate Tax Planning, which covers the taxation and NIC position of UK individuals working abroad and foreign nationals working in the UK. Call 0845 370 1234 or contact customer. services@lexisnexis.co.uk.

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newsfile Autumn Statement The Chancellor will deliver his Autumn Statement on 4 December 2013. Draft clauses to be included in Finance Bill 2014 will be published for consultation on 10 December 2013.

Tax gap The tax gap is the difference between the amount of tax HMRC collects and what it believes it should collect by reference to the law and the intent of Parliament behind that law. Since 2009 HMRC has attempted to estimate this unknown amount of “missing” tax, and this year it has published the methodology used to calculate the figures. The latest estimate of the tax gap covers the tax year 2011/12, and results in a total figure of £35 billion. This is made up of: ● VAT: £11.4 billion; ● other indirect taxes and excise duties: £3.6 billion ● personal income tax, NIC and capital gains tax: £15.3 billion; and ● corporation taxes £4.7 billion. Although the total is a slight increase on the revised total of the tax gap for 2010/11 (£34 billion), HMRC say the percentage of total tax liabilities represented by the tax gap is falling. What is evident is that the majority of the tax gap is perceived to arise from taxes paid by individuals rather than by companies.

Rural fuel discounts The UK has submitted an application to the European Commission to extend the rural fuel rebate scheme to ten mainland towns in 2014. This would cut fuel duty on road fuel by 5p per litre in the approved areas. The current rural fuel scheme only applies on certain offshore islands, including the Scilly Isles, the Inner and Outer Hebrides and the Northern Isles.

Patent box The European Council is considering whether the UK’s patent box legislation is harmful. In particular the code of conduct group on business

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taxation is to examine two aspects of this tax relief: ● the lack of a specific provision requiring activities to be located in the UK which constitute “real economic activity”; and ● the lower rate of tax allowing a statutory deduction equal to 50% of final profits, which is not in line with internationally agreed principles.

RTI research HMRC has published the findings of its research into the RTI pilot that examined the impact of RTI on employers’ PAYE end of year (EOY) activities by interviewing 756 employers. The majority of employers were confident about their EOY procedures under RTI, although most were also confident about the previous PAYE procedures. Three-quarters of employers said the EOY procedures under RTI were very, or fairly easy to deal with. However, employers who were less confident about the EOY processes had a less positive end of year experience. Micro businesses were less likely to be confident about EOY procedures using RTI. The research found little evidence of any increase in agent or banking costs as a result of RTI. Almost half (47%) of employers reported an increase in software costs in the year they migrated to RTI, but these costs were not always directly related to RTI upgrades or support. Employers who reported low confidence in the EOY process expected the EOY costs to be lower for the following year. Overall three-quarters of employers described a benefit of the RTI system compared with the previous system, and most cited EOY time savings as a positive outcome. Half of employers felt that there was at least one downside of the RTI system; being technical issues or the lack of help or guidance.

Code of practice for banks Banks have been given until 4 December 2013 to bring their policies

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in line with the code of practice on tax for banks. HMRC will publish an annual report on the operation of the code from 2015. This will list which entities have unconditionally adopted the code, and those small banks which have agreed to adopt only section 1 of the code. The report will also list those who have breached the code, but no account will be taken of any conduct occurring before 4 December 2013, or if later, the date the bank adopted the code.

Tax agent strategy As research for its tax agent strategy HMRC is visiting tax agents who act for subcontractors registered under the construction industry scheme (CIS) and who regularly claim tax repayments. These visits will test the use of a checklist and guidance as methods to provide educational support to the tax agents. HMRC will share the results of this research with the professional tax bodies.

Proposed legislation Offshore employment agencies Following consultation the Government has decided not to change who has responsibility for deducting PAYE and NICs from workers engaged in the UK to work for offshore employers. The UKbased intermediary will remain responsible for deducting and reporting PAYE. However, a certification scheme is to be developed for offshore employers in the oil and gas sector. Legislation for the changes will be included in the current NICs Bill and the Finance Bill 2014, to take effect from April 2014. NICs for members of LLPs Members of LLPs who are engaged on terms similar to employment are to be treated as employees for NIC purposes. The criteria that determine which LLP members are to be treated in this way will be set out in primary tax legislation. Changes will be made to NICs legislation to:

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newsfile ●

disapply LLPA 2000, s 4(4), which deems LLP members not to be employees for all purposes; categorise “salaried members” as employed earners; and ensure that no Class 4 NIC arises on members categorised as employed earners.

Profi t deferral in partnerships Where an alternative investment fund management (AIFM) firm is set up as an LLP or partnership, the AIFMD rules require that the profit made in the base year must be retained and deferred for distribution for three to five years. Currently partners are taxed on those deferred profits. Clauses in Finance Bill 2014 will allow AIFM partnerships to comply with the AIFMD rules in a way that would not result in individual partners paying tax on partnership profits that they cannot access in the base year. Employment allowance The employment allowance will allow every business and charity which is an employer in the UK to claim up to £2,000 per year against the employer’s NICs incurred from 6 April 2014. The allowance will be applied automatically under RTI. Legislation to provide for the employment allowance is included in the National Insurance Contributions Bill which was published on 14 October 2013. NIC Class 2 recovery Draft regulations have been released which determine how the recovery of unpaid Class 2 NICs by HMRC is treated for benefits purposes. In particular the Class 2 NICs will be treated as paid on 5 April in the tax year during which the amount due is recovered through the taxpayer’s PAYE code.

Consultations Judicial review The Government is inviting views on potential measures for the further reform of judicial review following an earlier consultation

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this year. The proposals include restricting who is eligible to bring a judicial review claim to those who have a tangible and direct interest in the matter. The right to apply for protective costs would also be restricted. There is also a proposal to restrict legal aid for those who bring judicial review proceedings. The consultation closes for comments on 1 November 2013.

HMRC guidance Pension liberation HMRC has been working with other Government departments to deter pension liberation where this puts at risk pension savings. The new HMRC procedures introduced to achieve this include: ● a detailed risk assessment before registering a pension scheme; ● providing confirmation of registered pension schemes only where the receiving scheme does not appear to be used for pension liberation; and ● a factsheet for individuals regarding pension liberation. RDR1 This guidance note, entitled Residence, Domicile and the Remittance Basis, replaces HMRC6 for 2013/14 and subsequent tax years. It should be read in conjunction with the guidance note: RDR3 Statutory Residence Test (SRT).

Employer advice PDV The HMRC software, PAYE desktop viewer (PDV), has been updated. The new version (2.4) will run with MS Windows 8. RTI warnings HMRC has begun to send electronic messages to employers who have apparently submitted a full payment submission (FPS) later than the date on which their employees are paid. This key RTI report should be submitted to HMRC on or before the day of payment.

From April 2014 there will be automatic penalties for submitting a late FPS, but in 2013/14 late filing penalties only apply for the last FPS submitted for the tax year. Until April 2014 employers with fewer than 50 employees can use the relaxation for RTI, and file the FPS by the end of the tax month rather than by the date of payment. If the employer falls within this exemption no action is required. In order to pick up these electronic messages from HMRC the employer needs to access their payroll software, or log on to HMRC’s PAYE online services and look for notifications. The messages are also accessible using the HMRC’s PAYE desktop viewer software package. PAYE scheme cancellation Employers who have an inactive PAYE scheme and have not registered the scheme as an annual scheme, or indicated the scheme is open for other reasons, such as paying subcontractors under the CIS, will have that PAYE scheme automatically closed by HMRC. The employer will be informed by a letter (RTI206), which will cancel any obligation to make RTI returns. This letter includes information on how to contact HMRC to ask for the PAYE to be reopened.

HMRC manuals CG The Capital Gains Manual has been updated to reflect the introduction of the statutory residence test and the application of entrepreneurs’ relief to EMI shares. PAYE Details of the generic notification service for RTI have been added to the PAYE Manual.

International tax Multilateral convention Switzerland has signed the multilateral convention on mutual administrative assistance in tax matters, and is the 58th country

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points of law HMRC v Healy [2013] UKUT 367 (TCC)

R (Kevin Rouse) v HMRC [2013] UKUT 383 (TCC)

Accommodation had dual purpose Healy is a professional actor, who lives in Cheshire with his wife. He accepted a role in a play at a London theatre and rented a flat which was just over a mile from the theatre. He claimed a deduction of £32,503 in respect of the rent of the flat, and also claimed deductions of £8,174 in respect of travelling (by taxi) and subsistence (meals in restaurants). HMRC rejected the claims and Healy appealed. The First-tier Tribunal held that the expenditure on restaurant meals was not wholly and exclusively for the purpose of his profession, and Healy had not submitted sufficient evidence in support of his claim for taxi fares, so these items were not deductible. With regard to the rent of the flat, Judge King allowed Healy’s appeal but the Upper Tribunal remitted the case back to the FTT for rehearing, observing that “the FTT needed to consider whether in all the circumstances of the case, the sole purpose for renting the flat was in order to carry on his profession of an actor”. If that had been Healy’s sole purpose, the expenditure would be deductible, but if Healy had had a dual purpose, the expenditure would not be deductible.

VAT refund must be paid This is a judicial review taken by Kevin Rouse into the power of HMRC to refuse to pay a VAT refund to him as a VAT registered trader, which HMRC agree is due. However, HMRC sought to set this refund against Rouse’s income tax liability under powers of set-off conferred by FA 2008, s 130. Rouse entered into transactions which generated losses; a negligible value claim of £1.5 million in respect of shares, and a partnership venture which produced trading losses of £1.7 million. Rouse sought to set these losses against his trading profits reported in his 2007/08 and 2008/09 tax returns. HMRC subsequently began an enquiry into Rouse’s 2008/09 return. They also began county court proceedings to collect unpaid tax for 2007/08. However, these proceedings were stayed pending the decision in HMRC v Cotter [2012] STC 745. The Upper Tribunal granted Rouse’s application for judicial review. Warren J observed that, in HMRC v Cotter, Arden LJ had held that only an enquiry under TMA 1970, s 9A “could be opened into a claim contained in a return”. It followed that, once an enquiry under TMA 1970, s 9A had been opened, there could not also be

to do so. This convention provides for all sorts of mutual assistance in tax matters, including simultaneous tax examinations and assistance in tax collection across international borders. The Swiss Government has also agreed to make changes required by the OECD, including the revision of double tax treaty provisions to include more transparency on bearer shares, and tighter rules of information exchange.

to the existing double taxation agreement between those two countries. This amendment permits automatic exchange of information based on FATCA principles. A separate tax information exchange agreement will set out details of the information to be automatically exchanged.

Isle of Man On 10 October 2013 the UK and the Isle of Man signed an amendment

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South Africa South Africa is to join the pilot scheme for the automatic exchange of tax information launched by the UK, France, Germany, Italy and Spain in April 2013. In addition the UK and South Africa have committed to

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an enquiry under TMA 1970, Sch 1A, para 5. Therefore the enquiry which HMRC had purported to open under TMA 1970, Sch 1A, para 5 was invalid and HMRC could not exercise the power given to them by TMA 1970, Sch 1A, para 4(3). Therefore there was “no debit on (Rouse’s) account against which the VAT credit due to him might be set off”. Warren J observed that this was a “surprising result”, but held that it was the inevitable consequence of Arden LJ’s decision in Cotter.

McMahon v HMRC TC02799 Legal costs not deductible Philip McMahon was employed as a recruitment consultant by Quantica Plc (Q) from November 2003 to April 2007, when he left to commence work as a self-employed recruitment consultant. Subsequently Q began legal proceedings against him, claiming that he had breached an undertaking not to contact or canvass any of Q’s clients. The proceedings were settled by a “Tomlin order”, under which McMahon agreed to pay Q £100,000 in settlement of Q’s claims. He also incurred legal costs of £15,354. In his 2007/08 tax return, McMahon claimed a deduction for the payment to Q plus his legal costs. HMRC rejected the claim on the basis that the expenditure had not been wholly and exclusively incurred for the purpose of McMahon’s business.

a long-term partnership to support the tax capacity building of revenue authorities in Africa. Uruguay The UK and Uruguay have signed a tax information exchange agreement, which will enable those countries to exchange information to OECD and international tax standards to ensure that the right amount of tax is paid in each country. The agreement will come into effect as soon as each government has completed the necessary procedures to give effect to it under its domestic laws.

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points of law The First-tier Tribunal dismissed McMahon’s appeal. Judge Cannan held that the expenditure had a dual purpose, and that one of the purposes had arisen out of McMahon’s contract of employment with Q. Accordingly, the expenditure was not wholly and exclusively for the purpose of McMahon’s own business.

D & Mrs M Koshal v HMRC TC2806 Rental income split 50:50 Mr & Mrs Koshal jointly owned 20 residential let properties. For periods up to 5 April 2004, Mr Koshal declared all the rental income from those properties on his own tax returns. From 6 April 2004 all the rental income was declared on Mrs Koshal’s tax returns. Mr Koshal explained this change in declarations was made because from April 2004 Mrs Koshal had taken on all the administrative duties concerning the let properties, so she should be taxed on 100% of the income from those properties. However, he stated that he would share in the capital growth from the properties. The couple did not submit a declaration on form 17 (or in any other manner) in respect of the let properties. HMRC issued discovery assessments and imposed penalties for under-declaration of tax. The couple appealed, and the husband contended that because his wife managed the properties, all the income should be treated as accruing to her. The Firsttier Tribunal rejected this contention and dismissed the appeals. Judge Khan held the effect of ITA 2007, s 836 was that, as the couple had not lodged an election under ITA 2007, s 837 (on form 17) “there was no evidence to show that the parties intended there to be a split in both income and capital which was otherwise than 50:50”.

SC Mak v HMRC TC2811 House was business asset SC Mak was a restaurant proprietor who purchased a house in 1995 and sold it in 2006. He claimed business asset taper relief on the basis that the house had been used from April 1998

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to 31 August 2004 to provide free accommodation for ethnic Chinese workers who were employed in his restaurant business. Mak entered into PAYE settlement agreements for the whole of the relevant period to account for tax due on the provision of this accommodation to his workers. HMRC investigated Mak’s 2006/07 tax return over a period from January 2009 to November 2010, and rejected the claim for business asset taper relief. Mak’s appeal eventually reached the First-tier Tribunal in July 2013, and it allowed the claim for business asset taper relief.

HMRC v Lloyds TSB Equipment Leasing (No 1) Ltd [2013] UKUT 368 (TCC) Capital allowances due Lloyds Leasing (L), which carried on a trade of finance leasing, claimed capital allowances on expenditure on two ships, which were designed and built to ship liquefied natural gas from Norway to Spain and the USA. HMRC issued an amendment rejecting the claim, considering that the effect of CAA 2001, s 123(4) was that L was not entitled to the allowances it had claimed. The First-Tier Tribunal allowed L’s appeal, holding that the ships were used for a “qualifying purpose” within CAA 2001, s 123(1), and that the restriction imposed by CAA 2001, s 123(4) did not apply, so that L was entitled to allowances. The Upper Tribunal upheld this decision.

T Rosenbaum’s Executor v HMRC TC2804 & TC2884 Evidence not sufficient In April 2012 HMRC sent a tax return to the executors of Rosenbaum’s estate. HMRC claimed to have received the paper tax return from the executors on 14 January 2013, and imposed a penalty as that return was received after the deadline for submitting paper returns of 31 October 2012. The executors submitted an online return on 24 January 2013, and appealed against the penalty. Judge Brannan allowed the appeal, holding

that since HMRC had not submitted the paper return in evidence, and there was no proof that it had been signed, it should not be treated as a valid return for the purposes of TMA 1970, s 8A. Accordingly the online return submitted on 24 January 2013 should be treated as the valid return, so that no penalty was due. At a subsequent hearing HMRC sought to set aside this decision, and included a copy of the disputed paper return. Judge Brannan refused to set aside his original decision saying; “There was no reason why the evidence (a copy of the disputed paper tax return) could not have been provided in the papers furnished for the original decision and no explanation for this failure has been put forward.”

Editor: Rebecca Cave Production: Heather Pearton Published twice monthly by LexisNexis, Lexis House, 30 Farringdon Street, London, EC4A 4HH. Telephone: 020 7400 2500 Fax: 020 7400 2842 Email: Rebecca@taxwriter.co.uk © Reed Elsevier (UK) Limited 2013 ISSN 1475-2352 This publication is intended to be a general guide and cannot be a substitute for professional advice. Neither the authors nor the publisher accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this publication. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission in writing of the publishers. Printed and bound in Great Britain by Hobbs the Printers Ltd, Totton, Hampshire.

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