2020 innovation training ltd monthly tax update webinar …€¦ · 22/06/2015 · 2020 monthly...

2020 Monthly Tax Update Webinar – June 2015

2020 INNOVATION TRAINING LTD

Monthly Tax Update Webinar

22 June 2015

Martyn Ingles FCA CTA

Ingles Tax and Training Ltd

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by the author or 2020 Innovation Training Limited


2020 – Monthly Tax Update Webinar – June 2015

Contents

1. THE QUEEN’S SPEECH AND FUTURE LEGISLATION ............................................... 4

1.1 Queen's Speech 2015 - Tax and benefit measures ................................................ 4 1.1.1 Tax lock commitment - National Insurance Contributions Bill and Finance Bill . 4 1.1.2 Personal Tax Allowance .................................................................................. 4 1.1.3 Scotland Bill ..................................................................................................... 5 1.1.4 Full Employment and Welfare Benefits Bill ....................................................... 5

2. HMRC ANNOUNCEMENTS AND OTHER DEVELOPMENTS ...................................... 6

2.1 Relief For Political Gifts – Qualifying Parties ........................................................... 6 2.2 Salary Sacrifices - Updated HMRC Guidance (May 2015) ...................................... 6 2.3 Employment Allowance Scheme in the HMRC spotlight ......................................... 9 2.4 Advisory fuel rates increased on 1 June 2015 ....................................................... 10 2.5 Do we need to Submit an ATED (Annual Tax on Enveloped Dwellings) Return? .. 11

2.5.1 Who should complete an ATED Return? ........................................................ 11 2.5.2 ATED rates for 2015/16 ................................................................................. 11 2.5.3 ATED Relief Declaration Returns ................................................................... 12 2.5.4 ATED Reliefs - Codes ................................................................................... 12

2.6 Waiver of Penalties for Late 2013/14 Tax returns ................................................. 13

3. RECENT TAX AND TRIBUNAL CASES ...................................................................... 14

3.1 Late Tax Return – Reasonable Excuse? ............................................................... 14 3.2 Resonable Excuse for Late Appeal against Suspended Penalty ........................... 14 3.3 VAT - Single or Multiple Supply – Promotional Campaign ..................................... 15 3.4 VAT – Value of Clothing Supplied to Staff ............................................................. 16 3.5 Dishonest Evasion – Director Responsible?.......................................................... 18 3.6 Deed of Variation effective for IHT and CGT? ....................................................... 19

4. TAX PLANNING OPPORTUNITIES ......................................................................... 20

4.1 Pension Planning Before The Summer Budget? ................................................... 20 4.1.1 Bring forward unused relief from the previous three years ................................... 20

4.2 Inheritance Tax and the Proposed Family Home Allowance ................................. 22


2020 MONTHLY PRACTICAL TAX UPDATE WEBINAR – JUNE 2015 There were a number of taxation measures announced in the Queen’s Speech and it has also been announced that the Summer Budget will be on 8 July 2015. Many of the Conservative party “promises” in their pre-election manifesto will now be fleshed out and are likely to feature in future Finance Bills. In this monthly webinar I will be drawing on the usual source material for the content of these webinars:

New legislation, in draft and enacted

HMRC practice and guidelines

Recent tax cases and Tribunal decisions

Tax planning ideas


1. THE QUEEN’S SPEECH AND FUTURE LEGISLATION

1.1 Queen's Speech 2015 - Tax and benefit measures

The Queen's Speech included Finance Bill and National Insurance Contribution Bill commitments to ensure there will be no rises in rates of income tax, VAT or NICs for the next five years, and link the income tax threshold to the level of the national minimum wage for individuals working 30 hours a week.

The Queen also announced a Scotland Bill to enable the Scottish Parliament to set income tax rates and thresholds in Scotland, share VAT revenues, and devolve air passenger duty and aggregates levy; and a Full Employment And Welfare Benefits Bill freezing tax credits for two years.

There was no mention of restrictions to pension tax relief for high earners and a proposed increase in the inheritance tax threshold for those passing on the family home – see later in these notes.

1.1.1 Tax lock commitment - National Insurance Contributions Bill and Finance Bill

“Legislation will be brought forward to ensure … there are no rises in income tax rates, value-added tax or National Insurance for the next five years.”

The purpose of the legislation is to:

1. Ensure there are no rises in income tax rates, VAT rates or National Insurance contributions (NICs) rates for individuals, employees and employers.

2. Ensure that the NICs upper earnings limit (the point at which the Employee NICs rate reduces to 2%) is no higher than the income tax higher rate threshold (the point at which income tax increases to 40%).

3. Ensure there will be no extension of the scope of VAT.

The main benefits of the legislation would be to prevent any increase in Income Tax rates, VAT rates, or individual, employee or employer rates of National Insurance, above the current rates.

The main elements of the legislation are to set a ceiling for the rates of Income Tax and VAT, and the individual, employee and employer National Insurance rates, so that these rates cannot be raised above their current levels.

There is however speculation that with the abolition of Class 2 NI contributions from 6 April 2016 and merger with Class 4 contributions that the self employed rate will be aligned with the employee rate at 12% up to the upper profits limit! The quid pro quo will be for the self-employed to have increased entitlement to State Pensions and Benefits.

1.1.2 Personal Tax Allowance

“Legislation will be brought forward to ensure people working 30 hours a week on the National Minimum Wage do not pay income tax”

The Government has a commitment to raise the personal allowance to £12,500. This will go further and ensure that in the future, individuals working 30 hours at the national minimum wage will not pay income tax.


1.1.3 Scotland Bill

New tax powers for Scotland

1. The Bill would enable the Scottish Parliament to set the thresholds and rates of income tax on earnings in Scotland and keep all the money raised in Scotland.

2. The Bill would provide the Scottish Parliament with the first ten percentage points of standard rate VAT revenue raised in Scotland (and 2∙5% reduced rate).

3. The Bill would also devolve responsibility for Air Passenger Duty and the Aggregates Levy to the Scottish Parliament.

4. Additional borrowing powers will also be agreed between the UK and Scottish Governments as part of a new fiscal framework for Scotland.

Scottish rate of income tax

HMRC have published draft guidance, for consultation, on the Scottish rate of income tax (“SRIT”). The draft guidance focuses primarily on the definition of “Scottish taxpayer” for the purposes of SRIT and proposes that individuals will be Scottish taxpayers if they are resident in the UK for tax purposes and, in the course of a tax year, they satisfy any of the following three tests: 1 they are a Scottish Parliamentarian; or 2 they have a “close connection” to Scotland, through either

having only a single “place of residence”, which is in Scotland; or

where they have more than one “place of residence”, having their “main place of residence” in Scotland for at least as much of the tax year as it has been in another part of the UK; or

3 where no “close connection” to Scotland (or any other part of the UK) exists – through day counting. If the individual spends at least as many days in Scotland as elsewhere in the UK.

The draft guidance defines the key terms used in the three tests and also provides examples of “close connection”.

1.1.4 Full Employment and Welfare Benefits Bill

Working-age benefit freeze

1. The new legislation would freeze the main rates of the majority of working-age benefits, tax credits and Child Benefit for two years from 2016/17.

2. Pensioners would be protected, as would benefits relating to the additional costs of disability.

3. Statutory payments, such as Statutory Maternity, Paternity, and Adoption Pay would also be exempted.


2. HMRC ANNOUNCEMENTS AND OTHER DEVELOPMENTS

2.1 Relief For Political Gifts – Qualifying Parties

The General Election result means that donations to the UK Independence Party now qualify for relief from inheritance tax as that party returned at least one member and secured at least 150,000 votes nationally. However the Alliance Party in Northern Ireland now ceases to qualify. The full list of the 11 qualifying political parties is:

Conservative

Democratic Unionist Party

Green Party

Labour

Liberal Democrat

Plaid Cymru

Scottish Nationalist Party

Sinn Fein

SDLP

UKIP

Ulster Unionist Party

Remember that this relief applies to gifts during the donor’s lifetime as well as bequests made to a qualifying party in their Will. These donations need to be made personally as such payments are not an allowable deduction in arriving at business profits.

2.2 Salary Sacrifices - Updated HMRC Guidance (May 2015)

HMRC have updated their guidance on salary sacrifice arrangements to take account of Auto-Enrolment and other developments and the current guidance is set out below:

A salary sacrifice arrangement is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee's entitlement to cash pay. This sacrifice of cash entitlement is usually made in return for some form of non-cash benefit.

Salary sacrifice can be financially beneficial for both employer and employee. For example, when part of an employee's remuneration shifts from cash - on which tax and National Insurance contributions (NICs) are due - to non-cash benefits that are wholly or partially exempt.

A salary sacrifice arrangement can't reduce an employee's cash earnings below the National Minimum Wage rates.

Changing the terms of a salary sacrifice arrangement

If an employee wants to opt in or out of a salary sacrifice arrangement, employers must alter their contract with each change. The employee's contract must be clear on what their cash and non-cash entitlements are at any given time.


It may be necessary to change the terms of a salary sacrifice arrangement where a “lifestyle change” significantly alters an employee's financial circumstances. Examples include marriage, divorce, or an employee's spouse or partner becoming redundant or pregnant. Salary sacrifice arrangements can allow opting in or out in the event of lifestyle changes like these.

If an employee can swap between cash earnings and a non-cash benefit whenever they like, it's not a salary sacrifice. In these circumstances, any expected tax and NICs advantages under a salary sacrifice arrangement won't apply.

Tax and NICs

The impact on tax and NICs payable for any employee will depend on the pay and non-cash benefits that make up the salary sacrifice arrangement. An employer's key responsibility is to make sure that they pay and deduct the right amount of tax and NICs for the cash and benefits they provide.

For the cash component, that means operating the PAYE system correctly through their payroll. For any non-cash benefits, it means checking the tax and NICs rules that apply and implementing them correctly.

Employers' reporting requirements for non-cash benefits

Reporting requirements for many non-cash benefits are different to those for cash earnings. In general, benefits must be reported to HM Revenue and Customs (HMRC) at the end of the tax year using forms P11D or P9D.

Tax and NICs exemptions on non-cash benefits

Some non-cash benefits qualify for an exemption from tax. Some may be disregarded before calculating NICs. If this is the case for a benefit an employer provides to an employee as part of a salary sacrifice arrangement, any conditions that apply to the exemption must be satisfied.

For example, if a benefit has to be made available to all employees in order to be exempt, then this condition must be fully satisfied, whether or not all employees have a salary sacrifice arrangement.

Guidance for employers on particular expenses and benefits is available.

Ask HMRC to confirm the tax and NICs

Once a salary sacrifice arrangement is in place, employers can ask the HMRC Clearances Team to confirm the tax and NICs implications. HMRC won't comment on a proposed salary sacrifice arrangement before it has been put in place.

HMRC Clearances Team Alexander House 21 Victoria Avenue Southend-on-Sea Essex SS99 1BD


Alternatively they can email the HMRC Clearances Team.

To be satisfied that the change has been effective at the right time and not applied retrospectively, HMRC would need to see:

1. evidence of the variation of terms and conditions (if there is a written contract) 2. payslips before and after the variation

Common Examples of salary sacrifice:

Salary Salary sacrificed Non cash benefit received

Consequence

£350 per week £50 of that salary Childcare voucher to the same value

Only £300 is subject to tax and NICs, childcare vouchers are exempt from both tax and Class 1 NICs up to a limit of £55 per week

£350 per week £100 of that salary Childcare vouchers to the same value

£250 is subject to tax and NICs, childcare vouchers are exempt from both tax and Class 1 NICs up to a limit of £55 per week

£5,000 bonus £5,000 £5,000 employer contribution to registered pension scheme

No employment income tax or NICs charge to the employee - the full amount is invested in the pension fund

Childcare vouchers and tax credits

Childcare vouchers from an employer may affect the amount of tax credits an employee gets. Employees can use a calculator to help them decide if they're better off taking the vouchers or not.

Earnings related payments

Employers usually decide how earnings related payments such as occupational pension contributions, overtime rates, pay rises, etc are calculated. Such payments can be based on the notional salary or the new reduced cash salary, but this must be made clear to the employee.

Earnings related benefits

Salary sacrifice can affect an employee's entitlement to earnings related benefits such as Maternity Allowance and Additional State Pension. The amount they receive may be less than the full standard rate or they may lose the entitlement altogether.


Contribution based benefits

Salary sacrifice may affect an employee's entitlement to contribution based benefits such as Incapacity Benefit and State Pension. Salary sacrifice may reduce the cash earnings on which NICs are charged. Employees may therefore pay – or be treated as paying – less or no NICs.

Statutory payments

Salary sacrifice can affect the amount of statutory pay an employee receives. It can cause some employees to lose their entitlement altogether. If a salary sacrifice arrangement reduces an employee's average weekly earnings below the lower earnings limit, then the employer doesn't have to make any statutory payments to them.

Workplace pension schemes

The employer decides whether salary sacrifice affects contributions into a workplace pension scheme. Often, employers will use a notional level of pay to calculate employer and employee pension contributions, so that employees who participate in salary sacrifice arrangements are not put at a disadvantage.

However, employers should always check with their scheme provider to make sure any such arrangements are allowable. Other salary sacrifice arrangements are possible. For example, an employer might agree to pay more than the minimum amount required, to cover some or all of the employee's contribution. The employee may then become entitled to a lower cash salary.

Auto-enrolment

Where an employee has been automatically enrolled into a workplace pension scheme, it will be a registered pension scheme for tax purposes. No tax is charged on the contributions an employer pays to a registered pension scheme in respect of an employee.

Where an employee opts out of a workplace pension scheme, it is possible that they will have received reduced earnings under the salary sacrifice arrangement. If the employer “makes good” that shortfall to the employee then the payment should be made subject to tax and NICs.

2.3 Employment Allowance Scheme in the HMRC spotlight

HMRC has added Spotlight 24 to its featured list of tax avoidance schemes. This concerns the Employment Allowance scheme reported recently by the BBC, whereby agencies create multiple companies, each claiming the £2,000 allowance against employer's NICs. HMRC's view is that the scheme is caught by the targeted anti-avoidance rule in NICs Act 2014 and does not work. The schemes featured in Spotlights are generally those which HMRC considers have the widest implications and about which there is the greatest need to warn potential users. They will often be schemes that have been disclosed to HMRC and have been given a Scheme Reference Number (SRN). The issue of a SRN does not mean either that HMRC “approves” the scheme or that HMRC accepts that the scheme achieves its intended tax advantage. Only a minority of schemes will appear in Spotlights. A scheme that has not featured in Spotlights may still be challenged.


Spotlight 24—Employment Allowance avoidance scheme—contrived arrangements caught by existing rules The Employment Allowance entitles employers to save up to £2,000 of employer's National Insurance contributions (NICs), and since its launch in 2014 over a million employers have benefited. To ensure that the benefit of the allowance was felt where it was most needed, anti-avoidance arrangements were included in the allowance from launch. An attempted avoidance scheme designed to exploit the Employment Allowance has recently caught the attention of the media, including BBC's Today programme and BBC online on 29 May 2015. HM Revenue and Customs (HMRC) view is that this scheme simply does not work. HMRC strongly advises anyone who has used such a scheme to withdraw. By withdrawing and notifying HMRC, people will avoid the costs of investigation and litigation and minimise interest on underpaid National Insurance and any penalties that might be applicable. HMRC is investigating cases where people have used this scheme and will challenge every case it sees. HMRC recommends that employers considering the use of such a scheme should think again. Users will find themselves out of pocket from the promoter's fees, and possible interest and penalties on the NICs liability. Scheme promoters suggest that users of the scheme can save themselves their entire employer NICs bill. The proposition is that a payroll company takes on your staff and sets up underlying companies, each of which employs small numbers of your staff. You are invoiced for the services your ex staff provide - as you no longer employ them. Each company claims the full Employment Allowance to wipe out the employer NICs liability. This scheme sounds too good to be true and it is. There is a targeted anti-avoidance rule in the Employment Allowance (NICs Act 2014, s 2(10)), so attempted avoidance schemes like this, which seek to use artificial and contrived arrangements to get an unintended advantage, do not work. HMRC's firm view is that such schemes are notifiable under the Disclosure of Tax Avoidance Schemes (DOTAS) rules. Anyone who comes within the meaning of a promoter for such a scheme who has not notified it under the DOTAS rules could be liable for a fine of up to £1 million. The definition of “promoter” under the DOTAS rules goes beyond those who devise the scheme itself. It includes people who:

make a firm approach to another person with a view to making a scheme available for implementation by that person or others

make a scheme available for implementation by others

organise or manage the implementation of a scheme

2.4 Advisory fuel rates increased on 1 June 2015

HMRC now review their advisory fuel rates every 3 months and have published figures

which will apply to all journeys from 1 June 2015 until further notice:

Engine size Petrol Diesel LPG

1400cc or less

1600cc or less

12p

10p

8p

1401cc to 2000cc

1601cc to 2000cc

14p

12p

9p

Over 2000cc 21p 14p 14p

Petrol hybrid cars are treated as petrol cars for this purpose.


Company car drivers should consider whether it is beneficial to have private petrol and

diesel provided by their employer or reimburse private usage at the above rates to avoid a

taxable benefit arising.

2.5 Do we need to Submit an ATED (Annual Tax on Enveloped Dwellings) Return?

The Annual Tax on Enveloped Dwellings is an annual tax payable by companies, partnerships with a corporate member and collective investment vehicles which own UK residential property valued at more than £2 million. Note that even where the company is not liable to pay ATED it is still required to file a return to claim the appropriate relief. Most residential properties are owned directly by individuals. But in some cases they may be owned by a company, partnership with a corporate member or other collective investment vehicle. In these circumstances the property is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’. Budget 2014 announced a reduction in the £2 million entry threshold to £500,000 to be phased in over 2 years. From 1 April 2015 a new band came into effect for properties with a value greater than £1 million but not more than £2 million with an annual charge of £7,000. From 1 April 2016 a further new band will come into effect for properties valued at more than £500,000 but not more than £1 million.

2.5.1 Who should complete an ATED Return?

You will be a chargeable person and so should complete an ATED return if you are a company, a partnership (where one of the partners is a company), or a collective investment vehicle (for example, a unit trust or open ended investment company) and your property is—

1. a residential property (a single-dwelling interest) 2. situated in the UK 3. valued at more than £1 million on 1 April 2012, or at acquisition if later (for

chargeable periods beginning on or after 1 April 2015) 4. valued at more than £2 million on 1 April 2012, or at acquisition if later (for

chargeable periods on or after 1 April 2013)

A person that owns property in the capacity of trustee of a settlement, or who is a beneficiary of a settlement, is excluded from ATED and is not required to complete a return.

A person who holds the property as a bare trustee/nominee (and holds no beneficial interest in the property themselves) does not need to complete a return. However, if the beneficial owner meets the ownership condition (it is a company etc.) then that beneficial owner will need to complete a return.

2.5.2 ATED rates for 2015/16

The rates of annual tax on enveloped dwellings (ATED) on properties valued at more than £2 million were increased for 2015/16. Although previous legislation stated that the charges would be keeping pace with consumer price index (CPI) inflation, the increases are substantial, being a more than 50% increase.


The following rates will apply in 2015/16:

Property value range

£ million

2014/15 ATED charge 2015/16 ATED charge

> 1.0 – 2.0 N/A £7,000* > 2.0 – 5.0 £15,400 £23,350 > 5.0 – 10.0 £35,900 £54,450 > 10.0 – 20.0 £71,850 £109,050 > 20.0 £143,750 £218,200 * Unchanged from the March 2014 announcement. There will be an administrative simplification that will allow companies that wish to claim relief on a number of properties to submit a single relief claim return, rather than a return for each affected property.

2.5.3 ATED Relief Declaration Returns

Finance Act 2015 introduced a new type of ATED return; the Relief Declaration Return, to be introduced for the chargeable period beginning 1 April 2015. If you own a property or properties eligible to a relief and as a result have no tax to pay, you may be able to use the new and much shorter type of return.

For the 2015/16 chargeable period, a Relief Declaration Return can be filed by 1 October 2015, instead of the normal filing date of 30 April. The new return will be launched in late July/early August 2015, well in advance of the 1 October filing date. More guidance will be published alongside the launch of the new return, including details of how to complete a Relief Declaration Return.

A Relief Declaration Return can only be made if the following conditions are met—

1. the chargeable person owns a property or properties within the scope of ATED; 2. the property or properties meet the conditions for a relief to apply; 3. no ATED liability is payable in respect of the property or properties at the point the

return is submitted (i.e. the claim to relief reduces the charge to nil).

A separate Relief Declaration Return must be made for each type of relief being claimed. The return must specify which relief it relates to. It can be made in respect of one or more properties eligible to that particular type of relief, but no property details will be required on the return. If you have submitted a Relief Declaration Return and a property later becomes liable to tax (for example, the property is no longer eligible for a relief), a further return is required.

2.5.4 ATED Reliefs - Codes

The list of Annual Tax on Enveloped Dwellings (ATED) relief codes are:

1. Property rental businesses (to include the special conditions for sale, demolition, and, conversion)

2. Dwellings opened to the public 3. Property developers (including qualifying exchange of dwellings interests) 4. Property traders carrying on a property trading business 5. Financial institutions acquiring dwellings in the course of lending


6. Dwellings used for trade purposes (occupation by qualifying employees and partners)

7. Farmhouses (occupation for the purposes of carrying on a trade of farming) 8. Registered providers of Social Housing

Enter the appropriate relief code in the box on the return (for example, enter “3” for a dwelling(s) to which a claim to property developer relief is made). You can claim a relief on an ATED return where the property also has an ATED liability at the point your make your return. Where you have previously made an ATED return for a property which is liable to ATED, and that property later becomes eligible for a relief, you may amend your ATED return. In these circumstances you should include the relief code in this box on the return.

2.6 Waiver of Penalties for Late 2013/14 Tax returns

It has been announced that HMRC will not contest appeals against the £100 late filing

penalty in respect of 2013/14 tax returns where the taxpayer provided a reasonable excuse

for not filing on time.

HMRC has in the past looked in detail to judge if each excuse is reasonable. They will in

future focus their efforts on persistent late offenders and reallocate resources onto tax

evasion and avoidance.

What counts as a reasonable excuse is normally something unexpected or outside your

control that stopped you meeting a tax obligation, for example:

Death of your partner shortly before the deadline

An unexpected stay in hospital

Your computer or software failed just before or while you were preparing your return

online

HMRC online service issues

Postal delays that couldn’t be predicted

You must try to send your return or payment as soon as possible after your reasonable excuse is resolved.

What’s unlikely to be a reasonable excuse: The following aren’t usually accepted as a reasonable excuse:

you relied on someone else to send your return and they didn’t

your cheque bounced or payment failed because you didn’t have enough money

you found the HMRC online system too difficult to use you didn’t get a reminder from HMRC

If you have a disability and claim to have a reasonable excuse that prevented you from meeting a deadline, HMRC will consider whether you made a reasonable effort to meet your obligation on time.

Although the latest announcement concerns late self- assessment tax returns the above list

of excuses applies generally to other returns and payments such as VAT, PAYE and those

due under the Construction Industry Scheme.


3. RECENT TAX AND TRIBUNAL CASES

3.1 Late Tax Return – Reasonable Excuse? Porter (t/as Crafty Creations) v

HMRC (2015) UKFTT 170

HMRC issued a £100 penalty notice to Ms Porter. The penalty was issued on the basis that the appellant had failed to submit her self-assessment return for the 2012/13 tax year by the 31 January 2014 deadline for electronic returns. She filed her return online on 5 March 2014. On 5 March 2014 she also wrote to HMRC explaining the delay and requesting that the penalty be waived. She stated that she had been unable to log on online and when she rang HMRC on 29 January 2014 she was informed there might be an IT problem and she would be sent a reminder at the end of June. She had continued to try the website but was unable to submit online. She then received a penalty fee of £100 she contacted HMRC who sent her a new ID number and she then completed her return online. Ms Porter appealed against the penalty for late filing to HMRC who rejected it on the basis the appeal was out of time. She appealed to the First-tier Tribunal and at the hearing HMRC stated that they had considered whether there were any special circumstances - for the purposes of FA 2009 Sch 55 para 16 - which would allow them to reduce the penalty but concluded there were none. On the facts it was clear that the reason for the short delay in submitting the appellant's return was an HMRC IT problem (an online service issue). She had clearly tried to submit her return online, telephoned and wrote to HMRC, and subsequently succeeded in resolving the IT problem. Those were the actions of a person who was doing their best to comply with the legislation and submit a return on time but unexpectedly encountered unforeseen IT problems. The appellant had established that she had a reasonable excuse for the late submission of her individual tax return. The appeal would accordingly be allowed.

3.2 Resonable Excuse for Late Appeal against Suspended Penalty Automation Ltd v HMRC

[2015] UKFTT

Automotion CPM

Group Ltd v HMRC

[2015] UKFTT

Automotion understated its output tax liability for three successive quarterly VAT accounting periods. Its director told the Tribunal that he had not noticed the error because it was not unexpected for the company to be making repayment claims, having purchased a number of qualifying cars in the relevant periods. However, the inaccuracy had resulted from taking forward to the VAT return only one month's output tax figures out of three each time. The Tribunal described this as “clearly” careless.

The Tribunal had firstly to consider whether to hear the appeal, which had been submitted late. Automotion claimed to have appealed on time and suggested that the Tribunal had not received the form. The Tribunal said:

“We allow the application for permission to appeal out of time. It is not clear why the appellant thought that the Tribunal was dealing with his appeal, but he clearly intended to pursue the appeal and had made contact with the Tribunal. In making this decision we feel it is necessary that the merits of the appeal need to be fully rehearsed and argued.”

The Tribunal was referring here to the issue of suspension. Automotion argued that HMRC should have opted for suspension (and by implication had acted unreasonably in not doing so). Automotion suggested that a suitable suspension condition could have been to instruct it not to repeat the error it had made.


There were two flaws in Automotion's case:

1. it had been subject to a previous suspension, under the condition that it check the results of its spreadsheet and had plainly failed to meet that condition before; and

2. it is not a valid suspension condition that future errors should not be made, since any suspension will cease to have effect (resulting in liability to HMRC for the suspended penalty) if errors are made during the suspension period, so such a condition would be otiose and cannot, therefore have been contemplated as a condition in its own right.

HMRC had not acted unreasonably in refusing to suspend the penalty. The appeal was therefore dismissed.

3.3 VAT - Single or Multiple Supply – Promotional Campaign Marketing Lounge Partnership

Ltd v HMRC [2015] UKFTT

The Card Protection Plan (CPP) decision at the European Court (ECJ) established important principles in determining whether different rates of VAT should be applied to component services or whether a single rate of VAT should apply based on the principal supply where other services are merely ancillary to the principal supply.

The key policy points arising from the ECJ judgement were:

A supply that comprises a single service from an economic point of view should not be artificially split - the essential features of the transaction must be ascertained to decide if the supply to a typical customer comprises several distinct principal services or a single service.

There is a single supply in cases where one or elements are to be regarded as ancillary services. An ancillary service is defined as something that does not constitute for customers an aim in itself but is a means of better enjoying the principal service supplied.

The fact that a single price is charged is not decisive. If the circumstances indicate that customers intend to purchase two or more distinct services a single price will not prevent these being treated as separate supplies with different liabilities applying, if appropriate, to those services.

In the current case the taxpayer company MLP ran promotional campaigns for insurance companies (partially exempt traders). Customers who renew their policies qualify for promotional benefits such as hotel stays, spa visits and film subscriptions. The appellant produces a brochure for each campaign. This is sent to all qualifying customers. Additional information is provided by means of a website. The appellant then deals via helplines with any queries the customers might have, assists in bookings, etc. The insurance company client's only involvement is to send the appellant a list of qualifying customers and to pay the appellant a fixed fee per customer.

MLP argued that it made two distinct supplies to its clients: a printed brochure; and other services. The brochure was a zero-rated supply and, if there were separate supplies, the other services were standard-rated. If there was a single supply, MLP argued that the brochure was the dominant element, so that a single supply would be zero-rated.

HMRC argued that MLP made a single, standard-rated supply of promotional services.

MLP pointed out that there was always a bespoke brochure produced for each campaign. The additional services, however, were optional. HMRC pointed out that the brochure was


basically the same for each campaign, only being altered in small details in order to tailor it to the particular client.

The Tribunal concluded that:

“In the present appeal the clients of the appellant company contracted for both the printed matter and the 'fulfilment services'. We consider that all the elements provided by the appellant were integral parts of a whole. It would probably be more costly to have more than one provider. In effect by engaging the appellant company the client was relieved of the whole responsibility of running its campaign: it could entrust the operation to one 'professional'. The guides and website were truly complimentary. The help lines were a natural support. Any sub-division, we consider, would be artificial and likely to create additional unnecessary expense …

“The purpose and overall nature of the supplies in the present case was the marketing and promotion of the clients' commercial interests. The printed material was a subordinate and incidental part of the promotion. That material was not individual to each client but followed a common model. Even then it was incomplete inasmuch as it had to be supplemented by reference to a website.”

There was thus a single, standard-rated supply of promotional services and the appeal was dismissed.

3.4 VAT – Value of Clothing Supplied to Staff French Connection Ltd Ltd v

HMRC [2015] UKFTT

French Connection (FC) required all its in-store staff to wear clothing from its most current range. Staff were permitted to choose and take away for free the clothing they would wear from that range, up to a stated limit. The staff would then wear those clothes at work until the next new range was released (broadly quarterly). Members of staff had to wear identification badges, so that they could be told apart from customers. If a member of staff left the appellant's employment during each quarterly “free clothes” period, that staff member would suffer a charge of 30% of the relevant clothes allowance.

FC did not account for any VAT in relation to the free clothes, on the basis that it was supplying uniforms to its staff. It did account for VAT when it made a 30% charge to leavers. HMRC made an assessment on the basis that the clothes had been supplied to staff. In cases where staff had provided no consideration the value of the supply was the cost to the appellant. In cases where staff had been charged 30% of the clothing allowance the value of the supply was the amount charged to the staff (thus agreeing with the appellant's approach – credit was given in the assessment for the VAT already accounted for). In cases where a staff member had been given clothes of a value in one year of up to £50, no VAT was to be accounted for (under the business gifts exemption).

FChad relied on HMRC's statement in Notice 700, para 4.4:

“You do not make a supply if you provide goods (such as overalls or tools) to employees solely for the purpose of their employment and make no charge.”

FC argued that this statement was in line with VAT Directive 2006/112/EC, art 16 (on which the UK legislation is based):


“The application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible”.

“However, the application of goods for business use as samples or as gifts of small value shall not be treated as a supply of goods for consideration.”

FC interpreted art 16 as providing that there is only a supply when business assets are used otherwise than for business purposes. However, the Tribunal considered this too simple a reading of art 16. In particular, art 16 states that there is a supply when business assets are disposed of free of charge, whether or not for the purposes of the business.

Art 16 is thus implemented correctly by VATA 1994 Sch 4 para 5:

“(1) Subject to sub-paragraph (2) below, where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, that is a supply by him of goods.

“(2) Sub-paragraph (1) above does not apply where the transfer or disposal is (a) a business gift the cost of which, together with the cost of any other business gifts made to the same person in the same year, was not more than £50 …”

The comment in para 4.4 of Notice 700 was not relevant to these circumstances, since the clothes were not provided “solely” for business purposes and “provide” in that context meant “make available without giving outright”.

The Tribunal reinforced its interpretation by considering the underlying purpose of art 16. In circumstances where a trader has purchased goods and has reclaimed (or intends to reclaim) input tax thereon, disposal of those assets without charging VAT would permit the trader an unwarranted advantage (since the input tax is supposed to be deducted from output tax charged and if there is no onward supply, there is no output tax). Disposal free of charge, whether or not for business purposes, is therefore a supply for VAT purposes.

On that basis it was irrelevant whether the clothes in question were uniforms (the Tribunal decided in any case that they were not), or whether they could be described as “business gifts”. In fact, the Tribunal agreed with HMRC and the appellant that clothes given to staff with an annual value of no more than £50 would benefit from the exception in Sch 4, para 5(2). The Tribunal noted that it was appropriate to call the clothes “business gifts” in that context only.

The Tribunal, having decided that under the terms of the agreement with the appellant's staff the clothes were given outright to staff, held that this was a disposal of business assets for no consideration. The value of the supply was the cost to the appellant. The subjective value to the staff member and the “net present value” of the clothes subject to possible clawback payments to the appellant, were irrelevant to the value of the supply when made. The effect of this was that HMRC and the appellant were wrong to agree that there was a supply by the appellant to the staff member when 30% was charged to a leaver. Those clothes had already been supplied to the staff member when given to him or her by the appellant. The value of that supply was the cost to the appellant and that was not affected by any charge made later, which was not ascertainable at the time of the supply.


However, the Tribunal merely dismissed the appeal, since the assessment was not in issue in that respect.

3.5 Dishonest Evasion – Director Responsible? Mohammed Azam v HMRC

[2015] UKFTT

Mr Azam was the owner and director of a company (Easy Recruitment Services Ltd) which won a contract to supply staff to a company called Stubbins. It was not an issue in this appeal but HMRC had asked Easy why it was not accounting for PAYE and NIC in respect of the wages of the staff supplied. Easy had informed HMRC that the staff were in fact employed by a sub-contractor called BCL (and payslips showing Easy as the employer were wrong).

Few records were available to the Tribunal. Easy accused HMRC of having lost the remaining records but the Tribunal was not concerned to attribute blame – it was able to decide the appeal without detailed evidence. HMRC made an assessment on the basis that Easy had failed to account for output tax on its supply of staff to Stubbins. Easy's response was that even if it had accounted for output tax, it would not have had a liability to HMRC, since the input tax on invoices from BCL would cancel out the output tax.

The Tribunal concluded from the available evidence that Easy had not accounted for the output tax in order to evade a VAT liability to HMRC. It had kept the BCL invoices as a second line of defence if (as had happened) HMRC discovered that the output tax had not been accounted for. However, the BCL invoices were not valid VAT invoices and did not reduce the output tax liability owed by Easy to HMRC.

HMRC had imposed a VAT dishonest evasion penalty on Easy's director, Mr Azam. Mr Azam denied any responsibility for the evasion. Under VATA s 61(1)(b) the conduct giving rise to the penalty must have been, “in whole or in part, attributable to the dishonesty of a person who is, or at the material time was, a director or managing officer of the body corporate” which had evaded the VAT in question. Mr Azam said he was not responsible for any of the acts of his company, Easy, because he had delegated all powers to act to his staff. The Tribunal dismissed his appeal. It said:

“In a situation where the appellant, on his own evidence, had complete and sole control of Easy's bank account, it is appropriate to consider what has happened to the money which was received from Stubbins.”

In essence, over £193,000 of cheques issued by Stubbins were never paid into Easy's normal business account but the appellant said he 'may' have paid them into another account. He has not produced copies of any statements for any other account to show what happened to that money (and there is no suggestion that those records might have been included in the records uplifted by HMRC in April 2005).The appellant was the only person with authority to sign for withdrawals from the account for which we have seen statements, into which over £587,000 was paid from Stubbins. Large cash withdrawals were made by him from that account, totalling some £510,000; this amount might have been roughly sufficient to pay the net wages of the workers (we note that the gross wages payable for the hours worked over the entire life of the Stubbins contract, at national minimum wage rates and before any deductions for PAYE and NIC, would have been approximately £617,400) but it would have been nowhere near enough to pay the sum of just under £732,000 supposedly due to BCL under the BCL invoices. In short, the appellant has carefully managed the money received from Stubbins in a way which is entirely inconsistent with his evidence of the supposed arrangements with BCL, and large amounts of that money have simply disappeared without explanation.


The Tribunal rejected the suggestion that the appellant was innocent of any dishonesty by reason of his delegation of Easy's VAT affairs to others. They found that the appellant was well aware that the BCL sub-contract was a fraudulent fabrication, and he either instructed Easy's book-keeper to exclude the Stubbins output tax from Easy's VAT returns or he knew of the omission and took no steps to correct it. The Tribunal found that the conduct giving rise to Easy's penalty was attributable to the director Mr Azam’s dishonesty.”

3.6 Deed of Variation effective for IHT and CGT?

Vaughan-Jones and ors v Vaughan-Jones and ors

[2015] EWHC

The claimants were the two proving executors of the last will of the deceased. The first claimant was one of the deceased's sons. The first defendant was the deceased widow. The other two sons were the second and third defendants. Under the terms of the deceased's last will, his residuary estate passed to his widow and his sons in equal shares absolutely.

The claimants sought rectification of cl 3 of a deed of variation of the dispositions of the deceased's estate that had been executed in October 2009. The parties to the deed of variation were the two claimants, in their capacity as executors of the estate, and the three defendants, in their capacity as the beneficiaries of the estate. Clause 3 stated that: “The parties hereto shall, if called upon to do so, give the notice required under the relevant Finance Acts for capital transfer purposes”. In the past, an election, to be effective for Inheritance Tax purposes, had not needed to be contained within the deed of variation itself, but it had to be sent to the Capital Taxes Office within six months of the deed. That was changed by FA 2002. As so amended, s142(2) IHTA 1984 provided that the fiscal effect of all alterations of dispositions taking effect on death, would not apply to a variation unless the instrument contained a statement made by all the relevant persons to the effect that they intended the subsection to apply to the variation. Thus the deed of variation, as drafted, and unless rectified, was ineffective for inheritance tax and capital gains tax purposes.

The claimants sought the deletion of cl 3 from the deed of variation and its replacement with the words: “The parties hereby elect that the provisions of s 142(1) of the Inheritance Tax Act and s62(6) of the TCGA 1992 shall apply to the variation of the dispositions of the estate of the deceased hereby effected.”

None of the defendants contested the claim. For the claim to be allowed, it was necessary that there be convincing evidence of mistake on the part of all the relevant parties to the deed in question. It was also necessary for there to be live issues that would be resolved by an order for rectification.

The claim would be allowed.

There was sufficient evidence to satisfy the high burden of proof required in a rectification claim. There had been a sufficient mistake to found jurisdiction in a court of equity to rectify the deed of variation. Further, there were real issues that fell to be resolved between the parties if an order for rectification was made. There were live issues that would be resolved by an order for rectification. However, the question of whether the deed of variation would fall foul of s 142(3) of the 1984 Act was a matter for a future decision by the First-Tier Tribunal (Tax Chamber).


4. TAX PLANNING OPPORTUNITIES

4.1 Pension Planning Before The Summer Budget?

In their 2015 Election Manifesto the Conservatives stated that they plan to cut pension tax relief for anyone “earning” more than £150,000. They will effectively limit contributions upon which tax relief can be reclaimed. There is currently a £40,000 annual allowance. It is proposed that for every £2 an investor earns over £150,000, the allowance will fall by £1. Investors earning £210,000 or more will have a £10,000 annual allowance. There is speculation, mainly by pension companies, that this change may take effect from 8 July 2015 (the summer Budget) however that could prove administratively difficult part way through the tax year. Nevertheless, high earners may wish to consider bringing forward pension contributions just in case there is an immediate change from 8 July. Note that the suggested restriction applies to earnings over £150,000 although the current 45% tax rate applies to taxable income in excess of £150,000. Maybe the Chancellor will announce the removal of the 45% rate as a “sweetener” on 8th July, but probably not effective until 6 April 2016 at the earliest. Examples – how tax relief could be restricted for high earners Earnings

Contribution allowance

Tax relief available (up to 45%)

£150,000 or less £40,000 £18,000 £170,000 £30,000 £13,500 £190,000 £20,000 £9,000 £210,000 or more £10,000 £4,500

If the proposal goes ahead, a high earner will still be able to invest more than their new allowance, but will effectively receive no tax relief on the excess. Therefore, for someone earning £210,000 or more, a £40,000 contribution will receive a maximum of £4,500 tax relief and cost £35,500. If made now, the same £40,000 contribution would receive up to £18,000 tax relief and effectively cost as little as £22,000.

4.1.1 Bring forward unused relief from the previous three years

Remember that individuals can bring forward any annual allowance that they have not used from the previous three tax years to the current tax year. The amount of the unused annual allowance can then be added to this year’s annual allowance. This gives you a higher amount of available annual allowance.

The annual allowance for 2008/09, 2009/10 and 2010/11 was deemed to be £50,000 and remained at that level until 6 April 2014. So if your pension input (included that from the employer) in a tax year was £20,000 you would have £30,000 (now £20,000) unused annual allowance to carry forward.

If the pension input is more than the available annual allowance the


individual will have to pay the annual allowance charge - but only on the amount over the available annual allowance. There is a strict order in which the annual allowance is used. You use the annual allowance in the current tax year first. You then use your unused annual allowance from earlier years, using the earliest tax year first (FIFO). You add the amount of the unused annual allowance brought forward to the current year's annual allowance. This gives a total amount of available annual allowance. This three year carry forward rule allows you to make occasional large pension savings without having to pay the annual allowance charge. For example if you are self-employed and in one year make a large profit, you might be able to make a contribution to your pension scheme that is larger than normal and is above the standard annual allowance level. This depends, of course, on the amount of contributions that you have been paying over the previous three tax years and the amount of unused annual allowance that you can carry forward. If the individual’s pension saving is more than their available annual allowance they have to pay the annual allowance charge - but only on the amount over the available annual allowance.

Example (based on HMRC guidance)

Sybille plans to make pension savings of £60,000 (gross) for the 2015/16 tax year. In the previous three tax years her pension savings were: 2014/15 - £32,000 2013/14 - £30,000 2012/13 - £25,000 The annual allowance 2012/13 and 2013/14 was £50,000 and £40,000 for 2014/15 Sybille has unused annual allowance of £25,000, £20,000 and £8,000 from those three tax years: 2014/15 - £8,000 2013/14 - £20,000 2012/13 - £25,000

£53,000 This means Sybille has £53,000 unused annual allowance to carry forward as at 6 April 2015. Together with the £40,000 annual allowance for the 2015/16 tax year Sybille can have pension saving of £93,000 without the annual allowance charge being due. Sybille’s pension saving for the 2015/16 tax year is less than her available annual allowance. She therefore does not have to pay the annual allowance charge. She has used up the £40,000 annual allowance for the current tax year and £20,000 unused annual allowance from three years ago. Although she still has £5,000 (gross) unused annual allowance from three years ago she cannot carry this forward to 2016/17 so should consider making a further pension contribution before 5 April 2016.


Sybille would then have £28,000 unused annual allowance that she can carry forward to 2016/17. If the annual allowance in the next tax year is still £40,000 she will be able to make a pension contribution of £68,000 (gross) for that year and still not have any annual allowance charge.

4.2 Inheritance Tax and the Proposed Family Home Allowance

Further detail has emerged (in a leak to the Guardian newspaper) concerning a new inheritance tax (IHT) allowance announced in the Conservative Party election manifesto to set against the value of the family home. The proposed new family home allowance provides for an additional £175,000 nil rate band from April 2017, bringing a couple’s combined tax free estate to £1,000,000 where they transfer the family home. This allowance is subject to a taper where the amount being left is more than £2,000,000 with £1 of the family home allowance being lost for every £2 of estate value over £2,000,000. This clawback seems to be based on the value of the estate before reliefs such as business property relief and agricultural property relief and may result in some additional complications and redrafting of Wills. We will almost certainly see further details announced in the Summer Budget on 8th July, however, at first sight this does mean that individuals with BPR/APR assets will need to carefully consider their wills. Business assets left by one spouse to his or her survivor will impact on that spouse’s entitlement to the new allowance (whilst if it were left on discretionary trust, no IHT would arise because of BPR and the assets would not be comprised then in the surviving spouse’s estate , therefore potentially protecting the family home allowance for the survivor. Where the proposed family home allowance is potentially in point, proper consideration will have to be given to the value of assets relieved from inheritance tax by business property relief etc. because of the potential impact of this value on the family home allowance , whereas as matters stand, where IHT is not in point, the value of the business assets is often not formally established where covered by 100% relief. Complexities will exist even for individuals without businesses. For example where a couple have assets worth £3,000,000, including the family home worth £2,000,000 and savings etc. worth £1,000,000, all owned equally. On the first spouse’s death there is entitlement to the family home allowance as the deceased had an estate of less than £2,000,000 (i.e. the interest in the house worth £1,000,000 and the share of the savings etc. worth £500,000). The family home allowance would appear to be transferable to the surviving spouse on the first death. Assuming that the surviving spouse inherits the entire estate, the survivor, due to this inheritance, has an estate of £3,000,000 so that on that person’s death, no family home allowance accrues and it appears likely that there would be no benefit from the unused allowance from the first spouse’s death as the family home allowance on the second death would be increased by the unused proportion from the first death i.e. the family home on the second death would be doubled to reflect the unused allowance on the first death. This gives no relief as it is 200% of £Nil. Once we get more details on 8 July it would be an opportunity to meet with clients to discuss the full implications on their wills and estate planning.

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