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Employee share schemes Stephen Woodhouse considers the eect of the avoidance debate on share plan design VAT flat rate scheme Neil Warren considers the complicated issues and piƞalls arising from the FRS 30 41 44 www.tax.org.uk www.aƩ.org.uk Tax on life insurance Hui Ling McCarthy examines the impact of Lobler and the subsequent law reforms 2016 CTA Address Excellence in Taxation June 2016 www.taxadvisermagazine.com PLUS Dividend exempƟon – Back to basics: private equity – Accessing tax advice – Oshore trusts On the theme of ‘restoring trust’ Professor Judith Freedman considers ways in which the tax authoriƟes can move towards ‘reasonably placed trust’ with ‘checks and balances’, page 22

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Page 1: Download June 2016 pdf

Employee share schemesStephen Woodhouse considers the eff ect of the avoidance debate on share plan design

VAT flat rate schemeNeil Warren considers the complicated issues and pi alls arising from the FRS

30 41 44

www.tax.org.uk www.a .org.uk

Tax on life insuranceHui Ling McCarthy examines the impact of Lobler and the subsequent law reforms

2016 CTA Address

Excellence in Taxation June 2016www.taxadvisermagazine.com

PLUS Dividend exemp on – Back to basics: private equity – Accessing tax advice – Off shore trusts

On the theme of ‘restoring trust’ Professor Judith Freedman considers ways in which the tax authori es can move towards ‘reasonably placed

trust’ with ‘checks and balances’, page 22

Page 2: Download June 2016 pdf

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Page 4: Download June 2016 pdf

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Page 5: Download June 2016 pdf

CONTENTS

Welcome3 Editor’s welcome

A ques on of tax trustChris Ma os

4 President’s pageNumber 52Bill Dodwell

6 ATT welcomeA ma er of trustRalph Pe engell

Briefi ngsFrom Ar llery House

8 CIOT President’s inaugural speech

10 CTA Address 201611 ADIT at the Global

Tax Policy Conference in Dublin

12 CIOT and IFS: Mind the Gaps

13 ATT Prizewinners’ lunch14 Pathway to success15 Looking forward to a new

season of events in the branch network

Recruitment 58 Looking at the best

industry jobs

Technical From the Technical team

47 Tackling VAT evasion via online market places

48 Will alignment of VAT disclosure with DOTAS be eff ec ve?

49 EC publishes plan to modernise EU VAT

50 EU double taxa on dispute resolu on

51 Corporate Contribu ons to Grassroots Sports

52 Working Together goes digital

53 HMRC’s review of RTI54 Scotland update 55 LITRG guide for armed

forces

Features

17 Historical taxThe VAT Album Helen Thornley looks at the taxa on of recorded music and the introduc on of VAT in the UK

GENERAL FEATURE INDIRECT TAX

18 Accessing tax adviceMoving on A er 15 years at the helm of TaxAid, Rosina Pullman is stepping down and handing on the baton. In this ar cle she refl ects on some of the people she has met and who TaxAid has helped

GENERAL FEATURE

20 Making Tax DigitalPausing to refl ect Anthony Thomas suggests that the Making Tax Digital agenda needs further considera on before successful implementa on

GENERAL FEATURE MANAGEMENT OF TAXES

22 2016 CTA AddressRestoring trust On 10 May 2016, Professor Judith Freedman gave the 2016 CTA Address on the topic of ‘restoring trust’

GENERAL FEATURE MANAGEMENT OF TAXES

26 Back to basics: private equityMoU refresher Tom Klouda and Ashley Prior provide a refresher guide to the memorandum of understanding between the BVCA and HMRC on the income tax treatment of managers’ equity investments in venture capital and private equity backed companies from 2003

LARGE CORPORATE TAX OMB

28 Corporate dividend exemp onSmall or large company? Stuart Pibworth outlines the exemp ons from UK corpora on tax for company dividends

LARGE CORPORATE TAX OMB

30 Tax on life insuranceLife a er Lobler Hui Ling McCarthy examines the impact of Lobler v HMRC and the proposed op ons for reform

PERSONAL TAX

34 Off shore trustsWeighing it up Stephen Arthur explains the requirements and benefi ts of off shore trusts, and how to determine if a UK tax liability arises

PERSONAL TAX INHERITANCE TAX

38 Self assessmentReturn of the taxpayer Keith Gordon discusses the First- er Tribunal’s decision in Revell v HMRC and the broader implica ons of the case

PERSONAL TAX MANAGEMENT OF TAXES

41 Employee share schemesIden fying the boundaries Stephen Woodhouse considers the eff ect of the tax avoidance debate on share plan design

EMPLOYMENT TAX

44 VAT fl at rate schemeNot so simple The fl at rate scheme is intended to simplify VAT returns for a small business with annual taxable sales of less than £150,000, but it has many complicated issues which are considered by Neil Warren in this Q&A ar cle

INDIRECT TAX

T h i l

Letters16 Andrew Mor mer provides

updated calcula ons

Branch events 56 Dates for your diary

R it t

Disciplinary 56 Findings and orders of the

Disciplinary Tribunal

www.taxadvisermagazine.com | June 2016 1

Page 6: Download June 2016 pdf

@ourATT on

+BETTER TOGETHER

OVER 2,000 CIOT MEMBERS HAVE ALREADY CHOSEN TO BECOME JOINT MEMBERS OF THE ATT.

WWW.ATT.ORG.UK/JOINT

Page 7: Download June 2016 pdf

[email protected], Tax Adviser

Details of the editorial advisory board can be found at www.taxadvisermagazine.com/editorialadvisoryboard

Chris Ma osEditor-in-chief, Tax Adviser

I left with a hope that

Professor Freedman had ignited a ticker-tape towards change

A question of tax trust

Journal of The Chartered Ins tute of Taxa on and The Associa on of Taxa on TechniciansAr llery House, 11-19 Ar llery Row, London, SW1P 1RT. tel: 020 7340 0550The CIOT is a registered charity – No. 1037771; The ATT is a registered charity – No. 803480

EDITORIALEditor-in-chief Chris Ma osPublisher Chris JonesEditor Emma [email protected]: 020 7400 4653

ADVERTISING & MARKETINGHead of Sales Charlo e Sco charlo e.sco @lexisnexis.co.uktel: 020 8212 1980Commercial Marke ng Director Sanjeeta Patel

PRODUCTIONProduc on Manager Angela WatermanProduc on Assistant Nigel HopeDesign Manager Ellio TompkinsDesigner Jo Jamieson

Offi ces LexisNexis, Quadrant House,

The Quadrant, Su on, Surrey SM2 5AS.

tel: 020 8686 9141

UK subscrip on rate 2016

£100.00 for 12 issues

Europe subscrip on rate 2016

£132.00 for 12 issues

O/S subscrip on rate 2016

£206.00 for 12 issues

ATT student rate 2016

£48.00 for 12 issues

For Tax Adviser magazine subscrip on queries contact 0845 370 1234 or email [email protected] any queries regarding late deliveries/non-receipt please direct to Julie e Walker, Magazine Distribu on Administratorjulie [email protected]: 020 74002817Reprints: Any ar cle or issue may be purchased. Details available from Charlo e Sco charlo e.sco @lexisnexis.co.uktel: 020 8212 1980© 2016 Chartered Ins tute of Taxa on (CIOT).Printed by Headley Brothers Ltd,Ashford, Kent.

This product comes from sustainable forest sources. Reproduc on, copying or extrac ng by any means of the whole or part of this publica on must not be undertaken without the wri en permission of the publishers.

This publica on is intended to be a general guide and cannot be a subs tute for professional advice. Neither the authors nor the publisher accept any responsibility for loss occasioned to any person ac ng or refraining from ac ng as a result of material contained in this publica on.

ISSN NO: 1472-4502

On 10 May, the annual CTA address was given to a packed house at One Great George Street by Professor Judith

Freedman. I have been to many previous lectures, all of which have been very enlightening, but I admit that this year’s struck a nerve with me. That evening, I le with a hope that Professor Freedman had ignited a cker-tape towards change. The focus of her address was the trust of taxpayers in governments and revenue authori es. As I noted in my April editorial, I fi nd that one of the biggest issues that my clients have with the tax system is a fear of ge ng things wrong and this o en stems from a distrust they have of HMRC. Professor Freedman contemplated how we might create or restore trust in HMRC following the recent debates, revela ons and cri cisms. You can read an abridged version of the address on page 22.

Looking back over the bridgeIn the past 15 years around 100,000 people, some very vulnerable, have had their lives improved – indeed, in some cases, turned around – because TaxAid was able to help them. During that me, Rosina Pullman has been at the helm, and as she passes on the baton, she refl ects on some of the people she has met and who TaxAid has helped on page 18.

Corporate dividend exemptionThis month we welcome the fi rst of another cohort of CIOT prizewinners to take us back to basics with a look at an area which interested them in their studies. On page 28, Stuart Pibworth explains that the corporate dividend exemp on is far from straigh orward. He warns advisers not to fall into the trap of assuming that the exemp on

is available simply because it was an cipated that it would be available when a structure was established.

Life after LoblerThe tax regime governing the taxa on of part surrenders of life insurance policies has drawn severe cri cism from the First- er Tribunal in several cases. In the Upper

Tribunal case of Lobler, a tax charge of around £350,000 arose, yet the taxpayer made only a small economic gain. The case was found in favour of the taxpayer and as a result, on 20 April 2016, HMRC published a consulta on document, invi ng views on three op ons for change. Hui Ling McCarthy reviews the consulta on on page 30.

Identifying the boundariesStephen Woodhouse considers the eff ect of the tax avoidance debate on share plan design and iden fi es the boundaries of appropriate planning and perceived abuse. As he explains on page 41, the focus should be on delivering incen ves to make full use of the intended reliefs off ered by tax legisla on while balancing the interests of par cipants with other stakeholders.

Welcome from the editor-in-chief

Page 8: Download June 2016 pdf

I’m very proud to be a

member of the tax profession. Being a professional means that we have ethical standards at the heart of the way we approach our work, underpinned by self-regulation

I’m delighted and honoured to succeed Chris Jones as the fi y-second President of the CIOT. Chris is a hard act to follow, but I am helped

enormously by the way in which the offi cers have worked together as a team. The three offi cers and the immediate past president meet almost every month. We are also fortunate to have an excellent execu ve team: chief execu ve, Peter Fanning; director of educa on and secretary, Roz Baxter; and two more recent recruits – tax policy director, John Cullinane and director of fi nance and opera ons, Paul Davies. We are also supported by our treasurer, Gill Evans – and indeed the whole of the joint CIOT/ATT staff .

Perhaps I should start by telling you about my career in taxa on. I studied law and was privileged to be taught by the late Professor John Tiley. He fi rst engendered in me a fascina on with the structures of taxa on – and the constant change. I started work at Arthur Andersen, thinking I might stay for a few years and then go to the Bar. However, working in a team turned out to be a much be er op on! Ini ally I covered a whole range of taxes, including US personal tax returns. Ul mately I specialised in interna onal corporate taxa on. In 2002, together with most of Andersen’s UK people, I joined Deloi e, where I moved to the Tax Policy Group. This brought me back to the wide range of taxes. I joined the CIOT’s Interna onal Tax sub-commi ee and for the last six years have chaired the Technical Commi ee. You can see where my interests lie! So you won’t be surprised when I say that I am enthusias c about the ini a ve that CIOT has just launched with the IfG and the IFS, to see if we can fi nd ways to improve the process of making tax policy. I will keep you informed of progress via these pages. For now I recommend you check out the introduc on to the project on page 12 along with an invita on to contribute your ideas.

I’m looking forward to mee ng members – and students – at events around the UK. My President’s recep on is in London on 11 October. If you would like to come, do drop me a note with your name and membership number. I’m very proud to be a member of the tax profession. Being a professional means that we have ethical standards at the heart of the way we approach our work, underpinned by self-regula on. Our ethical standards are set out in ‘Professional Conduct in rela on to Taxa on’, a code of rules and guidance maintained by seven professional bodies – but actually they are best demonstrated in the way in which we act.

I would like to highlight two other aspects of being a profession. The fi rst is the tax advisers’ livery company – the Worshipful Company of Tax Advisers. Hundreds of years ago guilds and livery companies were the fi rst professional bodies. In 1995, CIOT members established the

Guild of Tax Advisers, which received its Royal Charter in 2009. The Company provides a tax briefi ng before the Lord Mayor’s overseas visits to assist discussions with businesses, offi cials and government ministers. The Company supports chari es, including the Tax Advisers’ Charitable Trust and the Tax Advisers’ Benevolent Fund. The Company organises two formal dinners every year, where members and guests can partake of some of the City of London’s history, at a wide range of livery halls. There is also a variety of informal social ac vi es. The Company’s Master is Anthony Thomas, a former CIOT president. You can learn more at www.taxadvisers.org.uk. Membership is open to anyone connected with taxa on.

The second area is charity. This me last year, Chris Jones launched the Bridge the Gap Appeal to raise support for our two tax advice chari es – TaxAid and Tax Help for Older People. The importance of their work really crystallised for me in a speech by Steve Edge – in which he brought out that many of the people who come to the two chari es don’t only have a tax problem. There is o en another major challenge they have to deal with in their lives. Steve’s example focused on homelessness – but there are several others. TaxAid’s clients can suff er from serious mental or physical illness; the loss of their home or their business. And debt is frequently a common thread. Rosina Pullman provides some examples of the people helped by TaxAid on page 18. Tax Help for Older People’s clients may have suff ered bereavement; or, a er a life me on PAYE, face having to account for a small self-employed income as well as several small pensions.

Solving their tax problem is o en a key part of helping vulnerable people start to get their lives back on track. TaxAid has helped more than 100,000 people in the last decade, but both chari es know there are many more people – o en at crisis point – who need professional tax advice but can’t aff ord to pay. That is the gap they face and the two chari es try to bridge it. But they can’t provide the support needed unless we – in the profession – step up and help fund their work. Please consider suppor ng the chari es. You can fi nd out how at www.bridge-the-gap.org.uk.

Number 52!

Bill DodwellPresident, [email protected]

[email protected] Fairpo

President’s [email protected] Dodwell

4 June 2016 | www.taxadvisermagazine.com

Page 9: Download June 2016 pdf

ON TIME. RIGHT FIRST TIME.

16-18 September 2016University of Warwick

Conference fee:

Lecture topics include:• Personal tax update

Sue Moore

• HMRC powers Tori Magill

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• Finance Act 2016 Tim Good

• Farming and equine tax update Julie Butler

• Using one’s pension for IHT planning John Woolley

• current issues in VAT Michael Ashdown

• Philip Ridgway

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OPENto non

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Book online at: www.tax.org.uk/artuc2016

www.taxadvisermagazine.com | June 2016 5

Page 10: Download June 2016 pdf

ATT [email protected] Pettengell

April and the start of May has been a quiet period at the ATT for the leadership team, with our new execu ve director Jane Ashton

bedding into her role following Andy Pickering’s re rement.

I, along with others in the leadership team, hosted a table for our dis nguished guests at the Tolley Taxa on Awards, which was a great night – we were one of the main sponsors again this year. The Tolley Taxa on Awards night clashed with our Admission Ceremony for new members at the House of Lords, but don’t worry, Michael Steed, our President, as well as a number of head offi ce staff and Council Members were on hand to make our new members and their families feel very welcome.

The new tax year has been quite a busy period for me; I spent many hours ge ng myself up to speed with the taxa on of trusts.

It was ten years ago, on 22 March 2006, that the trust regime changed fundamentally for the Financial Services industry. Prior to this, the industry used more or less exclusively fl exible life interest trusts (interest in possession trusts) for placing life policies in trust and inheritance tax packaged products such as discounted gi trusts and loan trusts – oh, how simple life was in those days! However, a er this change we moved to using discre onary trusts more or less exclusively, and a signifi cant number of hours was spent ge ng up to speed with the taxa on and administra ve regimes. This month sees some of the fi rst of the Financial Services world trusts reach their tenth anniversary and therefore the fi rst periodic charges we have had to deal with.

I am concerned that there is a poten al problem brewing for many lay trustees who are completely unaware of their obliga ons to complete IHT100s and pay the periodic tax charge, and they are si ng on a poten al tax and penalty me bomb. The reason for this is that the wealth management and fi nancial services industry is responsible for se ng up tens of thousands of these trusts since their introduc on, the vast majority of which are completely off the HMRC radar.

The reason that most of these trusts are not registered with HMRC is that the investment solu on used for many trustees to help them remove the need to submit tax returns and pay income tax is an investment bond, onshore or off shore. An investment bond is a non-income producing asset and will not normally be subject to capital gains tax. This means that trustees sa sfy the requirements set out in HMRC’s Trusts, Se lements and Estates Manual para 1405 which refers to new trusts with no likelihood of income or gains. The manual says that the trustees of

such trusts need not no fy the trust offi ce of the existence of the trust, as there is no need to issue an annual self-assessment return.

I have been asked to look at a discounted gi trust which was one of the fi rst created post-22 March 2006.

Discounted gi trusts are an inheritance tax planning solu on. They are designed to help people who want to reduce their inheritance tax liability but need income to live off so under normal circumstances would fall foul of the ‘gi with reserva on’ rules. However, a discounted gi trust enables a client to make use of the IHT gi ing rules whilst retaining an income for life and qualifi es for an immediate reduc on in their estate for IHT, known as a discount. The client receives an immediate reduc on in their estate for IHT, and the balance of the gi falls out of the estate a er seven years, but the client receives the income for the rest of their life. HMRC set out their requirements for discounted gi trusts to achieve this objec ve in a Technical Note in 2007.

In the example I have been asked to look at, the value of the assets in the discounted gi trust is £350,000 so on fi rst sight you would assume that it is over the nil rate band and the trustees will have to pay the 6% IHT tax charge. However, if the se lor is s ll alive, which is the case for this trust, to calculate whether the trust needs to complete an IHT100 or pay IHT you recalculate the discount based on the se lors age at the ten year anniversary. HMRC set out the basis to be used to calculate the relevant property element of the trust in a briefi ng note (Number 22) published on 9 August 2013. In this example, the d iscount was 25% and therefore it takes the assets for tax and IHT100 purposes to £262,500. The good news for the trustees is there is no tax liability but the bad news is they are now over 80% of the nil rate band and therefore will have to complete an IHT100.

I am very pro trusts to help with succession planning and IHT planning but the complexity in terms of tax and administra on has led to many professional advisers turning their back on them as a planning tool, which is quite sad in my opinion.

I am concerned

that there is a potential problem brewing for many lay trustees who are completely unaware of their obligations to complete IHT100s and pay the periodic tax charge

A matter of trust

Ralph Pe engellDeputy President, ATTpage@a .org.uk

6 June 2016 | www.taxadvisermagazine.com

Page 11: Download June 2016 pdf

The Association organises an Annual Tax Conference which is held across several locations in the UK. This conference concentrates on topical issues with an emphasis on the practical issues faced on a daily basis by the Taxation Technician. Our knowledgeable speakers provide detailed notes and illustrate their lectures with practical examples gained from their experience in practice. The conference also gives you an ideal opportunity to network with like-minded professionals. Attendance at the Annual Tax Conference will also give you 6 hours of Continuing Professional Development.

WWW.ATT.ORG.UK/ANNUALTAXCONFS2016 ND FOR MORE INFORMATION

City Date Venue

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Speakers to include:

• Marion Hodgkiss•• Michael Steed• Mike Thexton

Conference pricing:

• ATT members and students: £125The above reduced rate also applies to AAT, ACCA, ICAS, CIMA

• Non Members: £195

The sessions will include:

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Page 12: Download June 2016 pdf

BRIEFINGS

8 June 2016 | www.taxadvisermagazine.com

CIOT

AGM 2016

I am delighted – and privileged – to be the 52nd president of the Chartered Ins tute of Taxa on. Our Ins tute was founded on 5 December 1930, by a number of accountants, former inspectors of taxes and a barrister. Our fi rst chair, Ronald Staples, was a former inspector of taxes and founder of Taxa on magazine. Ours is mainly a second qualifi ca on. We con nue to include barristers, accountants and inspectors of taxes among our members, together with many others.

The Ins tute pe oned for a Royal Charter in 1952 – but other bodies objected that taxa on wasn’t then a separate profession. Finally, a new pe on was submi ed in 1991 and a Charter was granted to the Ins tute on 29 April 1994. In 1997 the Privy Council agreed that our members would be called Chartered Tax Advisers, with the CTA designa on following in 2002. Incidentally, I’ve fi nally discovered that ATII stood for Associate of Taxa on Ins tute Incorporated; the extra ‘i’ was added as another body already used ATI and FTI.

We should be proud of our history and development over 85 years to become the leading professional body focussed on taxa on, and also proud that we are also a charity. We became a registered charity in 1981, dedicated to educa on as well as support for the unrepresented through our Low Incomes Tax Reform Group.

ThanksI’d like to thank many people. Firstly, I should like to thank Chris Jones for the insight he has brought and all the hard work he has put in as our president over the past year. My second thanks goes to my former partner at

Deloi e and now tax policy director, John Cullinane. John recommended that I joined the Interna onal Tax sub-commi ee and later supported my joining Council. I would also like to thank my fi rm, Deloi e, for suppor ng me fi rstly as an offi cer and now as president. My family – especially my wife, Miranda – has supported me in taking this step – and I hope we’ll be able to manage the extra absences this year. Miranda is also a CTA, although she no longer works in taxa on.

Like Chris, I would also like to thank the execu ve group – our chief execu ve Peter Fanning, our director of educa on and secretary Roz Baxter and two more recent recruits: tax policy director John Cullinane and director of fi nance and opera ons Paul Davies. They – and the CIOT staff – ensure that we can meet our wider objec ves, including, we hope, 18,000 members this year.

The tax environmentWe all know that tax and tax professionals are in the news – indeed in public consciousness – in a way I imagine none of us probably expected when we started our careers. What has become clear over the last decade is that the cancer of tax evasion fl ourished through a lack of exchange of informa on interna onally. Even though the vast majority comply honestly with their tax obliga ons, thousands of people have not disclosed their income or gains in accordance with the law. At the same me what might be described as a mechanis c approach to tax law interpreta on led some to devise and market so-called investments, which have turned out to be anything but. Most of these arrangements have been found to be ineff ec ve by

the tribunals and higher courts, leaving investors substan ally out of pocket. There were similar approaches in corporate taxa on, too. At the same me, the interna onal corporate tax rules have failed to keep up with modern ways of conduc ng business, including the development of digital services. The G20 asked the OECD to lead the BEPS project, which will lead to increased corporate taxa on and a closer alignment between profi ts and economic substance.

Our leadership as tax professionals can help with a the new approach – where we help advise clients, or the companies we work for, run their businesses or make their investments, in an eff ec ve manner. No one should forget the major contribu on made by business, large and small, to the UK economy. Naviga on through the complexi es of taxa on benefi ts from the good advice of professionals. Our professional standards bu ress the work we do and, as many will be aware, we and other bodies have been challenged by government to enhance those standards. Chris Jones and John Cullinane have been working hard on this with the ICAEW and other bodies. We currently expect that work to lead to new standards to be announced in the autumn.

Our technical approach to policyChris Jones has emphasised the importance of educa on and our new deputy president, John Preston, has contributed extensively to our exams. My focus at the CIOT is on technical tax, where it is important that we have an informed voice on all ma ers of policy: everything from new taxes to opera onal eff ec veness. We have strengthened our in-house team over the last few years with the appointment of a tax policy director, as well as our head of technical and our technical offi cers. We also rely very heavily on volunteers and input from members generally. Without everyone working together – to coin a phrase – our input would not be as eff ec ve. We do need to recall, though, that we do not have a policy partnership with the Treasury and HMRC. HMRC is the statutory body mandated by parliament to operate the tax system. We only build infl uence by consistent high quality, professional – and helpful – responses to HMRC. Ul mately, though, choices about the tax system are not ours.

Perhaps the most important technical area in the coming year is the development of HMRC’s Making Tax Digital strategy. It’s clear that increased digi sa on in taxa on, as elsewhere, is inevitable. As Chris Jones has

CIOT president’s inaugural speech

New CIOT president, Bill Dodwell

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www.taxadvisermagazine.com | June 2016 9

covered in his remarks, we hope to infl uence posi vely the approach to help ensure it supports taxpayers, rather than imposing addi onal burdens.

One of the ini a ves we’ve recently launched is a project to look at how to improve tax policy development in the UK. We are partnering with the Ins tute for Government and the Ins tute for Fiscal Studies. The aim of the group is to bring together the IfG’s deep understanding of government, the IFS’s unparalleled experience analysing tax policy and the prac cal insight of CIOT members into how the tax system actually operates, to off er prac cal, posi ve sugges ons for improvements in the policy making machinery of government. You can read more about the project on the partners’ websites (and on page 12). Contribu ons are welcome to tax@ins tuteforgovernment.org.uk

It’s a great pleasure to con nue working with the IFS – one of the premier research bodies in the UK – defi nitely not a think tank. We con nue to run joint debates with them on tax policy and also hold events at some of the party conferences.

We need to con nue suppor ng the academic study of taxa on. This helps develop tax policy and is also an important part in the educa on of new tax advisers. Past president Anne Fairpo ini ated support for the new Journal of Tax Administra on and we also put in place a bursary scheme. I’ve no doubt it would be helpful if we could expand this during my me in offi ce.

Strength through diversityOne of the great benefi ts of our Council is that it brings together chartered tax advisers across the spectrum. Some, like me, work for large fi rms; others

for mid-size and smaller fi rms, including sole prac oners. Many of our member work for companies and for HMRC. Others are involved in training. We have barristers, solicitors, accountants from several bodies and members of the Associa on of Taxa on Technicians. We also cover most types of tax, and have geographic spread. This diversity is a great strength. Yet diversity has other meanings too. We know, for example, that about a quarter of our council members are women, while about half of new members are women. In part this is a func on of diff erent approaches decades ago, as council members are typically in the second half of our careers. Less than 25% of partners in most large fi rms are women and there’s a similar sta s c for heads of tax in businesses. We are not going to see immediate change, given these dynamics. However, we should welcome that women make up 30% of the chairs of our Technical sub-commi ees and more than 40% of our branch offi cers. The Council is ac vely considering ideas on how we can work with a wide range of candidates for council and we shall con nue to do our best to encourage poten al candidates. I would also like to recognise the work

that Chris Jones has done in developing the new(ish) New Tax Professionals commi ee, which brings another form of diversity.

ConclusionAt this point, some of you may be asking whether I have a theme. Last year I could talk about Magna Carta – apparently a tax statute – but this year is Shakespeare’s 400th anniversary. Taxa on isn’t a major theme in Shakespeare’s work but he did write: ‘All the world’s a stage, and all the men and women merely players: they have their exits and their entrances’. Chris Jones has made his exit and in a year’s me so will I. Our role as

offi cers – and as your Council – is to build on each other’s work and pass it on so that together we are greater than the sum of our parts. Our themes are the objects of the CIOT and what we do in pursuit of them.

My career in taxa on started with inspira on from the late Professor John Tiley, who taught me the diff erence between trees and their fruit – and inspired me to join Arthur Andersen and make taxa on my career. I am a chartered accountant but I take great pride that I became a chartered tax adviser fi rst! I very much look forward to the coming year.

CIOT

EVENT Fellows’ dinnerThe seventh Fellows’ dinner will take place at Haberdashers’ Hall on 13 July 2016. Our guest speaker will be Angela Knight CBE, Chair of the Offi ce of Tax Simplifi ca on. Please visit www.tax.org.uk/fellowsdinner2016 or contact Lisa Drakley at [email protected] to sign up for this popular and pres gious event.

Front row: Peter Fanning (chief execu ve), Bill Dodwell (president) and John Preston (deputy president). Back row : Rosalind Baxter (Ins tute secretary and director of educa on) and Ray McCann (vice-president)

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BRIEFINGS

10 June 2016 | www.taxadvisermagazine.com

EVENT

The 2016 CTA Address was given by Judith Freedman CBE, Pinsent Masons Professor of taxa on law at Oxford University, on the topic ‘restoring trust’.

Freedman posed the ques ons: ‘How do we create or restore trust in HMRC following the recent debates, revela ons and cri cisms? And how do we make sure that we separate out the cri cisms of our na onal and interna onal tax systems, which many agree require reform, from the serious ques ons around trus ng and equipping HMRC to apply and implement the law at an opera onal level?’

She set out a ‘menu’ of ways forward which she stressed were modest rather

than revolu onary. These included be er consulta on, formally making HMRC a ministerial department, extending the benefi ts of personal contact with HMRC beyond large companies, and asking the Na onal Audit Offi ce to explore a random selec on of se lements on an ongoing basis to assess their reasonableness and consistency with the law. She argued that while greater transparency was increasingly being demanded it could not be an end in itself. ‘What really ma ers is the kind of informa on we collect and its prac cal value, and whether or not it is acted upon when it does become available.’

The speech was followed by a lively discussion with an audience of CIOT members and other tax professionals

CIOT

and policy-makers at the Ins tu on of Civil Engineers, in Westminster.

Paul Johnson of the IFS wondered if there was merit in looking at a Scandinavian approach in rela on to the amount of third party repor ng of tax informa on there. Glyn Fullelove, the new Chair of the CIOT’s Technical Commi ee, was disappointed by the lack of ar cula on of basic principles of the tax system – such as the arms-length basis – from government. Chris Jones, outgoing CIOT President, wondered if increased use of digital, eff ec vely used, could go some way towards restoring trust among younger taxpayers.

An HMRC ques oner asked about the role of the tax profession in improving trust. Freedman responded that while her speech had focused on trust

in the tax authority she saw a role for all groups, including tax professionals, in improving trust in the tax system.

Other ques oners wondered whether HMRC‘s trust in taxpayers had declined in recent mes, whether HMRC communicates eff ec vely with taxpayers and whether, refl ec ng on the existence of a Professor for the Public Understanding of Science, there was a need for a Professor for the Public Understanding of Taxa on. Freedman replied that, although both the Oxford Centre for Business Taxa on and the IFS perform this func on, it would be wonderful if someone wanted to fund a further post!

See an abridged version of Professor Freedman’s speech on page 22.

Bill Dodwell and Professor Judith Freedman

CIOT

2016 CTA Address

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BRIEFINGS

www.taxadvisermagazine.com | June 2016 11

The ADIT (Advanced Diploma in International Taxation) qualification exhibited to visiting delegates at the recent Global Tax Policy Conference, in Dublin, from 9 to 11 March.

Hosted jointly by the Irish Tax Institute and the Ash Centre for Democratic Governance and Innovation at Harvard Kennedy School,

the conference was a huge success with nearly 400 tax professionals from across the world in attendance. There was a huge presence from heads of tax and senior tax executives in the corporate sector, as well as tax advisers from both sides of the Atlantic. Titled ‘New Rules for a New Era’, more than 30 of the leading figures in tax policy and business addressed the conference on

the latest developments in international tax governance, many of which feature in the latest edition of the ADIT syllabus.

The Irish Tax Institute is our partner institute in Ireland and offers international tax courses based on the ADIT syllabus. Our exhibition stand was staffed by Irish Tax Institute personnel, who have extensive experience of ADIT.

EVENT

ADIT at the Global Tax Policy Conference in Dublin

International tax learning remains in high demand among tax professionals in Ireland, where more than 150 students are currently registered onto the ADIT qualification.

We would like to thank our colleagues at the Irish Tax Institute for their efforts in promoting ADIT at the conference, and congratulate them on the success of the event.

ADIT

CIOT

POLICY

Views sought on tax policy process

The CIOT, Ins tute for Government (IfG) and Ins tute for Fiscal Studies (IFS) have launched a project to look at how we can improve the process around Budgets and tax policy-making.

The IfG will contribute its understanding of policy-making and Whitehall processes, the CIOT its extensive prac oner exper se and the IFS its deep knowledge and analysis of fi scal policy.

The aim is to work together to produce a clear set of recommenda ons to the Treasury, Opposi on and stakeholders on how to improve the UK tax-policy making process. The project will report around the me of the 2016 Autumn Statement.

Bill Dodwell, CIOT president, said: ‘The Chartered Ins tute of Taxa on works for a clearer,

simpler tax system for all those aff ected by it – taxpayers, their advisers and the tax authori es. Our experience is that good tax policy comes from an open, consulta ve process in which all those aff ected have a voice, and where there is eff ec ve scru ny to ensure policy inten ons are translated into statute accurately and without unintended consequences. Our members see in their daily professional lives what happens when bad tax policy is introduced. We are pleased to be working with IfG and IFS, in the public interest, to iden fy ways the process can work be er.’

Jill Ru er, programme director, IfG, said: ‘The Ins tute

for Government has long been concerned about the quality of tax policy-making and budgets. Recent events have underlined that many features of the budget process – for example advance secrecy, lack of collec ve decision-making and low levels of scru ny and evalua on – are not conducive to successful policy-making. We are delighted to be working in partnership with experts at the IFS and CIOT to make tax policy be er.’

Paul Johnson, director, IFS, said: ‘The Government takes nearly £4 in every £10 earned in the economy in tax. How it does so ma ers enormously, and so does how it decides on

tax policy. We at the IFS tend to look at the tax system that comes out of the policy-making sausage machine. I’m delighted that we will be working with IfG and CIOT to look at how we might fi x the machine such that it produces be er policy in the fi rst place.’

We are keen to draw on as wide a range of views as possible, including from CIOT and ATT members. If you would like to contribute thought/ideas, please email tax@ins tuteforgovernment.org.uk.

Engage with us on twi er #be ertaxpolicy.

Paul Johnson Bill DodwellJill Ru er

Irish Tax Ins tute director of educa onal strategy, Mar na O’Brien

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BRIEFINGS

12 June 2016 | www.taxadvisermagazine.com

CIOT and IFS: Mind the Gaps?

The risks to the UK Government’s tax take and how tax policy and administra on might respond to them were explored in the latest joint debate hosted by CIOT and the Ins tute for Fiscal Studies (IFS).

The speakers were Paul Johnson, director of IFS, Janine Juggins, EVP global tax at Unilever, Robert Chote, chairman of the Offi ce for Budget Responsibility and Ray McCann, partner at New Quadrant Partners and incoming CIOT vice president. CIOT president Chris Jones chaired the event, which took place once again at the Royal Society of Arts in Central London.

Paul Johnson noted that the highest earning 1% of the popula on were increasingly paying more tax in propor on to other groups. He expressed

concern that the government’s ‘triple lock’ on income tax, na onal insurance and VAT will constrain the Chancellor as he seeks to run a budget surplus by 2020. Johnson showed the audience graphs which illustrate how VAT has become more signifi cant since 2007, property taxes have shot up and there has been a drama c fall in North Sea oil and gas revenue.

On risks, Johnson asked what the government’s strategy was for dealing with a new ‘equilibrium’ with lower corpora on tax as a percentage of revenue, a greater reliance on the very rich to bring in the tax take, and a reluctance to increase major taxes leading to ‘more, smaller taxes’.

Janine Juggins has more than 25 years interna onal corporate tax experience. She argued that how much tax is needed is dependent on choices made by poli cians about spending.

Such decisions are o en made because of public pressure.

Juggins said that having a stable, compe ve tax system is one of the UK’s selling points. A tax system that is ‘responsive’ and ‘fi t for purpose’ is important for the tax take. The tax system needs to’ catch up’ with more sporadic economic ac vity where value crea on cannot be isolated to par cular work or loca on, such as the digital economy. She said: ‘The development of new businesses could help to ensure that major centres of innova on are located in the UK; the rewards in future may not come from the corporate income tax take, but from higher paying jobs and broader economic footprint’. To achieve the goal of full taxpayer compliance with minimal interven on by HMRC, we need a simple, self-policing, fair and transparent tax system with a high level of trust, she said.

Former Financial Times journalist, Robert Chote, now runs the Offi ce for Budget Responsibility, the UK’s independent fi scal watchdog. He said the biggest ‘cash risk’ to hopes of a 25% increase in the tax take is if the economy does not grow as quickly as the Treasury wish.

There are falling alcohol, tobacco and fuel du es but it is not drama c enough to move us around country league tables, said Chote. The Treasury suff ers much more when wages or consumer spending are one

pound weaker than when profi ts, business investment or the trade balance are one pound less than expected, he observed. Among other economic risks is that created by the produc vity puzzle, with produc vity growing less strongly than expected since the fi nancial crisis. He also talked about distribu onal factors aff ec ng revenue forecasts such as for SDLT, and the impact of fi eld ownership changes when it comes to North Sea oil. He reminded the audience that OBR forecasts at the me of the Budget relate to the current government policy, which can change. The OBR would like to review more of its past forecasts, he said. He added that there is concern about the likelihood of not mee ng the Chancellor’s fi scal target in 2019-2020.

Ray McCann said that, the fi nancial crisis aside, we have seen ‘scandals and shocks’ to the tax world that we would not have expected. McCann is a former HMRC compliance specialist. He said the ‘con nued denigra on of HMRC has to stop’ and there was a danger that too many tax agents feel ‘HMRC is out to get them’. He praised HMRC’s record in courts but said that they need to get rid of the vast ‘mountain’ of taxpayers who are s ll wai ng to have their day in tribunal or ma ers se led. He said the ‘never ending expansion’ of the tax code, which needs a ‘Transit van’ to carry it around, had le the tax code ‘all over the place’.

McCann said there needs to be a rebalancing and a greater focus on real risk – iden fying real risk and tackling it in a strategic, grown up way. HMRC has become wedded to the li ga on and se lement strategy, he said. We need a strategy for those taxpayers who will not se le but there is a ‘gumming up’ within HMRC, he argued. The ordinary man on the street wrongly thinks it is the wealthy who are to blame for the tax gap. He closed his speech by sta ng that agents and advisers have a ‘responsibility’ to ask themselves: this may be legal, but is it ‘ok’?

Hamant VermaExternal rela ons offi cer, CIOT

EVENT

CIOT

ATT

ATT annual report for 2015 and AGM NoticeThe ATT’s annual report for 2015 is now available on our website www.a .org.uk. Any member who would like a hard copy of the report should contact the execu ve director at Ar llery House, 11–19 Ar llery Row, London SW1P 1RT, or e-mail info@a .org.uk

The no ce for the Annual General Mee ng to be held on 7 July 2016 at 2pm is enclosed with this issue of Tax Adviser and is also available on our website.

Le to right: Paul Johnson, Janine Juggins, Chris Jones, Robert Chote and Ray McCann

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BRIEFINGS

www.taxadvisermagazine.com | June 2016 13

On the unexpectedly bright spring day of 13 April 2016, the Centre for Tax Law at the University of Cambridge held our fi rst annual Tax Policy Conference with the generous help of the CIOT. The topic was ‘The role of judges in developing the content of tax law’ and we enjoyed a series of fascina ng papers ranging from Dr John Avery Jones’s historical review of the judicial func on and Judge Malcolm Wallis’s close analysis of tax avoidance doctrines to Professor Kris n Hickman’s somewhat arres ng revela ons about regulatory

retroac vity in the US. We were par cularly encouraged by the strong engagement of tax professionals including accountants, lawyers and in par cular a number of senior judges and tribunal members who were able to contribute to the discussion from fi rst-hand experience.

One of the main purposes (no pun intended) of this conference is to support early-career academics and students, and we were well rewarded with a series of though ul and thoroughly researched papers by current PhD candidates. Stephen Daly spoke about recent cases that shed a light on the excep onal

status, or otherwise, of tax law, and Tobias Franz discussed the challenges faced by judges in rela on to the proposed European GAAR. Chris Jenkins off ered an historical account of judicial willingness to imply terms into tax legisla on that cohered well with Dr Avery Jones’s previous discussion. There was an encouraging a endance by tax students of all levels, promp ng hope that the early-career involvement in the next conference will be similarly strong.

Unsurprisingly, we have many people to thank, including those who chaired sessions and prepared commentaries

on papers. The team at Christ’s College, headed by Sue O’Donnell and Kevin Keohane, administered the event like clockwork, and Dr Avery Jones provided heavyweight intellectual support throughout. Last but not least the late Professor John Tiley, the founder of the Centre for Tax Law, demonstrated that talking about tax in a small-scale and good humoured College se ng can be good fun as well as instruc ve. We hope that he would have enjoyed himself as much as we did.

Dominic de CoganUniversity of Cambridge

EVENT

CIOT

Tax policy in Cambridge

ATT

EVENT

On Thursday 7 April 2016, ATT President Michael Steed welcomed the prizewinners from the 2015 examina ons to the Annual Prizewinners’ Lunch which was held in the majes c surroundings of Clothworkers’ Hall. We were also delighted to welcome past presidents Frank Collingwood, Peter Gravestock, Trevor Johnson and Erica Stary, who awarded their specifi c medals.

ATT

ATT Prizewinners’ Lunch

Back Row L to R Erica Stary, Peter Gravestock, Colin French – Gravestock Medal, November 2015, Christopher Gaunt – President’s Medal, November 2015, George Massey-Reed – Gravestock Medal, May 2015, Dabeluchukwa Onugha – Johnson Medal, May 2015, Frank Collingwood, Nora Markova – Ivison Medal, November 2015, Liam Nicholson – Stary Medal, November 2015, Rajandeep Nandha – Jennings Medal, November 2015, Ahmad Qasim – Collingwood Medal, May 2015, Geoff rey Randall – Kimmer Medal, November 2015, Trevor Johnson, Chris Jones Front Row L to R Alicia Shrimpton – President’s Medal, May 2015, Amy Wallace – Associa on Medal, November 2015, George Edmondson – Jennings Medal and LexisNexis Prize, May 2015, Michael Steed, Rebecca Ellis – Collingwood Medal and LexisNexis Prize, November 2015, Edward Symons – Stary Medal, May 2015, Stephanie Daniel – Kimmer Medal, May 2015

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BRIEFINGS

14 June 2016 | www.taxadvisermagazine.com

ATT

New ATT Offi cers appointedAt its mee ng on 7 April 2016, ATT Council approved the following to serve as Offi cers from the AGM taking place on 7 July 2016:President: Ralph Pe engellDeputy president: Graham Ba yVice-president: Tracy Easman

On the 15 June 2016 a new route to the ATT and CTA qualifications will be launched.

In a dynamic, fast paced industry, the demand for highly qualified tax professionals has never been higher.

With this in mind, the ATT and CIOT are introducing the new innovative Tax Pathway, a streamlined route into the exciting tax industry.

The Pathway, once successfully completed, is a route to membership of both the ATT and CIOT, bringing together the technical compliance and advisory knowledge of both qualifications.

Combining the strengths of both the qualifications, the Pathway maintains the quality and rigour associated with the ATT and CTA qualifications.

There are five elements of the route, with students being eligible for ATT membership after completing three of the elements.

Students will sit any two of the six ATT exam papers which form the Core Knowledge 1 element, allowing them to progress onto Core Knowledge 2, which will consist of one of the remaining four ATT papers or the CTA Awareness paper. The Law and Professional Responsibilities & Ethics examinations within the qualification, are

computer based compulsory elements that can be taken at any time before the final examination paper is completed.

As well as having the prestige of both qualifications, there are many benefits to employers and students. The key benefits for employers are: recruitment attraction; pathway flexibility; optimised study time and cost efficiency. Students will benefit from a wealth

EDUCATION

Pathway to Success

of support, with updated syllabi, past exam papers, organised branch events and student newsletters, all tailored to support students on their path to successfully completing the qualifications. Students, who follow the Tax Pathway route also have the option of earlier qualification as they have one less exam to sit than if they had taken the sequential route to the ATT and CTA.

Further details will appear next month.

ATT/CIOT

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BRIEFINGS

www.taxadvisermagazine.com | June 2016 15

CIOT/ATT

BRANCHES

Research earlier in the year strongly indicated that members wanted webinars from our branch network. However, the results of a pilot in the East Midlands Branch will be in at the end of the season and early signs are that they are far from conclusive. So what webinars do members want? We know from experience that webinars produced by colleagues in Technical Policy are always well received. The last in the series can be found here (www. nyurl.com/j b5o8). The last

webinar, broadcast in April looks at Professional Conduct in Rela on to Taxa on (PCRT). Do check it out if you haven’t already. At the recent Branches Forum in May, which takes the form of an induc on for new Branch Commi ee Members, I was delighted to hear from a member in South London and

Surrey Branch who described how the fi rm send a company-wide email invi ng interested par es to the boardroom where the webinar is shown live to all a endees! That is very encouraging news indeed.

What is not clear, is whether webinars are impacting on attendance at some Branch events. The attendance rates for some Branches and the impact of webinars remains a very hot topic and further research and pilots in other geographic areas may be required before we have the right answer to this question.

No two branches are the same however, many within our network are over-subscribed, we had to issue a warning to members in South West England this season to ask members not to show up to the venue if they had not booked online as the event was already very nearly over

capacity! Recognising what works well for one branch may well not work for another has been an important lesson learned for me at the very least.

In last month’s spotlight we introduced our ‘New Tax Professionals’ joint commi ee and I am pleased to say that a number of branches are considering holding an NTP event in the forthcoming season. Ini a ves that support members in the fi rst ten years of their career are so important. New tax professionals are the leaders of tomorrow’s tax world, to quote a very recent president of CIOT, and it is very important that they are made to feel welcome and that their contribu on to their Ins tute and their Associa on is recognised.

One thing we have learnt though, surprisingly, new tax professionals, who have just finished their exams (14 hours 45 minutes for CTA in total and 11 hours 45 minutes for ATT) are, oddly to my mind, reluctant to undertake a rigorous programme of Technical CPD offered by their branch but are, very partial to an alcoholic beverage and a free bowl of chips and dips! Weird!

We are poised to translate the new season of branch programmes to our online platform and to publish the new booklet in the August Tax

Adviser circulation. Branch Committees received their individual branch research packs at the conference back in March and it is great to see those research findings feeding directly into the new programmes.

If you haven’t been along to your Branch before but are considering going along do get in touch with either Mac or I or the chair or a member of the local branch committee all details can be found here: ATT: www.tinyurl.com/haaerwlCIOT: www.tinyurl.com/zgtdxad

If you are a ‘new tax professional’ and would like to register your interest for a forthcoming NTP event with your branch please email [email protected] and for all other branch enquiries [email protected]

On behalf of the Branch Network Chairman, all Branch Chairs and Committees, we look forward to welcoming you to the new season of events beginning in September 2016. Don’t forget to check out the remaining events for this season on page 56 to see if there is something of interest in your area.

Andrew McKenzie-Smart Chairman, Branch Network Emma BarklambHead of Member Services

Looking forward to a new season of events in the branch network

Members’ Support Service• The Members’ Support Service aims to help those with work-related personal problems•

give support• •

To be put in touch with a member of the Support Service please telephone 0845 744 6611 and quote ‘Members’ Support Service’

Page 20: Download June 2016 pdf

Full circle: revisited

Following on from my ar cle in the April 2016 issue of Tax Adviser, I am wri ng to point out that somewhat unfortunately readers cannot rely on all the calcula ons provided. Furthermore, I fear that the fi nal posi on may not be clear un l the Finance Act is published in July.

Regrettably in the 2016/17 calculations the 7.5% dividend ordinary rate liability on the trust standard rate band (1st slice) was omitted.

Although this increases the initial trust liability and reduces the dividend income available for accumulation (from 69.44% to 61.90% in the example) it would not in itself cause any great problems for trustees making discretionary income distributions from dividends received were it not for another sting in the tail regarding the amount of tax paid by them which can go into the ‘tax pool’.

When the 10% non-repayable tax credit on dividends commenced in 1999 legislative changes were understandably also made to ensure the non-repayable element could not go into the ‘tax pool’.

Having learned that the non-repayable tax credit on dividends was being replaced from 6 April 2016 by a potentially repayable initial tax liability I had assumed, somewhat naively, that there would now be no restriction on entry into the ‘tax pool’ of any of the tax paid on dividend income.

However, the draft Finance (No 2) Bill 2016 published after the 16 March budget does not provide for any alterations to ITA 2007 s 498, which stops tax paid on dividends other than at the ‘nominal rate’ (difference between the dividend trust rate and the dividend ordinary rate) entering the ITA 2007 s 497 ‘tax pool’.

In addition ITA 2007 s 498 also currently precludes dividend ordinary rate tax paid on the first slice going into the ‘tax pool’.

HMRC are aware of this and at 12:31am on 6 April 2016 updated the ‘tax pools’ advice at www.tinyurl.com/h2fugqp to read ‘what enters the tax

pool is the difference between the dividend trust rate and the dividend ordinary rate 7.5%, so only 30.6% the enters the tax pool’.

No mention has, as far I am currently (mid May) aware, however been made by HMRC regarding the 7.5% dividend ordinary rate liability on the first slice not entering the ‘tax pool’.

If no further legislative changes are made this will have a profound impact on trustees who make discretionary income distributions from dividend income and all beneficiaries (including those with no personal tax liability) receiving discretionary income distributions made out of dividend income received by non-income interest in possession trusts.

Furthermore in contrast with what one might reasonably expect to happen the percentage that beneficiaries will eventually be worse off will reduce, rather than increase, the higher their personal rate of income tax.

In addition the difference between what discretionary trust beneficiaries will eventually receive ‘in their hand’ from discretionary distributions made out of dividend income when compared with what income interest in possession beneficiaries and individuals with a full dividend tax allowance finally receive ‘in their hand’ will be even more marked.

Personally, coupled with the observa ons I made in the ar cle regarding what seems to me will be a substan al number of higher rate and addi onal rate taxpayers ending up paying less tax on dividend income under the new regime than previously, I consider this to be morally indefensible.

In addition to making personal representations to HMRC I have asked my MP and the Society of Trust and Estate Practitioners (STEP) to make representations for further legislative changes to be included in the Finance

Act 2016 in order that all potentially repayable income tax paid by non-income interest in possession trusts goes into the ‘tax pool’. My MP has passed the matter on to the Shadow Chancellor and STEP has advised me that they have approached HMRC.

We will have to wait a bit longer to find out whether these representations will be successful and we can then be sure how non-income in possession trusts receiving dividend income and beneficiaries receiving discretionary income distributions made out of dividend income are finally affected by the introduction of the new taxation of dividends regime.

Turning now to the 2016/17 figures included the article, if no further legislative changes are made, I calculate the percentages will now be:

Trustees initial tax liability rate: 33%Tax Pool Entry rate: 25.50%Tax paid rate if dividend distributed: 49.13%Maximum Possible Distribution: 50.87%

Percentage received by beneficiaries with:No income tax liability: 92.5% (7.50% less than in 2015/16)Basic rate income tax liability: 74.0% (6.00% less than in 2015/16)Higher rate income tax liability: 55.50% (4.50% less than in 2015/16)Additional rate income tax liability: 50.88% (4.12 % less than in 2015/16)

Andrew M Mortimer TEP

If you have any comments, or would like to share any of your experiences in relation to the articles you have read in Tax Adviser, please email [email protected]

Your lettersEmail us – your views, experiences and comments

16 June 2016 | www.taxadvisermagazine.com

Page 21: Download June 2016 pdf

HISTORICAL TAX

according to how luxurious each group was. Recorded and musical instruments sat in Group 19. Star ng at 33 1/3%, the rate on this group hit 100% in 1943.

Rates of purchase tax changed regularly. On 22 November 1968, The Beatles release of their eponymous album – also known as the White Album – coincided with the Chancellor announcing that purchase tax on records would increase the next day. Most record manufacturers physically embossed the disc with a code corresponding to the relevant rate of purchase tax. Consequently early pressings of the album have the le ers ‘KT’ for the old 50% rate as they were manufactured before the change. Any manufactured but not supplied to the retailer needed correc ve markings for the new rate. Later pressings have no embossed codes as the prac ce was phasing out – further proof that my copy is defi nitely not an earlier, valuable copy of the album!

Purchase tax was never purely a luxury tax though. When ‘the novel tax’ was proposed, the exchequer acknowledged the need for funds meant that it would have to go beyond luxuries. Concerned over how regressive it might be, as soon as it was announced MPs began lobbying for exemp ons. Relief on books and children’s clothes were granted early on. Exemp ons for dustbins, hula hoops, welsh harps and bicycles were rejected.

Whatever the result of this month’s referendum, it is unlikely we will give up that

most European of taxes: VAT. Originally a French construct, the imposi on of VAT on 1 April 1973 was one of the requirements of joining what was then the European Economic Community. A harmonised, indirect tax system was needed to ensure fair compe on for Community exports.

VAT replaced two taxes in the UK: purchase tax and selec ve employment tax (SET). The former applied to goods; the la er, in a broad sense, was a tax on services. VAT, of course, covers both. Although SET was unpopular and short-lived, purchase tax had a longer pedigree.

Introduced during 1940, purchase tax was intended to raise funds for the war eff ort, ‘discourage unnecessary spending’ at home and encourage exports. While the exchequer was aware of the turnover and sales taxes developing on the con nent, the UK opted for a tax that applied at a fi xed point. The trigger was when a wholesaler sold to a retailer. The idea was that wholesalers stood on one side of the fence and retailers on the other. When goods were passed over the fence to the retailer, purchase tax was applied by the wholesaler to the wholesale price. Trading which didn’t cross the fence was not chargeable.

Goods chargeable to purchase tax were split into more than 30 groups. Rates varied

That music was subject to purchase tax while books were exempted was always conten ous. Hansard records many impassioned arguments for the cultural and educa onal benefi ts of removing purchase tax on musical instruments and recordings.

Now, under VAT, there are circumstances where the treatment of books and music is aligned. If we compare music downloads to ebooks, both are subject to standard rates of VAT. Unlike purchase tax where groups could be added to as technology developed – vinyl and tapes were added to group 19 with gramophone records – VAT is much less fl exible. Ebooks didn’t fi t the condi ons to qualify for zero-ra ng as books so fell to be standard rated. As part of the EU we can’t unilaterally change the historic exemp ons in our system – most of which were inherited from purchase tax.

On the imports front, purchase tax generally applied on entry to the UK market, unless the goods were of such a low value the administra on was considered too great. This created an opportunity to escape purchase tax similar to Low Value Consignment Relief (LVCR) for VAT. In the 1950s Bri sh nylon stockings could be exported free of purchase tax. Ladies could then order Bri sh stockings from overseas suppliers, hoping each separately posted pair would escape Customs. Just as LVCR had to be removed from imports from the Channel Islands to ensure a level playing fi eld for imported music CDs, specifi c rules had to be brought in to stop cheap nylon imports from Malta and Gibraltar.

Whether in or out, purchase tax or VAT, I’ll give the Beatles the last word with ‘The Taxman’ from their 1966 album Revolver. Originally subject to 50% purchase tax on the wholesale price, now downloadable subject to 20% VAT: ‘Be thankful I don’t take it all cos I’m the taxman, yeah, I’m the taxman.’

Name Helen ThornleyPosition Senior tax consultantCompany Armstrong WatsonEmail [email protected] le Helen Thornley MA (Cantab) ACA CTA TEP is based in Cumbria and specialises in private client work. She writes, blogs and

tweets on the interes ng aspects of old and new taxes.

PROFILE

The VAT Album

© IStockphoto/avlntn

www.taxadvisermagazine.com | June 2016 17

Helen Thornley looks at the taxa on of recorded music and the introduc on of VAT in the UK

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ACCESSING TAX ADVICE

What is the issue? TaxAid helps low income tax payers move on with their lives. What does it mean to me?

Those in the profession have the opportunity to change lives for the better. What can I take away?

By dona ng you can help support vulnerable people. You can donate here: www.bridge-the-gap.org.uk.

KEY POINTS

In the past 15 years around 100,000 people, some very vulnerable, have had their lives improved – indeed, in some

cases, turned around – because TaxAid was able to help them. These are some of their stories. There is a common thread: the spiral descending into a devasta ng tax problem rarely starts with tax. There will o en be another underlying problem in their life. Tax trouble is o en a symptom, and adds fuel to the fi re. However, resolving the tax element can very o en set them back on the path to be er health, rela onships and work.

Being human, people of course may fail in their obliga ons, and on occasion be failed by poor services of rogue ‘accountants’ or employers or by HMRC. But if there is any

fi nal resolu on of his £70,000 determina on. TaxAid’s advisers were fi nally called in and took up the case. HMRC agreed our careful reassessment of £1,700 tax due for inappropriate expenses claims. Although resolu on came too late to save his haulage business, he rang us last week to tell us that he has a PAYE job and is back together with his wife.

Par cularly rewarding are the cases where we can help people when they are vulnerable to ‘buy’ a bit of me to enable them to get their lives back on track.

Laura was a young woman highly trauma sed by a violent rape. It took us

fault to be a ributed, it is that the tax system is too complex, not least for those who ‘fi nd themselves’ as self employed and struggle with limited literacy or poor mental health when handling their own tax ma ers. It is for these reasons that there is a con nuing need for the tax advice chari es as a safety net.

One par cular tragic case illustrates how an enquiry can be botched by an individual. Harry was severely mentally ill – to such an extent that his marriage had broken down. He had been subject to an enquiry that he had tried to respond to himself, leading himself into deeper trouble. Ul mately he was made homeless, in the years awai ng

18 June 2016 | www.taxadvisermagazine.com

Moving onA er 15 years at the helm of TaxAid, Rosina Pullman is stepping down and handing on the baton. In this ar cle she refl ects on some of the people she has met and who TaxAid has helped

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ACCESSING TAX ADVICE

A common mispercep on is that our advice service is about ge ng people off paying their tax. That’s not what TaxAid is about. Chrissie’s case was yet another familiar story of someone self-employed who didn’t have the resources to get out of trouble when her ‘accountant’ mislead her about what were – or not – allowable expenses. As a website designer she had had a couple of good years. But then work dried up and she found herself with a tax debt of £9,000. HMRC agreed a se lement of £300 a month, and although she has struggled, she has eventually cleared it – and in the mean me learnt from TaxAid how to complete her own tax returns accurately going forward!

We are particularly vital as a service compensating for low-income taxpayers’ inability to meet the exacting standards expected of those in self employment. Darren’s case was a particular challenge. As an enterprising young father living in rural East Anglia he started up a window cleaning round. Unfortunately he found himself subject to an enquiry when his tax return raised questions related to his cash income. He had been turned out of the family home in the belief that he must be a criminal, and was living in his car by the time that he contacted TaxAid.

We needed to provide evidence that he charged only £2.50 per hour for his window cleaning – and indeed to show how he could live on income below the Personal Allowance. Proving a negative is a huge challenge but we pieced together his income, expenditure and day to day activities, including delivery and collection of children to school and the miles needed to drive his round. But it wasn’t until we tracked down the warden at some assisted housing and found that she had kept a meticulous notebook of hours worked and the £2.50 payments from her elderly residents that the enquiry was settled with HMRC with no adjustment.

Even more encouragingly, Darren has

© IStockphoto/sezer66

now signed up to take a social worker foundation course at his local college because of his experience of the need for support when finance and family is at risk.

The client who illustrates for me personally the reasons why TaxAid’s work needs to continue to effect life-changing opportunities has to be David. David, because of his courage in coming forward and telling his story in film of how he fell from being an Oxbridge graduate and a film producer on a six-figure income to living on the streets with a life-limiting illness. See extracts of his story at www. tinyurl.com/gnuhp86.

It has been my privilege to work with the many dedicated people who have made TaxAid what it is today. I am now handing that over to my successor, Gary Millner, who is to be CEO of both TaxAid and the profession’s other tax advice charity, Tax Help for Older People. He will have the committed support of the CIOT, of our patrons, ambassadors and trustees and those who continue to work tirelessly as staff and volunteers.

I reflect that we could not have touched the lives of 100,000 people without those who believe – and fund – our work. The tax advice charities need the support of the profession more than ever before, which is why we have launched the Bridge the Gap campaign. I finish with the words of a client whose mental illness had prevented him from contacting HMRC when his business failed.

‘I really can not thank you enough for your help over the past three years. The peace of mind you and your colleagues at TaxAid are able to give to people like myself who, through no fault of their own, find themselves at a point and time in their lives where they feel they are no longer able to cope is truly priceless. You took a huge weight off my shoulders at a very difficult time in my life and for that I will always be very grateful.’

several anguished years of working with her as we wrestled between her inability to cooperate due to mental illness (brought on by the rape) and our needing her coopera on to respond to outstanding tax returns. The par cular challenge was that she had equity in her fl at, and understandably, was desperate to avoid losing her home. Although HMRC are normally reluctant to do so, in this case they very helpfully agreed to a voluntary charge on the property, an outcome that eventually enabled Laura to get back to her dress-making business.

We haven’t quite reached that stage in the years of working with Eva, but she is young and we hope will fi nd resilience. She came to us when she le prison for commi ng Tax Credit fraud, and is the fi rst to acknowledge that she has destroyed her career as an aspiring lawyer. Sadly she now seems determined to destroy her life, so that we have had occasions when we have called emergency services when she has overdosed or self-harmed. We ini ally helped her with outstanding tax returns that had accumulated while in prison. She now subsists on rental income from her property, but we are sugges ng to her how she might help others with accessing online informa on.

PROFILE

Name Rosina PullmanPosition Former directorCompany TaxAidTel 020 7803 4950Email [email protected] le Rosina Pullman has been

the director of TaxAid for the past 15 years and is succeeded by Gary Millner on 1 June 2016.

www.taxadvisermagazine.com | June 2016 19

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MAKING TAX DIGITAL

20 June 2016 | www.taxadvisermagazine.com

‘B ig Bang’ announcements provide wonderful soundbites for the press. Yet many fail on

implementation.In the March 2015 budget the

chancellor announced ‘the end of the tax return’. Headline measures and narrow implementation timescales were publicised with little in the way of prior public consultation. But consultation on an ‘implementation only’ basis puts at risk the success of trying to create one of the most digitally advanced tax administrations in the world. The chancellor’s announcement surprised

Pausing to refl ectAnthony Thomas suggests that the Making Tax Digital agenda needs further considera on before successful implementa on

those involved in tax administration and whose main focus is on tax compliance.

Anything the government can do to improve tax collection is welcome and digital options will help. Nevertheless, it seems likely that businesses and landlords will now be required to have digital records, with only minor exemptions. This will require a radical and substantial change in the behaviour of many taxpayers and business owners.

The slogan issued at the time of the budget, Making Tax Easier, promised to reduce the administrative burden. But, before long, HMRC realised that

this objective was not achievable so the principle became known as Making Tax Digital (MTD). The proposals to achieve this represent a significant and unprecedented change in the way taxpayers maintain their records and engage with HMRC. Further, there are major challenges for its eventual rollout within what many see as unrealistic timeframes. For MTD to work well it is crucial for its implementation to be managed carefully with a proper and open consultation with taxpayers, tax professionals and software developers to minimise risk of failure.

What is the issue?Cri cs suggest HMRC risks damaging further the already fragile rela onship and trust between taxpayer and state if quarterly repor ng is made compulsory for all. It will be crucial for the tax agent to have access to HMRC systems in advance of MTD being rolled out if it is to work properly. What does it mean to me?

Taxpayers will have to engage with HMRC at least quarterly. Despite HMRC’s assurances that it is going to be simple and straigh orward, the process may prove me-consuming, costly, worrying for many and turn out to be a burden on some taxpayers for li le, if any, value. What can I take away?

It is a big call for small and micro business to keep their records digitally within two years when taxpayers are unaware of their new repor ng requirements. Legal challenges may follow in rela on to people with disabili es or taxpayers who live in remote areas with limited internet access.

KEY POINTS

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MAKING TAX DIGITAL

www.taxadvisermagazine.com | June 2016 21

contribute towards the £400m cost savings to businesses. My fear is that on the contrary, the costs of compliance in training, so ware and me are almost certainly going to be signifi cantly increased.

HMRC says it will assist the digitally excluded, but may have underes mated the number of taxpayers and businesses that will fi nd it diffi cult to comply without considerable support. It is harsh that the smallest businesses with the lowest profi t margins will have to invest signifi cantly in training in computer technology in order to comply with HMRC’s repor ng requirement.

Alterna ve repor ng methods must be realis c. Requiring pensioners and business owners of pensionable age to use smartphones if they cannot use a computer would not be sensible. People must have a choice and so ware must be developed that is convenient and easy to operate. Rather like the fi ling of tax returns a er the introduc on of self-assessment, given a sensible mescale the digital op on will become the preferred choice.

HMRC asserts that some 3.7 million businesses are already using their digital account. The Department for Business, Innova on & Skills sta s cal release dated 14 October 2015 stated that there were 5.4 million private sector businesses at the start of the year. If 3.7 million (68.5%) are using digital to access their account, it follows that 31.5% are not – which is a signifi cant propor on. HMRC also seems to believe that all businesses are already using digital tools. It is true that many do use a form of technology but this is a far cry from assuming that all businesses, especially the smaller ones, use even basic accoun ng so ware. They do not.

Although HMRC says it will phone those who cannot use digital tools and help them, based on past experience, these conversa ons will not be easy. Many taxpayers are fearful of HMRC and even those using tax agents will want a reassurance review before submi ng anything. This will drive many taxpayers and businesses into the hands of tax professionals and increase their costs. It also means that agent access to HMRC systems

will be an essen al prerequisite to MTD being rolled out.

Rule of lawEvery public authority in a democracy must respect the rule of law, and HMRC is no excep on. The courts have found that enforcing mandatory use of digital technology can infringe the human rights of older or disabled people, or those who cannot access broadband easily because of where they live.

In L H Bishop Electrical Co Limited and others V HMRC Commissioners [2013] UKFTT 522 [TC] the judge held that regula ons that required online fi ling of VAT returns without providing exemp ons for older people, those with disabili es that make it diffi cult or impossible for them to use computers, or who live in a remote area where broadband access is unreliable or unobtainable, were in breach of the appellants’ human rights and were unlawful under EU law. This is s ll good law and HMRC may be challenged in the courts if it is perceived to be exceeding its powers.

It is worrying that there is li le apparent thought given to the immense communica on programme necessary if these MTD changes are not to harm the already fragile rela onship between taxpayers and HMRC. Millions of taxpayers and businesses are unaware of the imminent major changes to the tax system and their mandatory digital obliga ons. It is no exaggera on to say that MTD will not work easily despite assurances by HMRC that in many cases a click of the ‘send’ bu on will suffi ce. It is naïve to think it will be that easy.

In HMRC’s haste to operate the most digitally advanced tax system in the world, the MTD project has features that sometimes cause basically good ideas to go spectacularly wrong. Already Administrative Burdens Advisory Board and the Federation of Small Business have voiced legitimate concerns, as have some MPs. Perhaps some pause and reflection on quarterly reporting and the mandatory aspects would be wise. It would be a pity if it all went wrong with the consequent reputational damage to HMRC and cost to taxpayers.

MandationSerious concerns have been raised against the elements of compulsion in MTD – and not only from tax professionals. HMRC’s own research published last August (www. nyurl.com/zhmlb6u) showed that there

are many taxpayers who, for a variety of reasons, will be unable to cope with quarterly repor ng.

It is becoming clearer that the main plank of mandatory repor ng will be compulsory record-keeping in digital formats. A major stumbling block to this working easily will be the diffi cul es small and micro businesses may encounter in conver ng to digital records within two years.

There are features of MTD rela ng to mandatory quarterly repor ng that seem to be predicated on the belief that a signifi cant part of the tax gap relates to errors in bookkeeping and accoun ng records. But this is open to challenge. Only recently HMRC scrapped the Business Records Checks on the basis that they failed to iden fy the level of errors expected. The closing of the tax gap is the likely driving force for the ini al rollout on mandatory repor ng by smaller businesses, but where is the independent, robust evidence for the need to do this?

Every pronouncement made by HMRC focuses on how quarterly repor ng will help taxpayers. But it is likely that the record informa on will be subjected to computer analysis and used as a further tax compliance tool in HMRC’s relentless – some would say misguided and unachievable – quest to eradicate incomplete records. There will no doubt be penal es for those who make mistakes. Many needless enquiries will result should HMRC fail to appreciate the numerous innocent reasons why records, accounts and returns do not seem to match. This risks placing a dispropor onate burden on the tax compliant.

It is misleading for HMRC to state repeatedly that ‘quarterly updates will largely be a ma er of checking data generated from record-keeping so ware or app and clicking send’. There is no clearer indica on of the department’s failure to understand how businesses operate, especially smaller ones. Nor does it seem to recognise or give any apprecia on to the huge burden and costs that would be placed on ordinary taxpayers and enterprises in trying to comply while at the same me a emp ng to run their businesses. Indeed, the whole thrust of government policy seems to be towards increasing compliance burdens on businesses that are repor ng quarterly for VAT, will soon be repor ng monthly to the Department for Work and Pensions for universal credit, and are now required to report to HMRC—each periodical report using diff erent fi gures.

HMRC also believe that MTD will

Name Anthony ThomasPosition ChairmanOrganisation CIOT’s Low Incomes Tax Reform GroupTel 024 7622 7211Email [email protected] le Anthony Thomas is chairman of the Low Incomes Tax Reform

Group [LITRG] and current Master of the Worshipful Company of Tax Advisers. He was a CIOT president in 2012, sits on its council and is a member of the General Assembly of the CFE (Confedera on Fiscale Europeenne).

PROFILE

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CTA ADDRESS

Tax is at the top of the poli cal agenda and many substan al changes are taking place, partly as a response to

poli cal and popular pressure resul ng in the Base Erosion and Profi t Shi ing (BEPS) Ac on Plan, EU ini a ves and changes in domes c law and partly as a result of administra ve pressures and the capacity for new technological developments, such as the Making Tax Digital plans. New technology has also had a part to play in ramping up the poli cal agenda as it becomes easier to access and disseminate material and we cannot help being aware of the major impact of recent leaks of vast amounts of informa on.

The rapid pace of change has le many in the tax community gasping for breath. There is also some feeling of lack of direc on. As a result, there were so many topics I could have chosen for this lecture that I was spoilt for choice, but one common theme emerged. This is ‘trust’.

The importance of trustBy ‘trust’ I mean the belief in the reliability, honesty and ability or capacity of someone or some group, ins tu on, organisa on or government. I argue that sustainable tax systems must rely on trust to a considerable degree. Systems dependent purely on coercion generally do not work in the long term. But trust is many layered – there will be interlocking networks of trust across diff erent groups. We need trust of taxpayers in governments, poli cians, revenue authori es, courts, interna onal organisa ons and in each other; trust of the governments in the taxpayers; trust of na onal governments in each other; trust of interna onal organisa ons in domes c governments and also trust in what we, the public, are being told by the media and NGOs.

Some forms of trust, for example, between small elites, could exclude others and so make things worse. So, we need

a real crisis of confi dence. So, we need to ensure that the revenue authori es have the resources to combat these ac vi es and that there is a mechanism that makes them properly accountable to the public. This should not be seen as cri cism of employees of the revenue authority but is a call to support and monitor the system in a construc ve way to build trust. Relying on whistleblowers, media, NGOs and the public to administer taxa on cannot be a sustainable or adequate answer to the problems. This is not an argument against increased transparency, but it is a warning that it cannot by itself solve our problems.

Evidence of a lack of trust comes up me and me again in the tax debate.

For example, in its March 2016 report on tackling tax fraud, the Public Accounts Commi ee (PAC) expressed a lack of trust in HMRC because it did not feel it had the informa on it needed to assess what HMRC had done about fraud, despite having received a Na onal Audit Offi ce (NAO) report. It felt it was forced to rely on what was available to it and commented that ‘the percep on that HMRC does not tackle tax fraud by the wealthy needs to be addressed.’

Whatever the truth of the ma er, the percep on is important. We need

the right kind of trust, and checks on the wrong kind of trust.

Given the limits on space and me, I focus here on the trust of taxpayers in governments and revenue authori es. Although the rela onship has been complicated by globalisa on, taxa on remains fundamental to the rela onship between the ci zen and the state. Only governments can levy and collect taxa on.

We are currently on a trajectory that will increase transparency and regula on, but if transparency is increased without a commensurate increase in jus fi ed trust, the aims behind transparency (be er tax collec on, increased ‘fairness’) will not be served. We are likely to lower tax morale and raise distrust in the general popula on without necessarily increasing tax collec on overall or improving its balance.

Increasing the amount of data available can be valuable if it reveals otherwise undetected problems, especially where there have been a empts to hide informa on for criminal and corrupt purposes. But once we have the informa on, we need to be able to trust that governments are dealing with the problems. If it is believed that tax authori es are unwilling to deal with this data, or cannot manage it and use it properly, we shall have

What is the issue?Sustainable tax systems rely on trust at various levels. What does it mean for me?

Transparency alone cannot solve problems. Increasing transparency and data available from taxpayers will not achieve its aims without also taking measures to improve jus fi ed trust in tax authori es. What can I take away?

In the end, only governments can levy taxes. By taking some rela vely modest steps to improve resourcing, accountability and personal contact we could increase trust in our revenue authority with general benefi ts.

KEY POINTS

22 June 2016 | www.taxadvisermagazine.com

On 10 May 2016, Professor Judith Freedman gave the 2016 CTA Address on the topic of ‘restoring trust’

Restoring trust

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CTA ADDRESS

transparency and explana on from the tax collec on agencies, not only to convince other taxpayers but also so that the agencies can defend their ac ons and protect their own staff from the current ‘revenue bashing’ (as Andrew Tyrie called it in his 2012 CIOT Address).

Informa on by itself is not helpful. It needs interpreta on. As Baroness Onora O’Neill commented in her 2002 Reith lectures on A Ques on of Trust: ‘…. Increasing transparency can produce a fl ood of unsorted informa on and misinforma on that provides li le but confusion unless it can be sorted and assessed. It may add to uncertainty rather than to trust. And unless the individuals and ins tu ons who sort, process and assess informa on are themselves already trusted, there is li le reason to think that transparency and openness are going to increase trust.’

Further, she points out, ‘Perhaps it is not … surprising that public distrust has grown in the very years in which openness and transparency have been so avidly pursued. Transparency certainly destroys secrecy: but it may not limit the decep on and deliberate misinforma on that undermine rela ons of trust. If we want to restore trust we need to reduce decep on and lies rather than secrecy. Some sorts of secrecy indeed support decep on, others do not. Transparency and openness may not be the uncondi onal goods that they are fashionably supposed to be.’

So we need to consider the downsides as well as the upsides of demanding more informa on. For example, were tax returns

to be public, a taxpayer not wan ng his neighbours to know the full extent of his wealth might fail to declare informa on to the revenue authority when he would make a fuller return if it was not public.

Was there ever trust?The historian, Mar n Daunton

has shown that trust was founda onal to the rela onship between taxpayers and the tax authori es in the UK in the 18th century and again in the second half of the 19th century. In his book, Trus ng Leviathan, Daunton shows how the ability to collect taxa on effi ciently and without public unrest is connected not only with the economy and the form of the state but also to the ins tu onal procedures in place and the social norms created. The UK system was strengthened by the fact that the central state delegated the assessment and collec on of income tax to members of the taxpaying public: law commissioners chosen by the local business and professional community. Involving people with local knowledge made the assessment and collec on feel more personal. A er this system was dismantled, general commissioners of income taxa on were considered able to know the norms in their local popula on and this was an important basis for trust that taxpayers generally were paying their share. This system lasted un l 2009, when the tax tribunals took over. Although the previous system could not have been maintained, the current total removal of links between taxpayers and individual revenue offi cials is having an eff ect on trust.

Restoring the trust It is no surprise that calls for transparency and fairness in rela on to large businesses are reaching a crescendo in the UK at a me when personal contact with HMRC

Name Professor Judith FreedmanPosition Pinsent Masons Professor of Taxa on LawCompany Pinsent Masons Professor of Taxa on LawTel 01865 288337Email [email protected] le Judith is Pinsent Masons Professor of Taxa on Law at Oxford

University and Director of Legal Research, Oxford University Centre for Business Taxa on. She was a member of the Aaronson Tax Avoidance Study Group and has served on OTS consulta ve commi ees. The views expressed here are personal and do not represent those of any organisa on. This is an abridged version of the seventeenth Chartered Tax Advisers Address delivered in May 2016. The full version will be available on the Tax Adviser website.

PROFILE

is being lost as we move to call centres, centralised func ons and digital returns.

The current sense of unfairness is compounded by the feeling that large companies have a rela onship of trust through co-opera ve compliance that is denied to others. Although it is clear that the large business arrangements could not be replicated for smaller taxpayers, it is ironic that such eff orts are being made to build trust with large businesses at the same me as it is being lost with small businesses and individuals. Although there will be a small increase in HMRC customer services staff over the next couple of years, it has been made clear that the ul mate aim is to cut numbers substan ally as digital tax collec on is introduced.

The substan al backlash against the Making Tax Digital plans to date suggests that this is not going to be easy. Taxpayers required to deal with HMRC en rely through computers may have less and less trust in HMRC. Inves ng in some high quality human interac on to run alongside the machines would be advisable to maintain trust. Digitalisa on should not be seen as an excuse to cut staff yet further in the customer services arena.

In rela on to large businesses, the percep on that HMRC is doing ‘deals’ has not been displaced, despite a report from the NAO, including the Park inves ga on, that largely supported the claim that HMRC was following its published Li ga on and Se lements Strategy. Unfortunately there was some evidence of non-ideal behaviour from HMRC offi cials, highlighted in the UK Uncut li ga on ([2013] EWHC 1283)) and this has given rise to a concern that the trust being developed here is reserved for elite groups and is insuffi ciently monitored.

Many in the tax community consider that percep on is unfair. It would be ineffi cient if not impossible to take every case to court. Where there are issues of valua on in transfer pricing, for example, current law does not render a precise answer, and discussion within a range may be needed. Under the Li ga on and Se lements Strategy the outcome of a tax dispute, when achieved by agreement between HMRC and the customer, must

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be consistent with the law. Even extensive reform of tax law is unlikely to provide a system that could render a precise answer in every case. In any event, HMRC has to apply the law as it is.

The most worrying aspect of the re-emergence of the large companies ‘deals’ issue earlier this year over Google is that procedures were set up in 2012 precisely to create trust in HMRC’s dealings with such ma ers. New forms of governance were introduced, including the appointment of the ‘assurance commissioner’ whose very name relates to trust. Yet these had no discernible impact on the debate when Google was discussed in Parliamentary Commi ees, the public and the media. This does not mean that the procedures were not robust – but it does mean that they have not been well explained and that they do not go far enough to sa sfy the public, so that they do not achieve their objec ves. HMRC was inhibited from responding by rules on confi den ality and the general response it gave was considered too li le and too late. As a non-ministerial department, it could not be defended by a minister.

In a 2013 Bri sh Tax Review ar cle, I suggested that the appointment of the tax assurance commissioner might not address the need for reassurance in this area. This proved to be correct. Once again we face sugges ons that more transparency is needed, companies need to publish their tax returns and that the PAC needs greater powers to examine the tax aff airs of individual companies. The problem with all these sugges ons is that, in the end, however much informa on is available HMRC must apply the law to the facts and collect the tax due. This requires not only data but also analysis.

In 2012, following the Park review, the NAO stated that ‘There should not be a need for external reviews of

se lements, such as this one, to provide this assurance. The NAO will have a role in providing assurance that the Department’s arrangements are opera ng effi ciently and will con nue to have access to the details of individual se lements.’

This suggests a way forward. Currently the role of the NAO and the PAC is to review whether HMRC are opera ng effi ciently. This is the correct role for the PAC: poli cians should not be involved in the tax aff airs of individual taxpayers as a ma er of cons tu onal propriety. But an expert unit of the NAO could provide external scru ny of a random sample of se lements on a regular, rou ne basis. This would be far preferable to special inquiries by non-experts emerging periodically as a response to par cular events, because only a rou ne check will provide the reassurance necessary. The press release announcing the appointment of Edward Troup as fi rst permanent secretary at HMRC stated that the arrangements for assuring large tax se lements in HMRC are under review. This is a perfect opportunity for a re-think of the 2012 arrangements.

The way forward My lecture aimed to raise ques ons about trust and the rela onship between trust and transparency. I propose that the trust of UK taxpayers in HMRC and the tax system could be increased in various ways. It goes without saying that improved tax design, both on an interna onal and a domes c front would increase trust, but that is easier said than done. It is not clear that the Tax Consulta on Framework is off ering increased engagement beyond a small group of experts. Expert input is vital but may invite (o en unfair) mistrust. Be er ways need to be found to engage all those aff ected, not just the experts, through serious informed discussion (not market research). At the same me HMRC

needs to have the exper se to spot self-interested lobbying. Proper consulta on takes me and too many changes are s ll rushed or pulled as rabbits out of the Chancellor’s hat. NGOs and the media are good at highligh ng problems, but ul mately only governments and revenue authori es can implement solu ons. So, increasing trust at a na onal level requires us to have a well-funded, well-staff ed and well-trained revenue authority. Trust between HMRC and large companies has been increased through co-opera ve compliance, though mispercep ons about cosiness and deals may threaten this. The benefi ts of personal contact need to be extended to other taxpayers to give validity to coopera ve compliance for business. Given the above, there is a need to give assurance about se lements reached by HMRC with taxpayers by having a unit of the NAO or other similar body checking on this as a ma er of rou ne. Trust requires personal contact with taxpayers at all levels. The Making Tax Digital strategy and other new technologies may help to streamline administra on but should not be used as an excuse to reduce the work force – rather it is a chance to improve rela onships by releasing the workforce from mundane tasks. HMRC should be represented in Parliament by a minister with accountability, which would assist HMRC to explain issues. It should be possible to achieve this without breaching taxpayer confi den ality. Ques oning whether transparency is always useful is not suppor ng decep on or misinforma on. Demanding informa on that will not be useful or that will turn into a ck box exercise could be counterproduc ve. Important informa on may not be examined because resources are being wasted on informa on that will reveal nothing useful. Transparency ini a ves need to be well targeted and supported by resource.

This is not a revolu onary menu – it is a very modest one. But these recommenda ons suggest a way forward to restore trust in our revenue authority and our tax system. Failure to do so will result in a dangerous situa on. A tax system cannot be operated by public opinion but it needs consent, for it is impossible for it to func on without a large measure of voluntary compliance. I am not asking for blind trust but for reasonably placed trust. For that we need certain kinds of transparency but also checks and balances.

CTA ADDRESS

24 June 2016 | www.taxadvisermagazine.com

Page 29: Download June 2016 pdf

Indirect TaxesAnnual Conference 2016

Save the date – Tuesday 27 September 2016Full day conference at London Hilton Park Lane

Book online at: www.tax.org.uk/indirecttaxes2016

Speakers to be announced.Conference fee:

£315 (booking before 31 July 2016)

£420 thereafter

Morning session – CustomsChaired by: Jeremy White, Pump Court Tax Chambers

• Trade issues

• UCC so far – HMRC experience and views

• How to succeed post UCC and Brexit

Afternoon session –Indirect TaxChaired by: Michael Conlon QC, Temple Tax Chambers

• Future for the UK and EU indirect taxes system

• Case law update

• Making tax digital

Morning session – VATChaired by: Michael Conlon QC, Temple Tax Chambers

• Business/non-business and use

• Taxable persons

• Avoidance and abuse –

Look out for further details coming soon.

Kindly hosted by:

Wednesday 5 October 2016Freshfields Bruckhaus Deringer, Northcliffe House, 26-28 Tudor Street, London EC4Y 0BQ

In partnership with:

Topics to include:

• the vision to 2020

• chains in a post BEPS world

Commerce & Industry GroupAnnual ConferenceStaying Ahead – Thriving Through Change

www.taxadvisermagazine.com | June 2016 25

Page 30: Download June 2016 pdf

BACK TO BASICS: PRIVATE EQUITY

This article looks at the memorandum of understanding (MoU) between the British Venture

Capital Association (BVCA) and HMRC on the income tax treatment of managers’ equity investments in venture capital and private equity backed companies from 2003.

On acquisi on of the shares by managers, there is a risk of an income tax charge on any discount if shares have been received at undervalue. If the MoU applies, the risk is eliminated because it sets out an approach accepted by HMRC to determine whether the price that managers pay for their shares is at least market value, where they are not restricted securi es, or UMV where there are restric ons on them, such as on the ability to transfer them. This eliminates the need for a tax valua on to be performed on the equity investment, including the associated costs, and reduces the risk of a poten al HMRC challenge to the valua on.

When restricted securi es are subject to a chargeable event, if they were acquired for less than UMV the excess propor on between market value and UMV on any proceeds is chargeable to income tax rather than capital gains tax. Having restricted securi es deemed to be acquired for UMV is therefore benefi cial because, when a chargeable event occurs,

for example when the securi es are sold, the en rety of the proceeds will be subject to capital gains tax.

The approach set out by the MoU is a refl ec on of the law and represents a ‘safe harbour’ which HMRC will accept should the condi ons be met. HMRC does not have to accept the MoU if a signifi cant purpose of the arrangement is to avoid tax or there are material devia ons from the condi ons. Conversely the taxpayer may also argue that a diff erent interpreta on to the MoU applies in their situa on.

What is the issue?The MoU can provide a ‘safe harbour’ for HMRC to accept that unrestricted market value (UMV) has been paid when individuals acquire shares at the me of a private equity buyout. What does it mean for me?

If UMV has been paid there should be no PAYE or NIC when the shares are issued. If the MoU applies, it eliminates the need for a tax valua on to be undertaken and it can mi gate the risk of unforeseen tax liabili es arising. What can I take away?

If individuals invest in a ‘vanilla’ private equity structure at the same me and on the same terms as the investor while mee ng the condi ons of the MoU, UMV is deemed to have been paid, mi ga ng the risk of HMRC challenging the valua on.

KEY POINTS

The conditions for the MoU to applySix condi ons must be met for the MoU to apply:1. The shares that managers acquire must

be ordinary capital.2. Any leverage provided by holders of

ordinary capital (for example, the private equity/venture capital investors) that is in the form of preferred capital is on commercial terms. (It will be deemed to be on commercial terms when the coupon is not less than that on the most expensive fi nancing provided by third party lenders.)

26 June 2016 | www.taxadvisermagazine.com

Tom Klouda and Ashley Prior provide a refresher guide to the memorandum of understanding between the BVCA and HMRC on the income tax treatment of managers’ equity investments in venture capital and private equity backed companies from 2003

MoU refresher

Page 31: Download June 2016 pdf

BACK TO BASICS: PRIVATE EQUITY

additional rights which are acquire addi onal rights that are not available to the other holders of ordinary capital.

6. Managers should be fully remunerated by salary and bonuses (where applicable) through an employment contract.

In rela on to the above condi ons, if managers’ shares have restric ons requiring them to possibly transfer their equity for less than their market value should their employment end (‘bad leaver condi ons’) then, as long as condi on 3 is met, the managers will be treated as not having paid a discounted price. In addi on, tag-along and drag-along rights are treated as not depressing the value of the shares.

When managers’ shares are subject to ratchet arrangementsWhere managers’ shares are subject to ratchet arrangements HMRC accepts that these should be considered when determining the UMV. HMRC accepts that, if conditions 1, 2, 4 and 6 above as well as the conditions below are met, the price paid by the managers for their shares will be at least UMV.

The further conditions are: That the ratchets are arrangements whereby the participation in the profits of the company may be different depending on the company performance or the private equity investor’s return on its investment. The ratchet arrangements exist at the time that the private equity investors acquire their share capital. The managers must pay a price for their investment in the ordinary capital on acquisition that reflects the maximum economic entitlement.

How the MoU would applyLet us say that a private equity investor

acquired a 95% interest in a company and a single manager acquired 5%.

For the above transaction to be MoU-compliant, the manager must have acquired their interest at the same time as the private equity investor and they must have acquired either the same shares or those with substantially the same economic rights as those acquired by the private equity investor. The shares acquired by the manager must also have the same rights as those acquired by the private equity investor, say one vote per share. This would mean that the manager would hold 5% of the votes while the private equity investor held 95% of the votes, in addition to the same income and capital rights.

In this example, as long as the manager holds their shares for at least a year then, on disposal, it is likely that they would also qualify for entrepreneurs’ relief, subject to additional criteria.

When MoU may not applyThere are many situa ons in which the MoU may not apply. If, in the example above, the manager was unable to invest at the same me as the private equity investor, condi on 4 would not be met and the MoU would not apply. When the MoU was introduced, HMRC was fairly fl exible about equity acquired shortly a er the private equity investors. However, this is generally no longer the case. When managers acquire their shares at a diff erent me from the private equity investor, our understanding is that HMRC’s view is that the employee’s share acquisi on falls outside the MoU.

Award of shares under ESSThe MoU will not apply if managers’ shares are awarded under employee shareholder share (ESS) rules. This is because condi on 3 will not have been sa sfi ed since the manager will not have paid anything for the shares that they were awarded. Although any shares within the ESS regime will not fall within the MoU, it is one instance where it is possible to submit a pre-transac on valua on to HMRC that can provide certainty to the value of the shares awarded.

ConclusionIn practice, deals do not always follow the prescriptive rules set out within the MoU and there are various factors that can cause a transaction to fall outside the qualifying conditions. It is therefore important to take care to ensure the conditions are met. If these are not met, it will be necessary in most cases to perform a tax valuation to mitigate the risk to the company and the employee.

3. The price paid by managers for their shares should not be less than that paid by the private equity investor for its ordinary capital shares. These must be either the same class as managers’ shares, or shares of another class that have substan ally the same economic rights as the managers’ shares.

4. Managers must acquire their shares at the same me as the private equity investor.

5. The shares acquired by managers must have no addi onal features to give them or allow them to later acquire

Name Ashley PriorPosition Senior associateCompany PwCEmail [email protected] le Ashley is a senior associate in PwC’s deals tax team in London, specialising in advising private equity clients on their equity

incen ves for por olio management teams.

PROFILE

Name Tom KloudaPosition Senior managerCompany PwCEmail [email protected] le Tom is a senior manager in PwC’s deals tax team in London, specialising in advising private equity clients on their equity

incen ves for por olio management teams. Tom has a par cular focus on businesses that have been through one or more rounds of private equity ownership.

PROFILE©

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www.taxadvisermagazine.com | June 2016 27

Page 32: Download June 2016 pdf

CORPORATE DIVIDEND EXEMPTION

28 June 2016 | www.taxadvisermagazine.com

Small or large company?

Stuart Pibworth outlines the exemp ons from UK corpora on tax for company dividends

subsidiaries and some joint ventures. In prac ce, such aggrega on may make an otherwise small company large.

HMRC takes the view that, if a company goes over (or falls below) the ceilings in a given period, generally its status will not change (from small to large, or vice versa) un l the posi on is repeated for a second consecu ve year. This simplifi es situa ons in which there are temporary fl uctua ons that would otherwise change the status of the company.

Small company exemptionDividends received by small companies will be exempt if:1. at the me the dividend is received

the payer is resident only of the UK or a qualifying territory. This is defi ned as a jurisdic on with which the UK has a double taxa on treaty (DTT) containing an appropriate non-discrimina on ar cle – INTM412090 lists DTTs that HMRC regards as containing such ar cles;

2. no deduc on is allowed to any resident of a non-UK territory under the laws of that territory in respect of the dividend;

3. the dividend does not fall within CTA 2010 s 1000(1) para E or F; and

4. the dividend is not made as part of a tax advantage scheme (broadly, a scheme a main purpose of which is to obtain a more than negligible tax advantage).

Diffi cul es can arise when applying the fi rst condi on to dividends from non-UK payers: For these purposes residence is narrowly

defi ned. A payer will be resident of a territory if, under local law, it is liable to tax by reason of its domicile, residence or place of management but not in respect only of income from sources there or capital situated there. Therefore, even if the payer is treated as resident of that territory under local law it s ll may not be considered resident for these purposes. Dividends received from dual-resident

payers will not be exempt. This condi on may be relevant if the payer is resident of one territory by reason of incorpora on but resident of another by reason of being centrally managed and controlled from there (although a ‘ e breaker’ ar cle in an applicable DTT may help). Treasury regula ons provide that

specifi ed territories are not ‘qualifying territories’ for these purposes (even if they otherwise would be) in respect of any payer that is denied treaty benefi ts under the DTT. INTM652020 provides a list of these territories as at 31 January 2011. For example, let’s say the payer is a holding company established under the Luxembourg 1929 Act. Although Luxembourg would ordinarily be a qualifying territory (as the UK-

As tax advisers know only too well, where there are rules there are excep ons; the UK corpora on

tax treatment of dividends is no diff erent. Dividends received by UK companies (and UK permanent establishments) are subject to UK corpora on tax, unless an exemp on applies. In prac ce, it is not always easy to conclude whether that is the case.

‘Small’ or ‘large’ companyThe applicable condi ons for exemp on largely turn on whether the recipient of the dividend is a ‘small company’ or a ‘company that is not small’ (referred to in this ar cle as a ‘large’ company).

A company is small if, in an accoun ng period, it has: (i) fewer than 50 employees; and (ii) an annual turnover and/or a total balance sheet not exceeding €10m (known as the ‘ceilings’). If either limb is not met (or if, at any me in the period, the en ty is an open-ended investment company, authorised unit trust, insurance company or friendly society) the company will be large.

When applying the ceilings, the fi gures of the company must be aggregated with those of its so-called partner, or linked, enterprises, which would include

What is the issue?The applicable condi ons for the corporate dividend exemp on diff er depending on whether the recipient of the dividend is a small or large company. What does it mean for me?

Care should be taken in (i) determining whether the recipient of a dividend is a small or large company, and (ii) once such determina on is made, applying the appropriate condi ons for exemp on. What can I take away?

Whether any par cular dividend is exempt is a factual ques on that can only be determined by analysing the specifi c circumstances at the relevant me.

KEY POINTS

Page 33: Download June 2016 pdf

CORPORATE DIVIDEND EXEMPTION

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Name Stuart PibworthPosition Tax associateCompany Weil, Gotshal & MangesEmail [email protected] le Stuart advises clients on a broad range of complex UK and interna onal tax ma ers, including in the context of corporate and private equity transac ons, group restructurings, private funds, fi nance ma ers,

equity incen ve arrangements and tax li ga on. Stuart was the recipient of the John Wood Medal from the Chartered Ins tute of Taxa on in the November 2015 exam si ng.

PROFILE

www.taxadvisermagazine.com | June 2016 29

a non-UK territory under the laws of that territory in respect of the dividend (see comments above).

Compared with the ‘small’ company exemp on, two diff erences are apparent: there is no payer residence condi on.

Therefore, dividends paid by a payer resident of a non-qualifying territory, say Bermuda, to large companies would be exempt (if the condi ons are met); the same dividend would be exempt for small companies only if the CFC exemp on applied; and there is no general disapplica on of the

exemp on if the dividend forms part of a tax advantage scheme (see below).

The exempt classes cover dividends: from controlled companies (as defi ned

under the UK CFC rules); on non-redeemable ordinary shares (the

ordinary share class); from por olio holdings (broadly, those in

which the recipient has a less than 10% interest in the issued share capital, assets and profi ts); out of profi ts available for distribu on

that do not result from transac ons, the eff ect and a main purpose of which is to achieve a more than negligible UK tax reduc on; and on shares accounted for as liabili es and

taxable as loan rela onships.

Although fact-dependent, dividends received in most commercial arrangements will usually fall within an exempt class.

Prac cal diffi cul es may arise when considering the applica on of the ordinary share class when a non-UK payer does not have ordinary share capital (as that term is used for these purposes) albeit it has something comparable to it (say, a German GmbH). In these circumstances HMRC accepts that, if the capital of the non-UK payer exhibits characteris cs that are analogous to ordinary share capital, dividends arising from it may fall within the ordinary share class.

Finally the an -avoidance provisions should not be overlooked. The large company exemp on includes an -avoidance provisions, both targeted (aimed at specifi c exempt classes – TAAPs) and general

(applicable to all exempt classes – GAAPs). When a dividend falls within a TAAP, only the relevant exempt class is disapplied; the dividend may s ll fall within another exempt class. Conversely, if a dividend falls within a GAAP the dividend will be taken out of all exempt classes. Unlike the small company exemp on, the applica on of a GAAP does not turn solely on the ‘tax advantage scheme’ concept but requires something else, such as payment for dividends. The more nuanced approach to an -avoidance under the large company exemp on may have the prac cal consequence that a dividend that falls within the small company an -avoidance provisions (and is taxable) would not fall within the large company an -avoidance provisions (and may be exempt).

Election to taxAlthough generally welcomed, in some circumstances the dividend exemp on may have unintended adverse consequences, par cularly for groups. For instance, the dividend exemp on may restrict access to reduced withholding tax rates on dividends under a DTT if the rates are condi oned on a ‘subject to tax’ requirement, as is the case in the UK-Russia DTT. In these circumstances, depending on factors including the foreign tax rates and the UK corpora on tax rate, it may be more effi cient overall to incur UK corpora on tax on the dividend than be subject to the increased foreign withholding tax.

To remedy unintended adverse consequences, the recipient may elect to tax a dividend that would otherwise be exempt. This must be made on or before the second anniversary of the end of the accoun ng period in which the dividend is received.

ConclusionThe dividend exemp on is far from straigh orward. Advisers should not fall into the trap of assuming that the exemp on is available simply because it was an cipated that it would be available when the structure was established or that it was available for previous dividends paid by the same payer to the same recipient. Whether any par cular dividend is exempt is a factual ques on that can be determined only by analysing the specifi c circumstances at that me.

Luxembourg DTT contains an appropriate non-discrimina on ar cle), dividends received from the company would not be exempt because it is denied treaty benefi ts.

Care should also be taken when applying condi on 2. This condi on is not restricted to deduc ons for the payer. In addi on, HMRC considers the concept of deduc on to be broad and not necessarily limited to any deduc on allowed in compu ng net profi t for tax purposes.

There is an addi onal small company exemp on which generally applies to dividends paid by a controlled foreign company (CFC) out of profi ts that are chargeable profi ts of such CFC in respect of which a UK CFC charge has arisen, provided also that condi ons 2, 3 and 4 are met (the CFC exemp on). Therefore, the CFC exemp on ensures that a small company is not subject to both a UK CFC charge and UK corpora on tax on dividends received from the CFC, in eff ect on the same CFC profi ts.

Large company exemptionDividends received by large companies will be exempt if:1. the dividend falls into an exempt class; 2. the dividend does not fall within CTA

2010 s 1000(1) para E or F; and3. no deduc on is allowed to any resident of

Page 34: Download June 2016 pdf

TAX ON LIFE INSURANCE

30 June 2016 | www.taxadvisermagazine.com

Consider this scenario: a recently retired couple sell their family home for £1m with a view to

downsizing. They ask their IFA for advice on a safe place for their cash while they look for a smaller property. He tells them to invest in life insurance policies which offer slightly better growth than a bank account. The policies grow by £10,000. They duly find their new home for £800,000 and withdraw that amount. Their IFA completes the withdrawal form and returns it to the insurance company. The insurance year ends shortly after.

Now consider this: a group of pensioners have been persuaded by an unscrupulous IFA to invest their modest life savings of between £50,000 and £100,000 in various questionable financial products. They have been wrongly advised that the products are appropriate and low risk. The IFA completes all the paperwork and, in effect, makes all the investment decisions, investing in (and partly cashing out) numerous products over several years. The investments are a disaster: none is profitable individually and the pensioners lose everything.

If you ask the commercially-minded man on the Clapham omnibus how the two scenarios are taxed, after wondering whether it was a trick question he would invariably answer that the couple in the first one should surely pay tax on a proportion of their £10,000 gain; the pensioners in the second owe nothing since they made no profit at any stage.

No rational individual (without intimate knowledge of ITTOIA 2005 Pt 4 ch 9) would conclude that the couple in fact face a tax bill of about £400,000 and each pensioner owes HMRC tens of thousands of pounds. Yet these scenarios did happen. A quirk in the tax code deems the full value of the rights surrendered on a part surrender (not just any economic profit or gains) to be income, after deducting 5% of the total premium invested for each policy year.

The predicament facing these investors is especially egregious since other well-advised taxpayers took

What is the issue?HMRC are consul ng on changes to the life insurance policy regime to prevent dispropor onate tax charges from arising. What does it mean for me?

Anyone with clients aff ected by the decision in Lobler should contact HMRC. What can I take away?

Anyone with an interest in this area should review HMRC’s consulta on document.

KEY POINTS

Life after Lobler Hui Ling McCarthy examines

the impact of Lobler v HMRC and the proposed op ons for reform

advantage of the same anomaly to generate millions of pounds of artificial tax losses under the avoidance scheme, which was the subject of HMRC v Mayes [2011] STC 1296.

It is well known that Mr Mayes’s success was one of the driving forces behind the introduction of the GAAR in 2013. At the time, CIOT floated the idea of a ‘reverse GAAR’ to ameliorate the effects of the tax code when it misfired and created disproportionate tax charges, but it was not taken further.

However, CIOT has since been

instrumental in liaising with other organisations in the insurance industry and the tax profession, as well as with HMRC, to bring about law reform in this area.

Significant progress was assured when, in the March 2016 Budget, the government announced its commitment to change the tax rules for part surrenders and part assignments of life insurance policies to prevent excessive tax charges like these arising in future. On 20 April 2016, HMRC published a consultation document, Part Surrenders

Page 35: Download June 2016 pdf

TAX ON LIFE INSURANCE

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Name Hui Ling McCarthyPosition Barrister and CEDR-accredited mediatorCompany 11 New SquareTel 020 7242 4017Email [email protected] le Hui Ling McCarthy appears regularly in signifi cant, high-value

cases which include: ac ng for the taxpayers in Eclipse 35 and in WHA (Supreme Court); represen ng the pension trustees in Equity Trust (Court of Appeal); represen ng the CIOT in Lobler (Upper Tribunal); and securing what the Financial Times called an ‘important legal victory’ in the SDLT avoidance case, Vardy Proper es.

PROFILE

www.taxadvisermagazine.com | June 2016 31

works effectively on chargeable events which bring the policy to an end (for example, full surrender or maturity), in effect taxing the economic gain. The problem arises when value is derived from a policy without bringing it to an end (for example, part surrenders or part assignments).

The problemOn a part surrender or part assignment the full value of the rights surrendered or the full value of consideration received is the amount treated as the policyholder’s income, after a deduction of 5% of the total premium invested for each policy year. The 5% represents an annual cumulative allowance: policyholders can make part surrenders or part assignments of up to 5% of the premium paid each year the policy is held without incurring a tax charge. Although there are no gains at the point of withdrawal in these circumstances, the cash withdrawn is included as a receipt in the final gain calculation when the policy ends. So the 5% feature represents a tax deferral.

Any excess above the cumulative 5% threshold is, however, taxed in the year of part surrender. Accordingly, policyholders who partly withdraw substantial sums early on can unintentionally trigger swingeing income tax charges that far exceed the economic growth of the policy. A basic example used in Anderson v HMRC [2013] UKFTT 126 (TC) illustrates the point:

A taxpayer invests £1,000 in a single premium life policy. At the end of year one, the policy value is £1,100 (10% return has been earned by the insurer) and the policyholder withdraws £1,000. The return included in that withdrawal cannot exceed £100. However, the taxable chargeable event gain will be £1,000–£50 (5% of premium) which is £950.

If the policy had been surrendered in full by the end of the year, the gain would have been only £100 – the return on investment. If, in contrast, the policy is surrendered in full in a subsequent

year, there is no reduction or repayment of the previous year’s tax charge. Rather, the regime provides for ‘deficiency relief’ that can be set against other taxable income of the later year (subject to restrictions).

In Mayes, significant chargeable event gains were triggered offshore so escaping the charge to UK tax; the policies were then brought back onshore and fully surrendered, triggering millions of pounds of deficiency relief that the taxpayer set against his other income that year. In contrast, the taxpayers in the two scenarios already described had no significant other income in the year of full surrender. They were left with massive tax charges in year one, together with equally substantial sums of deficiency relief in year two, which were useless.

Who has been affected?The tax regime governing the taxation of part surrenders has drawn severe criticism from the First-tier Tribunal (FTT) in several cases. The investment habits of elderly or retired taxpayers have left them particularly vulnerable. These individuals may have invested life savings or proceeds on downsizing their house under the impression that these products are suitable for low-risk, short-term investment. Often they will have acted prudently and taken professional advice; in no cases I have come across have the policyholders’ decisions been motivated by tax avoidance. Yet, because of the way the regime operates, they faced a devastating loss of life savings and even bankruptcy.

LoblerIn Lobler v HMRC [2015] UKUT 152 (TCC), a tax charge of around £350,000 arose, yet the taxpayer made only a small economic gain. The FTT had held that the clear terms of the legislation prevented it allowing Mr Lobler’s appeal, despite the judge’s obvious sympathy.

The CIOT was granted permission to make submissions to the UT in the wider public interest of finding a solution for taxpayers in equivalent positions

and Part-assignments of Life Insurance Policies, inviting views on three options for change, more of which later.

The productLife insurance investment products (primarily investment vehicles) provide a policyholder with the ability to surrender all or part of the policy at any time. A UK-resident taxpayer is liable to income tax on any ‘gains’ as defined by the legislation arising on ‘chargeable events’, such as surrender, assignment or maturity. The tax regime

Page 36: Download June 2016 pdf

TAX ON LIFE INSURANCE

A policyholder invests £100,000 in a policy on 1 January 2018. On 17 August 2019 he sells a 50% share in the policy when it is worth £105,000.

Assume that the pre-determined amount above which gains are held over has been set at a cumula ve 3% of the premium paid.

Under the current rules the cumula ve 5% deferred tax allowance is £10,000 (5% of the £100,000 premium for two years). Since the policy is worth £105,000 when part assigned, the value of the part sold is £52,500. The gain arising to the assignor is:

Value of part sold = £52,500Less: cumula ve 5% allowance = £10,000Gain = £42,500However, in order to defer excessive gains the maximum gain that can be bought

into charge is 3% of the premium for each of the fi rst two policy years; that is to say £6,000. This £6,000 gain arises on 31 December 2019.

The remaining gain of £36,500 is deferred un l the next calcula on event.

EXAMPLE 3 - DEFERRAL OF EXCESSIVE GAINS

A policyholder invests £100,000 in a policy on 1 January 2018. He withdraws £44,000 on 1 August 2018 and £60,000 on 1 February 2020. He fully surrenders the policy for £3,000 on 1 May 2024.

The £44,000 part surrender is less than the premium paid. No gain calcula on is required.

A er the £60,000 part surrender on 1 February 2020, cumula ve part surrenders total £104,000. This exceeds the premiums paid. The gain is the excess of total part surrenders (£104,000) over premiums paid (£100,000) i.e. £4,000. It arises on 31 December 2020.

When the policy is fully surrendered on 1 May 2024, the gain would be £3,000, being: total cash received – premium paid – earlier excess event gains (£107,000 – £100,000 – £4,000 = £3,000)

EXAMPLE 2 - THE 100% ALLOWANCE

A policyholder invests £100,000 in a policy on 1 January 2018. She withdraws £4,000 on 7 August 2018 and £4,000 on 10 December 2018.

The £4,000 withdrawal on 7 August 2018 is below the 5% tax deferred allowance of £5,000. No gains arise but the available premium for subsequent calcula ons is reduced from £100,000 to £96,000.

A er the £4,000 withdrawal on 10 December 2018, the 5% tax deferred allowance for the year is breached and a gain calcula on is required. If the policy value immediately a er the withdrawal is £94,000, the gain calcula on is:

Withdrawal from the policy = £4,000Less: deduc ble premium, calculated as:Available premium x A / (A+B)£96,000 x £4,000 / (£4,000+£94,000) = (£3,918)Gain arising on 31 December 2018 = £82Premiums of £3,918 have been used in this calcula on, so the available premium for subsequent gain calcula ons is reduced to £92,082 (£96,000 less £3,918).

EXAMPLE 1 - TAXING THE ECONOMIC GAIN

32 June 2016 | www.taxadvisermagazine.com

to Mr Lobler. As the UT (Proudman J) recorded at [5]: ‘The CIOT is in the process of gathering information from other interested parties and professional bodies in order to make a formal submission to HMRC and the Treasury with a view to obtaining a change in the law.’

The CIOT contended that the tax charges were disproportionate and that the legislation should be interpreted so that Mr Lobler could carry back the deficiency relief and set it against chargeable event gains in previous years.

Although Proudman J considered that ‘the scales tip, only just’ in favour of HMRC’s contention that the tax charge was proportionate, the judge decided that he had made a ‘sufficiently serious’ mistake in completing the withdrawal form and erroneously selecting a part surrender across all policies.

Accordingly, the UT allowed Mr Lobler’s appeal and held that his tax position should be determined as if he had instead made full surrenders of policies to the extent possible. HMRC did not appeal.

Settling open cases in the wake of LoblerAlthough it would be fair to criticise the government for not amending the insurance policy legislation sooner, those at HMRC tasked with handling the consequences of the UT’s decision in Lobler have made significant progress: HMRC has offered to settle cases stayed behind Lobler on the basis of the UT’s decision so that, in effect, taxpayers pay tax on the economic gain. HMRC has also engaged with the life insurance industry, industry and policyholder representative bodies and the tax profession about workable options for change.

The product of those informal discussions is the three options posed in the condoc. What follows is an outline of each option plus abbreviated versions of the examples given in the condoc.

Option 1 – Taxing the economic gainThis option retains the 5% tax deferred allowance but brings into charge a proportionate fraction of any underlying economic gain whenever an amount in excess of 5% is withdrawn. Gains would arise only if withdrawals in excess of the cumulative 5% allowance are made and would always be an appropriate fraction of the policy’s economic gain. See Example 1.

Option 2 – The 100% allowanceHere, no gain arises until all the premiums paid have been withdrawn. It would change the current cumulative annual 5% tax deferred allowance to a lifetime 100% tax deferred allowance and ensure that only economic gains are taxed. Once all premiums have been withdrawn, any subsequent gains would be taxed in full. See Example 2.

Option 3 – Deferral of excessive gainsIf the gain exceeds a pre-determined amount of the premium (say, a cumulative 3% for each year since the policy started), the excess would not be charged to tax immediately. Instead it would be deferred until the next part surrender or part assignment. The gain arising from this would be increased by the amount of the deferred gain from the earlier event. If this total gain exceeded the pre-determined amount, the excess part of it would be deferred again (and so on). The gain on maturity or full surrender would be calculated by deducting premiums and gains (whether deferred or not) from total policy withdrawals. Deficiency relief might be available at this point if cash withdrawals

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TAX ON LIFE INSURANCE

Read Keith Gordon’s ar cle covering this case from the June 2015 issue of Tax Adviser at www. nyurl.com/hx2t8zp Read the decision in Lobler at www. nyurl.com/jp57smp

Read the condoc at www. nyurl.com/zlxbxlm

If you wish to contribute to the CIOT’s response to the consulta on, email Kate Willis at [email protected]

FURTHER INFORMATION

www.taxadvisermagazine.com | June 2016 33

are less than the total of premiums paid and earlier gains. The result would be that the total gains arising on the policy throughout its lifetime equal the economic gain from the policy. See Example 3.

From the perspective of the policyholders, each option will have charged to tax the overall economic gain made by the policy. But, in broad terms, the differences can be summarised as: Option 1 spreads tax charges over the number of years the policy is held by reference to the economic gain from the policy in each year of part surrender. Option 2 defers all tax charges to later years. Option 3 spreads tax charges over the number of years the policy is held by reference to the amount withdrawn in each year of part surrender, subject to a cap.

The government has identified certain desirable outcomes from any options for change, including: The prevention of disproportionate gains arising from any part surrender or part assignment – for new and existing policies. The maintenance of a tax deferred allowance (now 5%).

Changes that are simple to administer and understand, with as few systems changes as possible for insurers. New tax avoidance opportunities are not created.

The condoc seeks to identify a preferred option, together with: a be er understanding of the poten al eff ects on policyholder behaviour and the life insurance market; whether any of the op ons (if adopted) might place addi onal burdens on policyholders; the likely costs to the insurance industry (for example, changing IT systems and advising policyholders); any consequen al changes that needed to be made to repor ng requirements; and any tax avoidance risks.

ConclusionThe option of most benefit to any given policyholder will depend on his personal circumstances and the performance of the policy.

For instance, any policyholder who becomes non-resident before using up the 100% lifetime allowance in Option 2 would be significantly better off if this option were adopted. Option 1, in contrast, might not find favour with the

insurance industry if it requires insurers to make expensive systems changes. However, purely as a matter of tax policy, it might be the most coherent.

Although Option 3 seems more complex than Option 2, it has the benefit of spreading gains more evenly throughout the lifetime of a policy. However, in contrast to Option 2, Option 3 might give rise to chargeable event gains where there are no corresponding economic gains. These would, however, be capped at 3% as the proposal currently stands.

The consultation closes on 13 July 2016. Readers are encouraged to consider the condoc and submit responses to HMRC directly, or to the CIOT which will be preparing its own formal response to the consultation.

9–10 September 2016(Magdalen College, Oxford)

KEYNOTE SPEAKERSDavid Gauke MP (Financial Secretary to the Treasury)

Stephen Quest (DG Taxation and Customs Union, European Commission)

Edward Troup (Executive Chair and First Permanent Secretary at HM Revenue and Customs)For a full list of participants go to www.ifs.org.uk/events/1303

Every two years, IFS holds a residential conference, aiming to facilitate high-level knowledge exchange between practitioners, policymakers and academics on key areas of policy and practice. This year we will consider how anti-avoidance measures are designed, how governments’ and businesses’ perspectives on tax avoidance are changing, and what we can expect from international efforts going forward.

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OFFSHORE TRUSTS

Before addressing taxa on issues, ming requires some men on of

the so-called ‘Panama papers’. Trusts remain largely unaff ected by press prurience into the Mossack Fonseca company fi les which have come into the public domain. Although most off shore trusts, for a variety of reasons, usually own all the issued shares in an underlying holding company (o en provided by corporate forma on service providers, such as the source of the ‘Panama papers’) there is li le or no informa on in those papers regarding ‘ul mate benefi cial ownership’ where trustees are shareholders. The author’s personal experience is that corporate forma on providers have historically seldom asked for those details when providing shelf companies to other professionals or to corporate and trustee service providers.

A greater threat to privacy and the anonymity provided by off shore trust structures is the Small Business Enterprise and Employment Act 2016 which came into eff ect on 5 April 2016. That Act requires all UK companies to maintain a public register of ‘persons with a signifi cant interest’ – i.e. 25%+ shareholding, or vo ng powers, or (regardless of formal legal rights) individuals whose views are taken into account by company directors before deciding company policy and strategy. In the context of a discre onary trust which owns, directly or indirectly, more than 25% of any UK company, ul mate benefi cial ownership cannot easily be

What is the issue?When considering whether your clients should use off shore trusts, you should think about whether the addi onal costs of off shore trusts outweigh the benefi ts, and whether they will be exposed to unwanted publicity. What does it mean for me?

Off shore trusts can provide a tax effi cient estate planning structure for many clients, not just the ‘super-rich’. Long-term cross-genera onal tax benefi ts in substan al CGT and income tax savings jus fy addi onal professional costs. ‘Panama papers’ and similar public domain informa on are unlikely to create problems. What can I take away?

An understanding of the issues surrounding off shore trusts, and how to use them to manage ming and levels of UK tax liabili es within a family.

KEY POINTS

34

Weighing it Stephen Arthur explains the requirements and benefi ts of off shore trusts, and how to determine if a UK tax liability arises

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OFFSHORE TRUSTS

Name Stephen Arthur LLB CTA TEPPosition Barrister at lawCompany Temple Tax ChambersTel 020 7353 7884Email [email protected] le A substan al part of Stephen’s prac ce is based on advice to

non-UK trustees, both in terms of trust dra ing and advice, and with par cular focus on the taxa on of trust benefi t provision to UK and non-UK residents. He has many trust-based clients whom he has been advising for more than 25 years – and whose family fortunes have benefi ted from that advice. Stephen has worked with and within the off shore trust industry as a UK solicitor, as managing director of a Swiss private bank trust company, and since 2002 as a barrister in London.

PROFILE

defi ned – but any person who has the power to remove or appoint trustees (whether professional protector or nominated family member, or perhaps the se lor during life me) will be regarded as a ‘person with a signifi cant interest’ and must be named on the public UK register.

There are inheritance tax (IHT) benefi ts of off shore trusts, but they require a non-domiciled se lor in order to have the opportunity to ensure that trust assets are always ‘excluded property’ and therefore outside the scope of IHT liability.

The basic rule is that off shore trusts can operate like a tax-free pension fund. The two requirements to achieve that are: a deceased or non-UK resident se lor. TCGA 1992 s 86 treats trust gains as being the se lor’s personal gains if members of the se lors family, down to grandchildren, can benefi t and if the se lor is UK resident; and no direct UK investments by trustees.

FA 2013 imposed UK income tax liability at the 45% rate applicable to trusts (RAT) on UK source investments income. UK investments can be made through an underlying non-UK investment holding company

If those two tests are satisfied, there is no UK tax liability unless a UK resident receives a physical payment of money or transfer of assets from a non-resident

trust, or otherwise receives any benefit from the trust for which the

individual pays less than arm’s-length value. This would include rent-free occupation of a property or an interest-free loan.

If any UK resident individual who has transferred assets directly or indirectly into a trust structure might be able to take some benefit from the trust at any time, all trust structure income will be treated as the personal annual income of that individual on an arising basis under ITA 2007 s 720. For an example of how wide-reaching this section is in practice, see CIR v Botnar CA [1999] STC 711.

How does UK tax liability arise?Leaving aside ITA 2007 s 720, in order to determine whether any tax is payable analysis is required of historic: income received by the trust structure (the trust and any underlying companies). This income is now referred to as ‘relevant income’ in ITA 2007 s 733; and ‘offshore income gains’ (OIGs) comprised within realised trust gains. The reference here is the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001), in particular regs 20 and 21. OIGs are usually realised from investment in offshore collective investment funds that are not registered with HMRC in the UK – typically a private bank internal client investment fund; and gains realised by or within the trust structure – that is the trust and any underlying companies. Practitioners refer to undistributed gains as ‘stockpiled gains’. Bear in mind this is not a statutory term since the legislation refers to ‘TCGA 1992 s 2(2) amounts’. However, practitioners use the term ‘stockpiled gains’, which refers to any trust structure gains that have not been distributed within 12 months of the end of the tax year in which they arose.

There are inheritance tax benefi ts of offshore trusts, but they require a non-

domiciled settlor in order to ensure that trust assets are always ‘excluded property’ and therefore outside the scope of IHT liability

www.taxadvisermagazine.com | June 2016 35

up

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The legislation is widely drafted so that even if trustees, in breach of trust, apply trust benefi ts to a non-

benefi ciary who is UK resident, that individual will be treated as a benefi ciary for all income tax and CGT purposes

The tax rules stem from the substan al revision to the off shore income tax charging provisions brought about as a result of Vestey v CIR [1980] STC 10 when the Law Lords, now the Supreme Court, reversed 30 years of tax prac ce based on an earlier House of Lords decision. At that me, the highest rate of income tax was 60% and CGT was 30%. So the tax rules now require that distribu ons and benefi ts must be ‘matched’ against relevant income (to achieve the highest tax yield) before any distribu on can be taxed as capital.

Many of the tax rules directly contravene trust law, where a ‘capital payment’ means a payment from trust capital. The tax rules sit apart from trust law reality by requiring that, in some circumstances, a ‘trust capital payment’ will be taxed exclusively as liable to income tax.

The legisla on is widely dra ed so that even if trustees, in breach of trust, apply trust benefi ts to a non-benefi ciary who is UK resident, that individual will be treated as a benefi ciary for all income tax and CGT purposes.

Calculating tax liabilitiesDistribution payments and trust benefits provided are matched in the following order:a. against all available ‘relevant income’;

then when ‘relevant income’ is exhausted;

b. against all available OIGs – the usual TCGA 1992 s 87 matching procedure, trea ng all OIGs as a single pool, but taking later years before earlier years (LIFO); then when all available OIGs are exhausted; and

c. against stockpiled gains on a LIFO basis.

The individual fi scal circumstances of a taxable benefi ciary are then relevant to determine the rate of income tax or CGT payable on the taxable benefi t. So, for example, if an individual without any other income or chargeable gains for a tax year receives a taxable trust benefi t of £10,000, no tax will be payable. Either the income will be absorbed by the single person’s allowance or capital will be absorbed by the individual’s personal annual CGT exempt amount under TCGA 1992 s 3.

Tricks the draftsman thought of fi rstThere are diff erences in treatment between income and capital.

‘Relevant income’ con nues to be regarded so un l it is taxed in the UK. Let’s say a non-resident trust distributes all of

its accumulated £100,000 relevant income to a non-UK resident benefi ciary and then distributes £100,000 of realised chargeable gains to a UK resident benefi ciary. In this case it will con nue to be treated as having £100,000 of ‘relevant income’ and that will be matched against the benefi t received by the UK resident.

The converse is true of stockpiled gains. Such gains (and OIGs) distributed to a non-UK resident will be treated as distributed. So off shore trustees with no relevant income that distribute their £100,000 stockpiled gain/OIGs to a non-resident benefi ciary before distribu ng £100,000 to a UK resident benefi ciary (B) will ensure that B does not incur an immediate tax liability.

But – there is a catch in the tail – TCGA 1992 s 87A requires that any such untaxed benefi t will be ‘matched’ against any subsequent chargeable gains realised within the trust structure, and will be taxable in the year those gains are made. This may be several years a er the distribu on.

Another anomalyStockpiled gains, when matched against taxable distribu ons, may a ract an addi onal CGT charge under TCGA 1992 s 91, depending on how long the gains have

lain off shore. Assume that B receives a

taxable distribu on, matched against stockpiled gains, that

exceeds his annual CGT exempt amount, so that this becomes

payable at 20% – the rate on some

disposals eff ec ve for 2016/17. The rate of tax payable will be increased by 2% (10% of the eff ec ve rate of CGT under TCGA 1992 s 91) each year up to a maximum six years since the gain arose. The maximum rate of CGT payable in those circumstances can now be 32%.

Practical trust law problemsIf B receives £100,000 that is not immediately taxable, assume that in the next tax year, before gains arise, he is excluded from benefi t under the trust. He will then not have any legal right as a ma er of trust law to obtain informa on from the trustees on any subsequent trust gains. As a ma er of trust law there is no solu on to that problem. Trustees will be reluctant to breach confi den ality and face risk of

suit from other benefi ciaries by divulging informa on to a non-benefi ciary – and B will then be in breach of his tax fi ling obliga ons by not declaring that the trust has realised a gain that should be matched against his £100,000 distribu on.

Further, a se lor who falls within TCGA 1992 s 86 footnote 1 (namely, trust gains are treated as his personal gains) will similarly: have no rights to informa on about trust gains unless he is a benefi ciary or protector. He is unlikely to be a trustee because we are dealing with non-resident trusts; and have no rights to receive a trust distribu on to fi nance payment of CGT on trust gains imputed to him personally.

TCGA 1992 Sch 5 para 6 gives the se lor a debt claim against the trustees in those circumstances to recover any CGT the se lor has actually paid. But there can be legal diffi cul es in enforcing such a claim cross-border against trustees of a trust that may be governed by Jersey or Bahamian law.

Reducing tax liabilitiesTrustees can make loans to UK resident benefi ciaries. The ‘benefi t’ of an interest-free loan is taxable at the ‘offi cial rate of interest’ (currently 4%), but it may be possible to structure loans in order to avoid such an annual tax liability. Trustees may be able to invest seed capital into a UK business start-up without crea ng any UK tax liabili es.

OFFSHORE TRUSTS

36 June 2016 | www.taxadvisermagazine.com

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SELF ASSESSMENT

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Keith Gordon discusses the First- er Tribunal’s decision in Revell v HMRC and the broader implica ons of the case

In the May 2015 issue of Tax Adviser, I wrote about the Upper Tribunal’s decision in R (oao Higgs) v HMRC

[2015] UKFTT 92 (TCC). That case confi rmed that the ordinary four-year me limit for assessments does not

apply to self-assessments, meaning that, contrary to HMRC’s previously-stated posi on, taxpayers are free to submit tax returns (and, where appropriate, claim

the previous year, HMRC chose to wrote an address in Newhaven which Mr Revell had long since vacated. Mr Revell did not receive the P800.

A year and a half later, in September 2012, in the absence of any response from the P800, HMRC then sent Mr Revell a no ce to fi le a tax return for the 2008/09 tax year, this me to the Brentwood address. However, by then, Mr Revell had moved to a diff erent address in Brentwood, as would have been clear from the P14 issued by Rotherham United earlier that year. Mr Revell did not receive the no ce nor the accompanying return.

In the mean me, Mr Revell’s adviser telephoned HMRC to update their records, this me to show an address in Doncaster to which he had recently moved.

HMRC’s records show the return having been sent back to HMRC unsigned, although it transpires that what HMRC actually received was the blank return as it had not been undelivered. Not only did HMRC record this event inaccurately but the undelivered return prompted HMRC to add two more entries to the catalogue of errors in handling Mr Revell’s case.

First they overrode the previous no fi ca on of change of address so that, instead of showing the correct address in Doncaster, Mr Revell’s record now showed the historical address in Brentwood. Secondly, they issued to that incorrect address a duplicate tax return and no ce, but without any name or address on it.

What is the issue?The First- er Tribunal’s decision in Revell v HMRC has endorsed the approach now being taken by HMRC in cases where, as in Higgs, a taxpayer is seeking a repayment but, unlike Higgs, the tax return is unsolicited. What does it mean to me?

Advisers should check whether HMRC have validly issued clients with no ces to fi le tax returns and not just assume that a UTR will be suffi cient to make a tax return valid. What can I take away?

If a taxpayer has not received a no ce to fi le a tax return, the return, any enquiry into the return and any closure no ce following such an enquiry could all be invalid. When there is an invalid assessment, penalty determina on or closure no ce, the FTT will accept jurisdic on to hear any appeal challenging the validity of the no ce itself.

KEY POINTS repayments) at any me. As has since been reported in the Technical pages of Tax Adviser in December 2015 and March 2016, HMRC have now accepted the correctness of the Higgs decision, but will be introducing legisla on to come into eff ect on 6 April 2017 which will impose a four-year me limit on self-assessments (see F(No.2)B 2016 clause 156 inser ng a new TMA 1970 s 34A). In the mean me, HMRC has said that it will accept tax returns outside the four year period but only in cases where the taxpayer is responding to a no ce to fi le: unsolicited or voluntary tax returns will con nue to be rejected.

Although the factual background was very diff erent, the recent decision in Revell sheds some light on the stance taken by HMRC in rela on to unsolicited returns.

Facts of the caseMr Revell was a professional footballer who had a series of employments with a number of clubs outside the top fl ight. All of his income had been subject to PAYE and Mr Revell was at no point within the Self Assessment system.

On 28 March 2011, HMRC iden fi ed an underpayment on Mr Revell’s PAYE record and accordingly wrote to Mr Revell with what was presumably a P800 showing the alleged underpayment. However, rather than write to Mr Revell’s home address in Brentwood, which had been shown on a P45 prepared by Wycombe Wanderers

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Commentary The FTT’s conclusion has therefore endorsed the approach now being taken by HMRC in cases where, as in Higgs, a taxpayer is seeking a repayment but, unlike Higgs, the tax return is unsolicited. It also accords with another recent decision of the FTT in the corpora on tax case of Bloomsbury Verlag GmbH v HMRC [2015] UKFTT 660 (TC). Both decisions (Revell and Bloomsbury i.e. that a return must follow a no ce to fi le) make good sense when reading the statutory code, although the converse is certainly arguable. In par cular, there is nothing in either the income tax or corpora on tax codes that specifi cally precludes taxpayers from submi ng returns in the absence of any formal no ce.

Nevertheless, the FTT’s two decisions can give rise to diffi cul es. If an unsolicited return is not in fact a return, any self assessment included in that return will not then be an enforceable debt. Similarly, all subsequent enquiries, closure no ces and penal es will be invalid. In the main, these diffi cul es might well be overcome, mainly as a result of the deemed delivery of a no ce under the Interpreta on Act.

Nevertheless, if a taxpayer can successfully assert non-delivery of the no ce, then that should override any statutory deeming. Furthermore, HMRC’s record-keeping is not always ideal (as exemplifi ed in Revell). As a result, the Revell and Bloomsbury cases highlight a possible new way of challenging certain ac ons undertaken by HMRC.

What is not clear from the FTT’s decision was the extent to which there remained an underlying dispute between Mr Revell and HMRC concerning the amount of tax payable. In other words, was it agreed that Mr Revell had underpaid tax by £16,500 or was this also being challenged?

I raise this because it would be strange for a taxpayer to put in a tax return which deliberately understates his income (but this is not impossible given the view being taken that the tax return was too late). On the other hand, given that Mr Revell’s income was all covered by PAYE, HMRC

would have had full access to the details of his income. Therefore, there should have been no need for them to issue an excessive determina on (other than to fl ush out a return) or to revise the return when it was eventually made.

What I consider more concerning is HMRC’s willingness to say one thing yet do the com plete opposite (as I noted in my ar cle in the May 2016 issue of Tax Adviser, the irony of HMRC’s inconsistent approach in another case was not lost on the Court of Appeal). In their response to Higgs (and indeed in their submissions to the FTT in Bloomsbury) HMRC made it perfectly clear that a tax return is not valid unless it is in response to a no ce to fi le. Yet, in their submissions to the First- er in Revell, HMRC cited from what was

described as ‘long-standing advice from their solicitors’ which read as follows:

‘In my view that which is intended to be a return, whether paper or electronic and is in an appropriate form may properly be regarded as a statutory return. I appreciate that the statutory scheme puts an obliga on on the taxpayer to make a return arise [sic] only once he receives a no ce which requires him to do so. But in any case in which an unsolicited return has been received, the be er view, as it seems to me, is that the taxpayer has waived the formal no ce step.’

If HMRC’s legal advice was to the effect that ‘the better view’ is that a taxpayer can waive the need for a notice and can submit a return without one, one has to wonder why a government department (whose integrity should never have to be questioned) feels able to assert the contrary whenever it suits them?

This kind of conduct does not exactly set a good example to the taxpaying public – nor does it encourage cordial relations between citizen and the State. It also contravenes the recently watered-down HMRC Charter in which HMRC say that taxpayers can expect them to be professional.

The FTT’s decision has also highlighted one of the prac cal diffi cul es faced by taxpayers who receive defec ve demands (as opposed to ones that are

This led to a series of a further correspondence between Mr Revell’s adviser and HMRC un l, in December 2013, HMRC realised that – at least in accordance with their stance in Higgs – it was too late for Mr Revell to self-assess for the 2008/09 tax year.

HMRC decided therefore to issue a determina on under s 28C given their belief that a taxpayer had failed to respond to a no ce to fi le a return. This was in February 2014. A determina on has the eff ect of crystallising an enforceable debt and can be displaced only by a taxpayer submi ng a self-assessment (within specifi c me limits – as made clear in Higgs, there are diff erent me limits in rela on to tax returns that are made in order to displace a determina on). Mr Revell, under coercion, then submi ed a tax return in order to displace the determina on. However, HMRC were not happy with the return as submi ed and sought to open an enquiry into it. This return was duly closed, with suggested amendments increasing the tax payable by £16,500. The case before the First- er Tibunal (FTT) was Mr Revell’s appeal against the amendments made by the closure no ce.

The FTT’s decisionThe FTT concluded that HMRC’s failure to use the latest address that they had for Mr Revell on their records overrode any provision in the Interpreta on Act 1978 that could deem service of the no ce to fi le a 2009 tax return. Therefore, Mr Revell had not been served with a no ce to fi le a tax return for the 2008/09 tax year.

The lack of no ce meant that the subsequent s 28C determina on was invalid. But the FTT went on to consider the status of Mr Revell’s tax return which, as a ma er of fact, had been submi ed in response to the purported determina on. As the FTT noted, the legisla on does not create a category of tax returns being those made in response to a determina on (except when dealing with me limits). Instead, the validity of the

tax return turned on normal principles. HMRC tried to argue that, given the non-delivery of a no ce to fi le, Mr Revell had sent in an unsolicited return and thereby waived the requirement for a no ce. However, the FTT concluded that, on a proper interpreta on of the statutory scheme, there is in fact no such thing as an unsolicited return.

Without a prior no ce, a return is not a return. Without a return, there can be no enquiry into the return. Therefore, the closure no ce had no eff ect and the addi onal tax charged was declared to be non-payable. Mr Revell’s appeal was therefore allowed.

Name Keith GordonPosition Barrister, Chartered Accountant and Tax AdviserCompany Temple Tax ChambersTel 020 7353 7884Email [email protected] le Keith M Gordon MA (Oxon), FCA CTA (Fellow) is a barrister,

chartered accountant and tax adviser and was the winner in the Chartered Tax Adviser of the Year category at the 2009 Taxa on awards. He was also awarded Tax Writer of the Year at the 2013 Taxa on awards. He provides li ga on support and advises on tax and related ma ers to accountants, tax advisers and lawyers.

PROFILE

Page 44: Download June 2016 pdf

SELF ASSESSMENT

40 June 2016 | www.taxadvisermagazine.com

merely incorrect). When there is an invalid assessment, penalty determina on or closure no ce, the FTT will accept jurisdic on to hear any appeal challenging the validity of the no ce itself. The FTT will do so even though, applying a literal approach to the statute, its jurisdic on is dependent on their being a valid assessment etc in the fi rst place. (This can be jus fi ed because, as a ma er of common sense, the FTT must have jurisdic on to consider ques ons regarding its own jurisdic on in any par cular case.) Under the statute, however, the FTT has no jurisdic on to deal with determina ons (valid or otherwise).

Therefore, Mr Revell could not get the specialist tax tribunal to opine on the validity of the determina on made against him. Mr Revell then chose to submit a protec ve return in order to displace the determina on. However, this could have backfi red had the FTT concluded (in accordance with HMRC’s long-standing legal advice) that unsolicited returns were valid. Alterna ve approaches that he could have taken were similarly far from ideal: he could have ignored the determina on altogether and challenged its validity only in enforcement proceedings in the County Court or he could have commenced judicial review proceedings. The former is a perfectly

valid way forward but nevertheless a high-risk strategy; the la er is expensive (par cularly given the amount poten ally at stake in the present case). These diffi cul es would have been overcome if the FTT had a general right to hear judicial review claims made against HMRC.

However, the case also highlights a further prac cal diffi culty that can be faced by taxpayers. Suppose a taxpayer wants to claim a repayment. If a return will be invalid unless submi ed in response to a no ce, how can a taxpayer require HMRC to issue a no ce? On what grounds can HMRC actually refuse to issue a no ce? Should HMRC ever refuse to issue a no ce (and such refusal is unreasonable), a taxpayer’s only eff ec ve remedy would be judicial review.

Finally, many of HMRC’s diffi cul es as experienced in the Revell case were self-infl icted (or, to put it slightly more charitably, a consequence of ever-reducing budgets and poor training of staff ). However, there is no point in having a government department that is not fi t for purpose. In par cular, taxpayers have no choice but to deal with HMRC and, therefore, HMRC should be performing far be er than they did in this case.

Furthermore, the FTT noted that Mr Revell’s complaints were not properly investigated: it certainly seems as if

HMRC proceeded on the misguided assumption that their computer records were correct.

If there is one thing that HMRC should improve immediately is their attitude when dealing with complaints: they should learn that their role is not to justify or excuse the conduct being complained of but is in fact to investigate the subject matter of the complaint, resolve it and try to prevent it from happening again. Will HMRC learn from their mistakes and give taxpayers a new hope or will it be business as usual and taxpayers will simply have to wait for the HMRC menace to strike back?

Read Keith’s ar cle ‘Red card’ on HMRC’s inconsistent approach in BPP Holdings v HMRC at www. nyurl.com/jkryrbq

FURTHER INFORMATION

APPEAL PROCESSAPPEAL PROCESS

Denton v TH White Ltd [2014] 1 WLR 3296 endorsed the approach taken in Mitchell but considered that the Mitchell case had been widely misunderstood.Leeds where the Upper Tribunal

in McCarthy & Stone in the

Mitchell in Denton.

The debate, so far as the Tribunal rules are concerned, has now found its way to the Court of Appeal in the BPP case.

The facts of the caseBPP’s dispute with HMRC concerns the VAT status of printed materials produced by one company within the BPP group

group companies. In essence, the case asks whether the printed materials

of v HMRC [2014] UKFTT 109 (TC), the BPP case

occurs (except in basic cases) is that

Tribunal) with a statement of case. This is a document which sets out their

paper tax cases, the statement of case is

Tribunal. Occasionally, HMRC consider

the statement of case and, in such circumstances, they can ask the Tribunal for an extension.

In BPP, HMRC’s statement of case was almost three weeks late (and

application for an extension of the time limit). BPP did not object to the lateness of the statement of case, but did consider that what had been produced

clear HMRC’s position. BPP duly made a

days. (In the Upper Tribunal, Judge

reasonable, but the timescale to be

HMRC accepted that they ought to

a timescale for any such reply. BPP, therefore, approached the Tribunal seeking that the Tribunal direct that:

HMRC produce the information within 14 days; andany failure to comply would lead to their being barred from future participation in the case.

In due course, the parties agreed a

then to delay proceedings by more than

late statement of case of 21 October 2013 and the agreed response date of 31

referred to as an ‘unless order’ (i.e. unless you comply, you will be barred from future participation in the case – to use a footballing analogy, a red card). In

compliance by 31 January 2014, with any failure possibly leading to their being

yellow card in football but possibly more accurately to a potential red card).

January 2014 (i.e. on the last day), but BPP considered that the response was still insufficient. BPP duly made an application to the Tribunal seeking an order barring HMRC from any future

What is the issue?When a judge bars HMRC from

circumstances can that decision be

What does it mean to me?If HMRC are being dilatory, it will

assistance.What can I take away?

The tribunals and courts will not readily allow HMRC to be sloppy with

taxpayers.

KEY POINTS

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for by Judge Hellier. Had BPP obtained the unless order originally sought, then

(subject any application by HMRC to

actually obtained meant that BPP had to apply for HMRC to be barred from future participation (and that decision was ultimately at the Tribunal’s discretion). That application was heard (in June 2014) by Judge Barbara Mosedale who granted

noted that it was only when preparing their skeleton argument for the hearing before Judge Mosedale that HMRC finally stated their case in sufficient detail.

appealed against her decision to the Upper Tribunal. There the case was heard by Judge Bishopp who allowed HMRC’s appeal. BPP then appealed against Judge Bishopp’s decision to the Court of Appeal, seeking the reinstatement of Judge Mosedale’s order.

The court’s decisionThe case was heard by Lord Justices

latter being the current Senior President of Tribunals. It was Lord Justice Ryder

two colleagues stating their agreement.He noted that the source of HMRC’s

difficulties was the decision by Judge Hellier. That decision was not the subject of any appeal. In other words, HMRC had accepted that they were to be bound by it. Furthermore, the decision was what is categorised as ‘case management’ in nature. As case management decisions ultimately turn on the exercise of a

reluctant to interfere with them on

made on an erroneous basis. Lord Justice Ryder expressed an unwillingness ‘to

case management order in effect to

made’. He also noted that a court’s duty to encourage compliance by parties is not

Keith Gordon discusses the Court of Appeal’s decision in BPP Holdings Ltd v HMRC

Name Keith GordonPositionCompany Temple Tax ChambersTelEmail [email protected] Keith M Gordon MA (Oxon), FCA CTA (Fellow) is a barrister,

of the Year category at the 2009 awards. He was also awarded Tax Writer of the Year at the 2013

PROFILE

In the October 2014 issue of Tax Adviser,

in Leeds City Council v HMRC. The

and the extent to which those changing

in force.To summarise the key cases:Data Select Ltd v HMRC [2012] UKUT

considered that the approach taken

adopted by analogy in the Tribunals. My concerns about this decision are set out

Mitchell v News Group Newspapers Ltd change in the CPR was interpreted

McCarthy & Stone (Developments) Ltd v HMRC Upper Tribunal considered that the Tribunal should now adopt the harder

expressed in Mitchell.

42 May 2016 | www.taxadvisermagazine.com www.taxadvisermagazine.com | May 2016 43

Red card

If you would like to take part in the survey please email

picture of employer’s views on several points:

are not

• members enables you to win more business

• How likely you are to recommend the ATT to a friend or colleague

Page 45: Download June 2016 pdf

to fail to obtain those advantages, possibly leading to a worse tax result than if the planning had not been undertaken at all.

Stakeholder expectationsIn the 21st century, it is not just the interests of the taxpayer and HMRC that need to be considered. Shareholders are more ac ve and ready to cri cise both the context and structure of remunera on packages, and tax is part of this. This has various consequences: Investor associa ons warn against plans

that off er execu ves tax benefi ts at the cost of the company or its shareholders. As an example, plans that off er personal tax savings at the cost of corporate tax

The debate about tax avoidance con nues unabated, with the controversial leaking of the ‘Panama

papers’ adding fuel to it. Yet much of the discussion has been ill-informed with the media and public opinion not unduly concerned to understand the detail of the underlying facts. Dis nc ons between off shore funds and off shore trusts have been blurred in much the same way that the diff erence between tax evasion and tax avoidance seems like an archaic nuance in public percep on. It is apt that a former chancellor, the late Denis Healey, measured this diff erence in terms of the thickness of a prison wall.

What is the issue?The tax avoidance debate has had an impact on how share plans are perceived. What does it mean for me?

If you have an interest in the design or opera on of share plans (or are a par cipant), the impact of tax requires ever greater considera on. What can I take away?

Share plans need careful considera on to be structured to take into account tax issues without being seen as inappropriately avoiding tax.

KEY POINTS

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EMPLOYEE SHARE SCHEMES

This has an acute impact on the design of share plan and remunera on structuring, as the plethora of cases in the area and changing legisla on demonstrate.

Commercial contextIrrespec ve of the tax avoidance debate, the star ng point for plan design should be the commercial context and the commercial objec ves. A plan which is primarily designed to achieve a par cular tax objec ve with commercial issues being secondary is likely to be commercially ineff ec ve. Further, if the structuring involves seeking tax advantages that are not intended to be achieved by the underlying legisla on, the venture is likely

www.taxadvisermagazine.com | June 2016 41

Identifying the boundariesStephen Woodhouse considers the eff ect of the tax avoidance debate on share plan design

Page 46: Download June 2016 pdf

relief for the company are likely to be viewed unfavourably unless award levels are adjusted to compensate the business for any resul ng loss of tax relief. In turn, this implies the need for a more holis c approach to tax structuring. It is not enough to iden fy a par cular saving and any planning must take into account the overall eff ect, not just on the par cipants but related par es and external stakeholders. This extends to media percep on and the poten al for adverse reputa onal eff ects of a tax-based approach even where this is consistent with the intended purpose of the underlying law.

The avoidance debateThe fi nal point leads to considera on of the impact of the debate about tax avoidance and what is and is not acceptable. Views will vary from person to person and circumstance to circumstance but it is clear that the tradi onal bright line dis nc on between avoidance and evasion is no longer so clearly delineated. In 2009, Alastair Darling, when Chancellor of the Exchequer, stated in reply to a parliamentary ques on:

‘Tax planning has been with us … since the beginning of the 19th century … It is perfectly legi mate for people to tax-plan. They are only obliged to render un l Caesar what is due to Caesar and that has always been a feature of their case.’

Although that statement was made only seven years ago and correctly states established legal and policy orthodoxy, it now seems dated in the light of developments in statute and case law, to say nothing of public opinion.

Statutory changesThe range of statutory changes aff ec ng tax planning have been extensive and fundamental, ranging from general an -avoidance law (such as the GAAR, DOTAS and Advance Payment No ces or APNs) to provisions specifi c to employment tax and employee incen ves.

This is illustrated by some changes announced in this year’s Budget: Restric ng the capital gains tax relief for employee shareholder shares to a life me limit of £100,000 a person, substan ally limi ng the value of the relief and reducing the effi cacy of the en re relief, mainly to counteract the poten al use of the provisions for tax planning purposes. Imposing a prospec ve tax charge to take eff ect in 2019 on the capital value of loans from employee benefi t trusts (EBTs) if no se lement was reached with HMRC under the EBT se lement off er which closes on 31 July 2016.

Although the legisla on is prospec ve, when combined with the impact of the disguised remunera on legisla on introduced in 2011 and being applied to loans made before then, it will aff ect historic loans and in substance have retrospec ve eff ect. The message from these provisions is that statutory changes will be introduced to counter perceived abuses of reliefs. The intended purpose of reliefs will need to be considered, not just the explicit terms of the legisla on.

Case lawThis is reinforced by case law. The Rangers case (Advocate General for Scotland v Murray Group Holdings Ltd and Others [2015] CSIH) heard at the Court of Session in Edinburgh related to an EBT that the lower courts had found in favour of the taxpayer. The Court of Session overturned the decisions in earlier hearings, accep ng arguments advanced by HMRC which had not been raised previously. Poten ally, these have wide-reaching and nega ve eff ects for other structures, many of which (such as salary sacrifi ce into pension plans) have been operated for many years without controversy.

Similarly, in the case rela ng to planning implemented by two banks, UBS and Deutsche Bank (DB Group Services (UK) Limited v HMRC and HMRC v UBS AG [2014] EWCA Civ 452) decided by the Supreme Court, a gloss was added to the wording of the statute. The broad eff ect of this was to disapply tax reliefs rela ng to restricted securi es if the restric ons were included to avoid paying tax. This went beyond the applica on of Ramsey principles in that there was no ar fi cial step inserted with no commercial purpose other than the avoidance of tax which was ignored for determining the tax consequences of the arrangement – but construing the express words of the statute by extending them to achieve the presumed purpose of parliament in introducing the reliefs.

Both of these cases – together with earlier examples such as PA Holdings (HMRC v PA Holdings Ltd [2011] EWCA Civ 1414) – demonstrate the extent to which the courts will strive to prevent plans having a perceived tax avoidance mo ve achieving the planned tax saving.

Planning traps to avoidThe direc on of the developments is clear. The more diffi cult ques on is in iden fying planning which would and would not be likely to be eff ec ve in terms of the response of HMRC and taking into account the posi ons of other stakeholders.

Although it is not possible to be defi ni ve on specifi c traps, some principles can be iden fi ed.

Parliamentary purposeThe UBS case demonstrates the focus on the inten on of parliament. This creates a diffi culty for companies and their advisers as discerning Parliamentary inten on looking beyond the immediate wording in the legisla on.

Equally, if a plan has ar fi cial features that are included simply to achieve a benefi cial tax result, it will o en not be diffi cult to recognise that this is likely to result in HMRC and the courts iden fying tax avoidance and seeking to counteract the intended saving accordingly. Whatever the technical merits of the judicial analysis in UBS, there are several features of the planning which, viewed through the prism of the approach to tax in 2016, could be seen as likely to fail. These include: A clear inten on to mi gate tax in a

way running contrary to the purpose of the legisla on, in this case allowing the economic value of a discre onary bonus pool to be paid to the individual par cipants without incurring income tax or na onal insurance contribu on charges. Off shore companies incorporated for no purpose other than to facilitate the achievement of the intended tax saving. Features of the plan to create minimal and, aside from tax, unnecessary commercial risk.

Ar fi cial featuresSimilarly, including elements of the structure which are ar fi cial – typically inserted for no material purpose other than to achieve a tax saving – would be an indicator of tax avoidance.

Too good to be trueHMRC has made the point that, if the tax benefi ts of a plan look too good to be true, they probably are. A par cular example of this arises if a plan lacks tax symmetry – where the employer is seeking to obtain corporate tax relief but without a matching income tax or NIC charge – other than when this is explicitly contemplated by the legisla on.

Confl icts of interestAlthough this does not aff ect the likely effi cacy of the planning with HMRC, other stakeholders (mainly shareholders) will be concerned to ensure that tax planning to deliver benefi ts to employees, par cularly senior execu ves, does not prejudice their posi on or that of the company. An example of this is a plan implemented to deliver poten al employment tax savings for the individual at the cost of the company losing corporate tax relief without adjus ng the level of the awards to compensate the business for the less of that relief.

EMPLOYEE SHARE SCHEMES

42 June 2016 | www.taxadvisermagazine.com

Page 47: Download June 2016 pdf

Planning is not deadThe ques on is whether no planning is likely to be eff ec ve. That is not the case but in determining whether planning is likely to be suitable, the principles for iden fying unacceptable planning should be considered.

Taking that into account, some areas of acceptable planning would include a number of approaches.

All employee plansSome plans s ll a ract statutory tax advantages. As long as they are established in compliance with the detailed requirements of the legisla on and without including ar fi cial provisions designed to avoid an intended tax result, signifi cant benefi ts can be obtained.

In prac ce, many tax-advantaged plans are not considered due to the limits on the value of awards that can be delivered under them. As an example, company share op on plans are limited to awards for each person over shares with a maximum value at any one me at the date of grant of no more than £30,000.

Equally, in suitable circumstances, tax-approved plans can deliver signifi cant benefi ts. This can arise when there are either substan al numbers of employees or substan al increases in share prices.

A well-publicised example with both these features is the Bri sh Telecom share save plan. This was reported to have resulted in gains of £1.3bn being shared among employees across the workforce, with individual profi ts of £46,000 on average.

EMIThe poten al value of enterprise management incen ves (EMI) for smaller companies – those with gross assets of less than £30m at the date of grant – should not be underes mated. The limit on the value of awards for each par cipant, measured at the date of grant, is £250,000 with a total company limit of £3m.

As an incen ve targeted at smaller companies, many will have substan al poten al for equity value growth. EMI op ons granted with an exercise price equal to or greater than the market value of the underlying shares at the date of grant off er a poten al tax treatment with, for suitable companies:

No tax or NICs on the grant of the awards. No tax or NICs on the exercise of the awards. Corpora on tax relief on the exercise of the awards on the excess of the market value at the date of exercise over the exercise price. CGT on sale subject – where the op ons were granted at least one year before

EMPLOYEE SHARE SCHEMES

Name Stephen WoodhousePosition PartnerCompany Pe , Franklin & CoTel 0121 348 7878Email stephen.woodhouse@pe ranklin.comProfi le Stephen has spent more than 30 years working in various

large City fi rms qualifying acorss a range of tax ma ers. He specialises in employee share schemes and related remunera on issues including share valua on. he has advised on domes c and interna onal ma ers, becoming an acknowledged expert on various employee benefi t trusts.

PROFILE

the disposal of the shares – to the benefi t of entrepreneurs’ relief reducing the eff ec ve tax rate for the employee to 10%.

If an employee received op ons over shares worth £250,000 at the date of grant subject to a gain of fi ve mes over the life of the op ons, the poten al outline tax treatment would result in:

Op on gain = £1mTax on sale = £1m x 10% = £100,000Corpora on tax relief (at 17%) = £170,000

The overall eff ec ve tax rate, due to the benefi t of corporate tax relief, is 7%.

Growth interestsGrowth interests take diff erent forms. They may be a separate class of share par cipa ng only in corporate value above a s pulated threshold (growth shares) or through a joint share ownership plan where the ownership of ordinary shares is split, with the employee being granted a right to share in future value growth and their co-owner (being a third party such as the trustee of an employee share ownership trust or ESOT) owning the balance of the shares.

The structure and resul ng valua on dynamics of each structure are diff erent, but with a similar tax treatment, namely: Income tax on award equal to the market value (of the interest at the date of acquisi on). CGT on sale with the possibility of entrepreneurs’ relief depending on the nature of the interest and the company whose shares are subject to the award. No corporate tax relief on the realisa on of value on sale subject to capital gains tax.

With the signifi cant diff erences between corpora on tax rates (due to fall to 17% in 2020), capital gains tax rates and the combined income tax and NIC rates, this approach can off er signifi cant tax benefi ts without provoking controversy at HMRC (other than possibly in rela on to the determina on of the ini al market value). This is refl ected in Research Report

372, published but not wri en by HMRC, which recognised the nature of growth interests and their role in providing eff ec ve incen ves.

Subsidiary sharesAs a varia on on growth interests, there may be scope for awards to be made over shares in subsidiary companies. If the subsidiary operates a separate trade, in par cular one in the early stages of development, the resul ng value profi le and tax treatment is similar to growth shares, with a market to allow for the realisa on of value being provided through a sale to the parent company, either for cash or by way of a share for share exchange.

Pension replacementTax relief for pension contribu ons for higher earners has been signifi cantly restricted. At the same me, there is growing pressure, par cularly in the fi nancial services industry, for senior execu ves to be required to hold share interests over an extended period.

The combina on of these factors leads to the possibility of combining share plan awards with long-term pension provision in a manner similar to the approach in many US companies. This may off er the deferral of tax for the par cipants leading to them achieving a tax profi le similar to that for a conven onal pension scheme with tax (and NICs) only payable at the me of the delivery of shares.

SummaryThe boundaries of acceptable tax planning have changed substan ally. This has resulted in part as a response to changing economic circumstances that have added to the pressure to reduce Treasury defi cits and partly due to poli cal and social pressures.

This aff ects the design of share plans and other incen ves. It does not mean, however, that tax and achieving an op mal tax result is no longer relevant to plan design. Instead, the focus should be on delivering incen ves to make full use of the intended reliefs off ered by tax legisla on while balancing the interests of par cipants with other stakeholders.

www.taxadvisermagazine.com | June 2016 43

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VAT FLAT RATE SCHEME

44 June 2016 | www.taxadvisermagazine.com

I have a client who is eligible to join the scheme and will save a lot of tax compared to normal VAT accounting. He has asked if he can backdate his entry to create an extra tax windfall. Is this allowed?

A Unfortunately, HMRC do not recognise

the FRS as a tax saver, only as a me saver, i.e. to make the VAT return

process easier for a small business. Their policy is that once a VAT return has been submi ed, it is impossible to save me, so they will refuse any request to backdate the applica on. However, a retrospec ve request will usually be granted if returns are outstanding for earlier periods. This could be the case if a business is behind with its returns or is late registering for VAT, so has to complete a long period return. The reason that HMRC have strong powers is because the legisla on only allows a taxpayer to join the scheme at an earlier date ‘as may be agreed between him and the Commissioners.’ (1995 VAT Regula ons, SI1995/2518, Reg 55B).

Case law – in the recent First- er Tribunal (FTT) case of Julian Goodman (TC4827), the tribunal supported HMRC’s decision to refuse the taxpayer’s request to backdate his joining date by two years in order to produce a VAT windfall of £7,500.

It seems unfair that a business has to include zero-rated and exempt income in the calculations, when no tax is collected from customers on these sales. Why is this the case?

AThe scheme percentages in the

legisla on take into account two important factors:

What is the issue?There are many poten al pi alls with the FRS which can result in errors on VAT returns if the various quirks are not understood. For example, input tax can only be claimed on capital goods cos ng more than £2,000 and not capital services such as the cost of building an extension to business premises. What does it mean to me?

Advisers o en assume that many income sources for a business can be excluded from the scheme, e.g. buy to let rental income or the proceeds from selling a car. This is not correct and it has a very wide applica on. What can I take away?

Always be clear that HMRC view the scheme as a me rather than tax saver. So any requests to backdate an applica on to join the scheme will be refused if a business has already submi ed its VAT return for a period.

KEY POINTS

Not so simple

The fl at rate scheme is intended to simplify VAT returns for a small business with annual taxable sales of less than £150,000, but it has many complicated issues which are considered by Neil Warren in this Q&A ar cle

The average input tax sacrifi ced by a scheme user – this is why, for example, a pub has a lower FRS percentage than an accountant (6.5% versus 14.5%). The fact that some businesses have more zero-rated and exempt sales than others – which is why the lowest of all categories is for a business involved in ‘retailing food, confec onary, tobacco, newspapers or children’s clothing’ (4%).

In prac ce, some businesses will pay more tax by adop ng the scheme, and others less, compared to normal VAT accoun ng.

I understand that a quirk of the scheme is that buy-to-let property income is included in the calculations and also the sale of a business motor car. Is that correct?

ARental income earned from residential property is always exempt from VAT (unless it

relates to holiday lettings which are standard rated). And income earned from land or buildings is always classed as ‘business’ in accordance with EU Law (‘economic activity’ is the EU word for ‘business’):

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VAT FLAT RATE SCHEME

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Name Neil WarrenPosition Independent VAT ConsultantCompany Warren Accoun ng Services LtdProfi le Neil Warren is an independent VAT author and consultant, and is a past winner of the Taxa on Awards Tax Writer of the Year. Neil worked at HMRC for 13 years un l 1997.

PROFILE

www.taxadvisermagazine.com | June 2016 45

calcula ons, including Box 6 of the VAT returns (outputs box). This is good news for a business that provides services to overseas business customers, where the place of supply is the customer’s country in most cases under the general B2B rule. A business can also ignore bank interest earned in a business bank account because this income is classed as non-business (HMRC No ce 733, para 6.3). See Jane’s VAT return.

I am concerned that if a client chooses a category that HMRC disagrees with, an offi cer could go back and retrospectively assess tax for the last four years if HMRC’s choice has a higher percentage. Is this correct?

A HMRC’s published guidance clearly

states that an offi cer will not take retrospec ve ac on if the taxpayer

has made a ‘reasonable choice’ of category (HMRC No ce 733, para 4.2). What does this mean in prac ce? An obvious example of an unreasonable choice would be a lawyer who chooses the category for a hairdresser or a builder who describes himself as a food retailer. The challenge is to keep a clear wri en record as to why a par cular category was chosen at the me of joining the scheme.

On 4 May 2016, HMRC issued a revised No ce 733 in rela on to the FRS, and the amendments are very welcome in sec on 4

(compared to the previous version of the no ce) in confi rming that HMRC’s views on FRS categories that apply to various businesses do not have the force of law. The no ce states that a business should ‘use ordinary English’ in choosing its fl at rate category, and confi rms that ‘HMRC have off ered an interpreta on of each sector’ in their guidance (para 4.1). The revised no ce has also removed the previous para 4.4, which indicated that all consultants should choose the category for ‘management consultants’ (14%) even if they did not ‘fi t the tradi onal idea of management consultant’ and also excludes their view that engineering consultants and designers should always choose the category for ‘architect, civil and structural engineer or surveyor’ at 14.5%. This was the key outcome in the FTT cases of SLL Subsea Engineering Ltd (TC4256) and Idess Ltd (TC3638) where the courts concluded that ‘mechanical engineers’ were not ‘civil engineers’ because the la er work on land related projects whereas mechanical engineers work on plant and machinery. Mechanical engineers were therefore correct to choose the ‘business services not listed elsewhere’ category at 12% because there is no specifi c category for their business.

The star ng point for a business adop ng the FRS for the fi rst me, and choosing its category, is to use the list of

Jane is a management consultant (sole trader) who uses the FRS to complete her VAT returns. In the quarter ended 30 June 2016, she had the following sources of income: Income from consultancy fees: £20,000 including VAT for work carried out for UK based

customers; £10,000 (no VAT) for work carried out for business customers in Ireland and France. She sold her Volvo car for £5,000 She earned rental income of £1,000 per month (net) from ren ng out a fl at –

this fi gure was a er the deduc on of agent fees (£150 per month). Bank interest of £75 from her business deposit account.

How much FRS tax is payable by Jane?The gross income for FRS purposes is £28,450, made up of UK fees (£20,000), the car sale (£5,000) and the rental income before the agent fees are deducted (£1,150 per month x 3 months). The FRS tax payable is £3,983 using the 14% rate that applies to management consultants.

Note – this example highlights a poten al error for scheme users who use credit entries on their bank statements to work out their FRS payment. The principle of working out the tax payable according to a ‘payments received’ rather than ‘invoice date’ basis is fi ne – it means the business has adopted the ‘cash based turnover’ method (HMRC No ce 733, sec on 9). However, in the cash of Jane’s rental income, the correct fi gure is £1,150 per month rather than the banked fi gure of £1,000 per month.

JANE’S VAT RETURNArticle 9 – Directive 2006/112 – ‘The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.’

However, if the property is in a different legal entity to the VAT registered business, there is no FRS tax to declare on the rental income. And don’t forget that jointly owned property is always classed as a partnership (HMRC Notice 742, para 7.2).

The car sale is a ‘loser’ because the gross receipts must be included in the FRS calculations.

So what income is excluded from the scheme?

AIf a business has income that is outside the scope of VAT, then it is completely excluded from the FRS

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46 June 2016 | www.taxadvisermagazine.com

categories in the 1995 VAT Regula ons, SI1995/2518, Reg 55K, which can be found with a direct link from para 4.3 of the revised no ce. In areas of doubt (eg where there is no specifi c category for the business descrip on) HMRC off er assistance in their guidance notes FRS7200 and FRS7300 (a link is given in para 4.1) which now refl ect recent court cases.

What input tax can I claim if I use the scheme?

AThe basic principle of the FRS is that

no input tax can be claimed because the relevant FRS percentages refl ect

the average input tax sacrifi ced by a business in its relevant category. However, there are three situa ons when a claim can be made: Pre-registra on input tax. A scheme user

can claim pre-registra on input tax on its fi rst VAT return on the same basis as a non-scheme user ie in rela on to services purchased in the six month period before the date of registra on and up to four years in the case of goods. This is good news because a scheme user also benefi ts from an extra 1% discount to the usual scheme percentages in its fi rst year of VAT registra on.Note – it is important to be clear that the 1% discount only applies in the fi rst 12

months of VAT registra on and not the fi rst 12 months that a business adopts the scheme. So if a business registered for VAT on 1 January 2016 and joined the FRS on 1 July 2016, it would only benefi t from the 1% discount un l 31 December 2016. Capital goods cos ng more than £2,000 including VAT. As an example, if a scheme user buys a van for £5,000 plus VAT, he can claim input tax. However, be aware that a claim must relate to capital goods and not capital services. I came across a recent situa on where a hairdresser using the FRS claimed input tax on the cost of a salon refurbishment. This expenditure related to ‘construc on services’, apart from one or two items such as hair drying equipment, which could not be claimed anyway because the total cost was less than £2,000. Post-deregistra on expenses. A business that deregisters is deemed to leave the scheme on the day before it deregisters. This means that output tax must be accounted for on any business sales made on the fi nal date of registra on and therefore any standard rated stock or assets where input tax was claimed and the total value of the assets exceeds £5,000. It also means that input tax can be claimed on any expenditure incurred on the fi nal day, and also on post deregistra on expenses

(eg input tax on services invoiced a er a business has deregistered but relevant to the period it was registered, such as accountancy fees). A claim is made on form VAT427.

I understand there is a tax windfall with the scheme if I incur a bad debt. What is this all about?

A This is correct:

For example, a management consultant raised an invoice for

£3,000 + VAT to a UK customer, which was never paid and is now a bad debt that he has wri en off in his accounts. Even though he has not declared any FRS tax on this sale because he uses the cash based turnover method, he can claim a VAT windfall once the debt is more than six months overdue for payment (the usual bad debt relief period) as follows:

VAT that would have been paid by the customer = £600; less VAT that he would have paid using the FRS i.e. £3,600 x 14% = £504; Total to claim in Box 4 of his relevant VAT return = £96.

If he accounted for tax on an invoice basis (so would have paid £504 of VAT on an earlier return), his bad debt relief claim will be £600 ie producing a net gain of £96 in both cases. (HMRC Notice 733, section 14).

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Welcome to June’s Technical newsdesk

Angela Fearnside, Maric Glaser and Alison Ward kick off this edi on with a number of indirect tax ar cles covering the proposed measures to prevent VAT evasion and non-compliance by overseas sellers into the UK, the possible alignment of the VAT disclosure rules with the DOTAS regime, commentary on the recently published EU VAT ac on plan, and news for consultancy businesses opera ng the VAT fl at rate scheme.

A large part of the technical team’s work involves responding to consulta ons. Sacha Dalton reports on the CIOT’s response to the EU consulta on on double taxa on dispute resolu on mechanisms, and Margaret Curran and Will Silsby highlight the current open consulta ons on the corporate criminal off ence of failure to prevent the criminal facilita on of tax evasion and corporate contribu ons to grassroots sports. Details of all open consulta ons can be found on the CIOT and ATT websites.

Agents play a vital role in the opera on of the tax system. Margaret and Alison provide an update on Agent Services from HMRC, and I provide more informa on on how Working Together is evolving.

Real-Time Informa on is an issue close to the hearts of many agents and employers. HMRC launched its post-implementa on review of RTI in April. Alison provides a summary of the ATT’s response, and Robin Williamson summarises that from LITRG.

In a round-up of other ma ers, Sacha summarises the CIOT’s views on EU public country-by-country repor ng, and Joanne Walker reports on the recent mee ng between the CIOT and LITRG with the chief execu ve of Revenue Scotland. Ma hew Brown comments on the government’s welcome move to allow connected companies to share the £15,000 appren ceship levy allowance between them, and Gillian Wrigley highlights LITRG’s new guide to help personnel serving in the armed forces deal with their tax aff airs.

Finally, before our usual summary of technical submissions, we welcome a ‘guest’ ar cle from Charlo e Ali, head of professional standards at the ATT, who draws a en on to the recently revised guidance on le ers of engagement for tax prac oners.

Have a good June!

Richard Wild, head of tax technical [email protected]

Tackling VAT evasion via online marketplacesINDIRECT TAXES

FB 2016 introduces a package of measures to combat abuse and non-compliance by overseas businesses that import goods for sale via online marketplaces. The measures will also aff ect all UK-based businesses that fulfi l orders of imported goods and those involved in transpor ng them. HMRC is also consul ng on a fulfi lment house due diligence scheme – we seek your views.

BackgroundBudget 2016 announced measures to tackle VAT loss arising from overseas businesses failing to account for the tax on sales of goods into the UK using online marketplaces. The Treasury es mates this abuse accounts for between £1bn and £1.5bn of

x

Technical [email protected] Dalton, Technical Newsdesk editor

ContentsIn this month’s Technical briefi ngs we provide a summary of current consulta ons and our submissions to HMRC and the Treasury. We provide an update on recent events in Scotland and an update on agent services. We also cover other work carried out by the technical teams of the CIOT, ATT and LITRG.

[email protected] Dalton, Technical Newsdesk editor

Newsdesk ar cles Author(s)Welcome to June’s Technical newsdesk Richard Wild

p 47

Tackling VAT evasion via online market places – fulfi lment houses

Angela Fearnside/ Maric Glaserp 47

Will alignment of VAT disclosure with DOTAS be eff ec ve?

Maric Glaserp 48

European Commission publishes VAT ac on plan to modernise the EU VAT system

Angela Fearnside/ Maric Glaserp 49

Problems for small business consultants using the VAT fl at rate scheme

Alison Wardp 49

EU double taxa on dispute resolu on Sacha Daltonp 50

Corporate off ence of failure to prevent the criminal facilita on of tax evasion

Margaret Curranp 50

Corporate Contribu ons to Grassroots Sports: where is the goal?

Will Silsbyp 51

Agent Services (formerly Agent Online Self Serve) Margaret Curran/ Alison Wardp 51

Working Together goes digital Richard Wild p 52

HMRC’s post-implementa on review of RTI Alison Ward/ Robin Williamsonp 53

Country-by-country repor ng: CIOT comments on EU Commission’s proposals for public repor ng

Sacha Daltonp 53

Scotland update: mee ng with the chief execu ve of Revenue Scotland

Joanne Walkerp 54

Appren ceship levy Ma hew Brownp 54

LITRG guide for armed forces Gillian Wrigleyp 55

Tax engagement le er: joint bodies’ guidance updated

Charlo e Alip 55

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the total VAT gap and that implemen ng these measures will secure future revenues of £65m (2018-19) rising to £365m (2020-21). It is within the context of such high forecasts that these measures need to be examined.

Summary of measuresThere are two measures in FB 2016, along with a consulta on document:1. FB 2016 Clause 112 amends HMRC’s powers to direct overseas

businesses that sell goods into the UK to appoint a VAT representa ve here to account for output tax and pay it to HMRC. The power will be enforced by making the representa ve jointly and severally liable for the VAT due

2. FB 2016 Clause 113 allows HMRC to hold the online marketplaces through which goods are sold jointly and severally liable for the VAT due. It is worth no ng that the measures are not restricted to third-country businesses: they include any non-UK established business, which raises issues of whether they are compa ble with EU law.

3. HMRC consulta on – proposing a due diligence scheme requiring fulfi lment houses to register and undertake ‘fi t and proper’ checks on the goods they fulfi l. HMRC would have powers to remove or reject a fulfi lment house’s approval to trade, with penal es and possibly criminal sanc ons. HMRC acknowledges the scheme will place cost and administra ve burdens on par cular businesses (that will be defi ned) and seek to obtain the views of businesses aff ected.

Due diligence scheme – your views soughtThe CIOT will respond to the consulta on and our technical team requests your views (to indirec [email protected]). However, many of the 66 ques ons are aimed at aff ected businesses to fi nd out more about the impact these measures may have. We recommend that members also provide the sta s cal informa on requested by HMRC because our response will concentrate on these areas: How goods arrive in the UK and what knowledge exists of the

source and des na on of the goods. The eff ec veness of a narrow or wider defi ni on of

‘fulfi lment house’. Exclusions for small businesses. Proposed checks, record-keeping, burdens,

benefi ts and sanc ons. Suggested alterna ves.

Effectiveness of the due diligence schemeHMRC has proposed a defi ni on of a fulfi lment house as:

‘… a business that provides services of storage, breaking bulk, unpacking, re-packing and making (or arranging) subsequent delivery to its clients’ customers of goods imported from outside the EU which have been cleared for customs purposes’.

There is a sugges on that this defi ni on could be applied more widely to include businesses that fulfi l their own orders to prevent the compliance rules being avoided.

The due diligence scheme aims to deter abuse in this sector by requiring key businesses in the supply chain to work only with legi mate and compliant suppliers. HMRC considers this a ‘necessary and propor onate response’ to the VAT at risk.

Respondents will no doubt wish to give par cular a en on to the likely eff ec veness of the measures, which largely seek to use intermediaries to police the relevant transac ons rather than HMRC holding to account those that are non-compliant. HMRC acknowledges this will increase administra ve burdens and costs but wishes to minimise this as far as possible for legi mate businesses.

ConclusionThe consulta on raises several issues. The scheme assumes that the fulfi lment and transport parts of the supply chain are the best sources of informa on and requires those businesses to act as enforcers. However, another policy might be to consider taxing the sales of goods as the default op on by direc ng the online marketplace to act as an undisclosed agent (using Ar cle 28 PVD and s.47 VATA 1994). The eff ect would be a supply to and by the marketplace provider which would then account for VAT on the full sales price of the goods. Qualifying overseas businesses could opt out of this arrangement if they could prove they were compliant or not in business. The onus would then be on the overseas business to prove its compliance.

Since the government’s measures will not apply automa cally (HMRC will serve a no ce on the online marketplace), a ques on arises as to how HMRC will iden fy the businesses that will be required to comply with direc ons. The consulta on also does not indicate how HMRC will prevent businesses simply closing down one iden ty and crea ng a new one.

Given the amounts involved, it is clear that measures are needed to prevent loss whether due to evasion or inadvertent non-compliance. The key ques on will be how to balance the eff ec veness of such measures against the impact on legi mate business, par cularly small and medium-sized businesses.

Angela Fearnside Maric [email protected] [email protected]

Will alignment of VAT disclosure with DOTAS be effective?INDIRECT TAXES

HMRC is proposing to change the VAT Disclosure Rules (VATDR) to align with the Disclosure of Tax Avoidance Schemes (DOTAS).

BackgroundHMRC has published a consulta on called Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax. Part of the ra onale appears to be that disclosures have dropped signifi cantly since the VATDR legisla on was introduced in 2004.

The measuresTwo main changes are proposed. To impose the duty to disclose on promoters of avoidance

schemes rather than the posi on now, under which the duty falls on the users of schemes. To extend the scheme to cover other indirect taxes, in par cular

IPT and gaming du es, to which the current arrangements do not apply and where there appears to be evidence of the promo on of schemes.

Previous views we have expressedWe responded to the original consulta on before the 2004 legisla on and another one in 2014. We have pointed out that VAT is governed by EU law and therefore some arrangements that might be seen as objec onable for direct tax – for example, gaining a cash fl ow advantage – have been specifi cally sanc oned in EU case law, namely Weald Leasing Case C-103/09.

Further, we noted in the 2014 consulta on that, since the Halifax case, members have pointed out that there has been li le appe te for packaged and highly ar fi cial schemes, so it is not surprising that

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TECHNICAL

the number of disclosures has reduced.It should also be noted that, in the latest es mate of the VAT gap

by HMRC, the loss due to avoidance is given as £200m, which tends to support the view that there simply is not the level of avoidance needed to jus fy any signifi cant changes.

Extending the schemeAs noted, the consulta on document suggests that there is signifi cant avoidance of IPT and gaming du es, which generate revenues of £3bn and £2bn respec vely. These are very specialised taxes and we would like the views of people who either are responsible for such taxes in their organisa ons or who advise on them. We would in par cular like to fi nd out if possible the extent to which promoters are marke ng avoidance schemes.

ContactSend your replies to indirec [email protected] can fi nd the consulta on at www. nyurl.com/zxvuurl.

Previous consultationsOur previous responses to this subject may be found at:

2004: www. nyurl.com/hzyl6eg2014: www. nyurl.com/jx6a2z6

Maric [email protected]

European Commission publishes VAT Action Plan to modernise the EU VAT systemINDIRECT TAX

The European Commission publishes its ac on plan for the crea on of a single EU VAT area but acknowledges poli cal will and agreement is needed to take it forward.

Considering the current VAT system to be too complex and vulnerable to fraud, the European Commission published its VAT Ac on Plan (www. nyurl.com/zvdapcg) on 7 April. This proposes to ‘reboot’ the transi onal arrangements and create a simpler, more robust and business-friendly framework. Aimed at promo ng cross-border trade and recognising developments in technology, business models and a growing digital economy, the key features are: A single European VAT system based on the ‘des na on

principle’ that VAT on goods and services will be paid to the country where they are consumed; Short-term measures to tackle VAT fraud: The VAT gap was

es mated to be 170bn euros in 2013; Op ons to modernise VAT rates: two are proposed; Plans to simplify VAT rules for e-commerce in the context of the

digital single market strategy; and A VAT simplifi ca on package for small and medium-sized

enterprises (SMEs) to support the growth of cross-border trade.

The Commission plans to present legisla ve proposals on each of the issues raised in the ac on plan to trigger a debate with EU member states and with the European Parliament to secure poli cal agreement. Measures scheduled for 2016 include adap ng the VAT system to the digital economy, removing VAT obstacles to cross-border e-commerce and specifi c measures for e-publica ons. A VAT package for SMEs will be proposed in 2017, along with a proposal for the defi ni ve VAT system for EU cross-border trade, together with a

reform of the VAT rates.The CIOT will scru nise the ‘des na on system’ proposal

because this will convert what is today an intra-EU VAT-free, cross-border, business-to-business (B2B) sale of goods into one subject to VAT. Whether this will create a substan al cash fl ow burden on business will depend on how it is implemented and how quickly any VAT is refunded.

The proposals follow discussions in the European Commission’s VAT Expert Group, on which the CIOT has been represented for more than three years. The proposals have a long way to go before being adopted so there will be an opportunity to comment to the Commission on the detail of the proposals.

The CIOT is also represented on HM Treasury’s SME VAT forum, which has recently discussed the impact of these measures on SMEs and micro-businesses. This forum will give a voice to SMEs (in themselves forming a wide range of business types) and we would encourage members to feed back thoughts and concerns to the ITX technical offi cers as more details emerge.

The reform of VAT rates has been of great media interest since the UK government’s announcement in Budget 2016 that the tax is to be abolished on women’s sanitary products. The ac on plan now gives us further informa on on how this could happen if agreement is found on either of the Commission’s op ons for VAT rates. Op on 1 proposes a list of reduced rate goods and services that

would be regularly reviewed. All current reduced rates, including deroga ons (for example zero rates) would be maintained and could be adopted by all member states to ensure equal treatment. The minimum standard VAT rate of 15% would also be maintained. However, member states would not be able to introduce zero rates for addi onal goods and services. Op on 2 would permit member states to adopt the rates they

want on their choice of goods and services as long as they do not create distor on of compe on or unduly complicate the VAT system. There would be no minimum standard rate of VAT.

It is worth no ng that many countries, including the UK, have reduced rates and any changes would require unanimous agreement among all 27 member states and therefore cannot be imposed on the UK without its agreement.

In conclusion, the new system aims to both simplify the treatment of sales of goods from a VAT perspec ve and reduce the ever-increasing criminal ac vity aimed at exploi ng the VAT system. They are excellent mo va ons. Although we endorse simplifi ca on, we believe it must not be at the expense of imposing extra burdens on compliant businesses.

Angela Fearnside Maric [email protected] [email protected]

Problems for small business consultants using the VAT fl at rate schemeINDIRECT TAXES

The ATT highlights that recent decisions in tax tribunal cases have disagreed with HMRC’s published guidance on what category should apply to small business consultants using the fl at rate scheme and calls for HMRC to revise its guidance in line with these decisions.

The ATT’s VAT sub-group has been following the progress of several cases through the tribunal courts, namely Chilly Wizard Ice Cream

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TECHNICAL

Co Ltd VTD 19977, Calibre TAS Ltd VTD 20508, Idess Ltd TC 3638, SLL Subsea Engineering Ltd TC 4256, and KTD Management Ltd TC 4808

These cases have one feature in common: they all found in favour of the taxpayer a er HMRC had challenged the business category applied under the fl at rate scheme. This scheme was intended to simplify VAT accoun ng for small business that simply choose the relevant business category which then determines the percentage of its gross business income that will be paid as VAT.

Why has HMRC started to challenge the business categories being applied? The issue stems from the fact that some business sectors are not covered by the 51 scheme categories. This results in many consultants, say on health and safety or employment law, correctly choosing the sweep-up category for ‘other business services not listed elsewhere’, which has a rate of 12%.

However, HMRC has been taking a diff erent view. Its guidance in VAT No ce 733, para 4.4, states:

‘If you act as a consultant and you do not fi t into another specifi c sector, you should choose management consultant. This sector is not restricted to businesses that fi t the tradi onal idea of management consultancy.’

By applying this guidance to our examples, HMRC believes that the correct percentage to apply is the higher rate of 14% since this applies to management consultants. However, the courts have disagreed.

HMRC has also been trying to apply the category for ‘architect, civil and structural engineers’ (14.5%) to mechanical engineers. However, in Idess Ltd and SSL Subsea Engineering Ltd it was concluded that a mechanical engineer provides services linked to plant and machinery rather than land, so the sweep-up category with the 12% rate is the correct one to choose.

The clear message from each of the cases cited is that a business owner should use ordinary everyday words in choosing their category. So an adver sing consultant would never describe him or herself as a management consultant and a mechanical engineer would never describe him or herself as a civil engineer. Yet HMRC guidance con nues to ignore this message.

Despite assurances in No ce 733 that a choice of sector would not be changed retrospec vely as long as the original choice was reasonable, HMRC has been challenging the choice from the outset and issuing retrospec ve tax assessments. However, the court decisions show that HMRC’s view and guidance are fl awed.

The ATT suggests that this issue now requires a fi nal resolu on and clarity for scheme users. President Michael Steed says:

‘We feel it is the right me for HMRC to amend its guidance and accept that honest small business owners have adopted the correct category as intended by the legisla on.’

Read ATT’s press release www. nyurl.com/jnmh8em.UPDATE: As this edi on was going to press, HMRC has issued a

revised VAT No ce 733 redra ing the problema c para 4.4. Read more on this at www. nyurl.com/zr8jptv and on p X.

Alison Wardaward@a .org.uk

Double taxation dispute resolution mechanisms: EU consultationINTERNATIONAL TAX

The CIOT has responded to the EU consulta on on double taxa on dispute resolu on mechanisms.

The CIOT welcomed this EU ini a ve and the prospect of improvements even if they might be limited only to the the bloc. However, we noted our disappointment that the recommenda ons of Ac on 14 (dispute resolu on mechanisms) of the G20/OECD BEPS project had stopped short of endorsing a universal mandatory arbitra on provision for all bilateral double tax trea es. We said the EU should channel its resources in supplemen ng and encouraging the development of the OECD recommenda ons so that a global approach is taken by all countries, extending to those in the G20 and elsewhere. We are concerned to avoid any EU ac on that is not consistent and compa ble with any OECD developments in this area.

We support se ng up a permanent arbitra on court or tribunal specialising in interna onal tax disputes, which would off er a range of services to include media on and facilita on. We also recommended that the whole dispute resolu on process allows for more taxpayer engagement and par cipa on in order to improve the effi ciency of the process and reduce misunderstandings caused by an incomplete or insuffi cient understanding of the facts relevant to the issues in dispute.

Our full response can be read at: www. nyurl.com/znx7ynr

Sacha [email protected]

Corporate offence of failure to prevent the criminal facilitation of tax evasionMANAGEMENT OF TAXES

How might your fi rm be aff ected? HMRC is asking for prac cal examples to help inform its guidance on this new off ence.

HMRC has published a second consulta on document (www. nyurl.com/jzcp7xc) containing dra legisla on and guidance for a new corporate off ence of failure to prevent the criminal facilita on of tax evasion.

The CIOT is intending to respond to the document and welcomes comments from members. Send them to [email protected] or directly to HMRC at [email protected]. The deadline for responses to HMRC is 10 July.

This consulta on is not seeking feedback on the policy, which was covered in the previous consulta on last year, but seeks comments on the dra legisla on and the dra guidance, considered together. In the previous round of consulta on some stakeholders off ered HMRC examples of how the off ence would aff ect their organisa on and its interac ons with their obliga ons. HMRC said it found these par cularly helpful and welcomed further input from stakeholders, in par cular on how they approach due diligence in rela on to the acts of those providing services on their behalf.

The new off ence aims to overcome the diffi cul es in a ribu ng criminal liability to corpora ons for the criminal acts of those who act on their behalf. The off ence itself will have three stages:

Stage one: criminal tax evasion by a taxpayer (either a legal or natural person) under exis ng criminal law (for example, an off ence of chea ng the public revenue or fraudulently evading the liability to pay VAT);

Stage two: criminal facilita on of this off ence by a person ac ng on behalf of the corpora on, whether by taking steps with a view to: being knowingly concerned in or aiding, abe ng, counselling or procuring evasion by the taxpayer;

Stage three: the corpora on’s failure to take reasonable steps to prevent those who acted on its behalf from commi ng the criminal

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act outlined at stage two.A corpora on will commit the off ence if it fails to prevent an

associated person criminally facilita ng the evasion of a tax, whether the undeclared funds are in or outside the UK. A person ac ng in the capacity of one associated with the corpora on is defi ned as ‘someone ac ng on its behalf’. This means that the off ence would be commi ed if an employee, agent, subsidiary or a contractor, during his/her work, facilitated tax evasion by a customer of the corpora on.

It is the inten on that the off ence will apply in three situa ons:1. If a UK-based corpora on fails to prevent those who act on its

behalf from criminally facilita ng a UK tax loss;2. If a non UK-based corpora on fails to prevent those who act on

its behalf from criminally facilita ng a UK tax loss;3. If a UK-based corpora on fails to prevent those who act on its

behalf from criminally facilita ng a tax loss overseas. This applies if the jurisdic on suff ering the loss has laws in place equivalent to those in the UK – namely, if there is dual criminality.

The dra legisla on separates the domes c and foreign elements into dis nct off ences.

It will be a defence for a corpora on to prove that, when the off ence was commi ed, it had in place preven on procedures that could reasonably be expected in the circumstances to be in place or that it was not reasonable to expect it to have any in place.

The dra guidance is on pages 28 to 44 of the consulta on document, and there is also a case study on page 24 to help inform feedback. The purpose of the guidance is to explain the policy behind the new off ence and to help bodies of all sizes and in all sectors understand the sorts of procedures they can put in place to prevent persons associated with them criminally facilita ng tax evasion. The guidance is intended to be of general applica on and is formulated around six guiding principles, which will each be followed by commentary and examples.

The six principles are:1. Propor onality of reasonable procedures2. Top-level commitment3. Risk assessment4. Due diligence5. Communica on (including training)6. Monitoring and review

HMRC is keen for stakeholders to submit examples for the six principles, in par cular it asks that stakeholders submit anonymised case studies to refl ect the way their organisa ons make referrals, especially if the referral forms the basis of an ongoing rela onship or the joint provision of services to a client. This will help to ensure that the examples provided in the guidance are relevant and refl ect the manner in which corpora ons conduct their business.

Please send your comments/examples to [email protected].

Margaret Curran [email protected]

Corporate Contributions to Grassroots Sports: where is the goal?OWNER-MANAGED BUSINESS

The consulta on seeks input on what contribu ons should a ract tax relief, how they should be routed and what repor ng requirements might be appropriate.

The Treasury’s consulta on document, Corporate Contribu ons to Grassroots Sports, is refreshingly brief and simple with only eight ques ons. It is a stage one consulta on to set out objec ves and iden fy op ons. This gives the greatest opportunity for responses to infl uence policy.

In his foreword, the fi nancial secretary does not shy away from the fact that the government is looking to the private sector to support grassroots sports because of pressure on public fi nances. The point is developed in the introduc on which notes: ‘The government wishes to encourage sports clubs to fully exploit the poten al of alterna ve income streams.’ That does, however, beg the ques on: why should only corporate contribu ons be considered for a privileged tax status?

In brief, the consulta on: asks which sports should be eligible; asks how grassroots sports should be defi ned; seeks evidence on the nature and level of contribu ons now

being made to grassroots sports either by na onal governing bodies (NGBs) or companies (ignoring the possibility of non-corporate donors); asks what should be included within the eligible purposes for

contribu ons (apparently envisaging some ght ring-fencing); provides two alterna ve models for contribu ons – the fi rst

requiring all contribu ons to be routed through an NGB and the second permi ng direct contribu ons from donor company to the intended recipient but raising a ques on as to the defi ni on of eligible recipients; asks what repor ng requirements should be placed on donors

and recipients (without indica ng to whom such reports should be made – is that a func on that the NGBs might be prepared to take over from HMRC?); and raises the possibility of payments below a specifi ed monetary

limit being exempted from the repor ng requirements.

Overall, it is unclear whether the Treasury has a clear percep on of what might be the typical monetary value of a contribu on or what might be a typical donor company (there is no obvious exclusion of property or investment companies) or indeed what might be a typical eligible grassroots recipient. On the la er point, however, the document notes that some elements of the community amateur sports club (CASC) scheme rules might be appropriate. It also notes the need to exclude signifi cant personal benefi t to the contributor. This might conjure up images of all the track-suited limited companies that are regularly seen at the local trampoline and unicycle club and brings us back to whether qualifying contribu ons really need to be restricted to corporate donors.

The ATT is to submit a response to the consulta on. The closing date for submissions is 15 June. Send any comments to a technical@a .org.uk no later than 10 June.

The Treasury consulta on document can be found at www. nyurl.com/hn5y546

Will Silsbywsilsby@a .org.uk

Agent Services (formerly Agent Online Self Serve)MANAGEMENT OF TAXES

Important informa on from HMRC about work it is doing this year, including giving agents access to digital tax accounts.

The following is an update from Toni Clark, head of digital agent

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engagement at HMRC:‘I wish to advise you that Agent Online Self Serve (AOSS) has

been renamed Agent Services (AS) and to provide an update on the service which you may wish to publicise to your members and enable answers to their queries.

‘In April 2015 AS launched a PAYE liabili es and payment private beta service. This gave agents the opportunity to cleanse their employer PAYE client lists, and view their clients’ PAYE accoun ng periods and payment history. A new agent landing page (homepage) was launched in October 2015 for agents using the beta service. This enabled agent access to view clients’ PAYE for employers’ accounts, and provided links to agent guidance and other services they could use. The PAYE liabili es and payments beta currently has over 2,700 users, with user sa sfac on rates of around 80%. We con nue to test and refi ne this service based on agent feedback.

‘AS has now refreshed key priori es for 2016/17 and the revised name be er refl ects the scope of what HMRC aims to deliver for agents within this programme of work.

‘The four priority delivery areas for AS are: On-boarding – enable agents to access services and features

contained in the personal and the business tax account using third party so ware which will give them the ability to see and do what their clients are able to do through their tax account. Subscrip on – a process that will allow us to collect data

about a tax agency as part of HMRC’s agent strategy. Authorisa on – enhance exis ng online agent

authorisa on (OAA). Inbound secure messaging – work to understand what

informa on agents want to send to HMRC and explore the digital solu ons that can be used to cater for this requirement.

‘We will con nue to keep professional bodies and agents informed on the development of AS through regular forums, digital mee ngs and the Tax Agent Blog.’

An HMRC Talking Points webinar on AS was held on 19 May. If you missed it, go to www. nyurl.com/q6zzty4.

Margaret Curran Alison [email protected] award@a .org.uk

Working Together updateGENERAL FEATURE

Working Together goes digital. Here’s what’s happening, and how you can be involved.

Members involved in the Working Together (WT) ini a ve will know that it is changing. Those who aren’t involved may wonder what is happening or even think that nothing is happening at all. More background to the WT ini a ve can be found on the CIOT and ATT websites (as well as on GOV.UK), but let me explain what is changing.

What’s changing?Historically, WT has operated on a regional basis, when most towns had a tax offi ce and local WT mee ngs could be held between agents and HMRC. In some areas these worked well, in others they did not. The increasing centralisa on and specialisa on of HMRC ac vi es, alongside increased digi sa on, have resulted in either local HMRC

offi ces closing or having no infl uence over the issues and problems faced by agents in the area. Against this backdrop, in September 2015 the WT mee ngs were moved to a digital foo ng, allowing agents from around the country to par cipate.

Ini ally, the plan was to retain the geographical structure: HMRC would allocate a specialist agent manager (SAM – an individual dedicated to the WT ini a ve) to one of ten regions, and each professional body involved in WT would assign a volunteer or representa ve to each of them. This la er part proved diffi cult for professional bodies, and we also ques oned the need for a geographical structure if the mee ngs were to be held digitally.

The professional bodies suggested to HMRC that, instead of having a regional structure, the SAMs could instead be allocated to a par cular professional body. Each organisa on would, therefore, collate issues raised by their members, and have a direct route into HMRC through their SAM. He or she would link in with the other SAMs to consider whether the issue had been raised by other professional bodies and therefore may represent a widespread problem.

We are grateful that HMRC considered this request, and that it has been approved by them and the WT Strategic Group (broadly, professional body representa ves who guide the direc on of the WT ini a ve), and at the me of wri ng this is being rolled out.

WT digital meetingsAs noted above, WT mee ngs recently moved to a digital format – broadly a webinar without the pictures (a relief for those running the mee ngs, and no doubt for par cipants, too!) – and WT has therefore been renamed Digital Working Together (DWT). DWT mee ngs were held at the beginning of April and May. They are currently being run by members of the Issues Overview group (IOG – volunteers and staff of the professional bodies) from their individual loca ons. These will con nue to be run by the IOG bi-monthly for the rest of 2016. Do bear with us as we become accustomed to running these mee ngs – but we would welcome construc ve sugges ons for improvements.

Many of the issues being discussed are reported in HMRC’s Agent Update. These are also published bi-monthly, and provide not only a summary of some of the main issues addressed as part of the DWT ini a ve but also other useful informa on. They can be found at www. nyurl.com/hbsj798.

Currently, the DWT mee ngs can be a ended only by the 800 or so agents who have previously been involved in the WT ini a ve. If you are one of them, try to par cipate in the next mee ng in early July. We have averaged around 60 agents for the past two DWT mee ngs, so there is room for improvement, although the feedback from them has been broadly posi ve. Soon, it is intended that DWT mee ngs will be opened to all agents, and we will let members know when this happens.

ConclusionI am convinced that the professional bodies (including the CIOT and ATT), and importantly HMRC, are commi ed to the DWT ini a ve and want to make it work, and we remain indebted to our Working Together volunteers. Of course, not all issues can be resolved (remember, one-off client-related ma ers may be be er directed at the agent account manager (AAM) service – see GOV.UK for more details), but the more evidence we receive about problems or ‘grit’ in the system, the more chance we and HMRC have to address them. Check the Working Together pages on the CIOT and ATT websites for more informa on. To get involved in DWT, or if you would like to raise an issue, email [email protected].

Richard [email protected]

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HMRC’s Post-implementation review of RTI EMPLOYMENT TAXES

HMRC launched its post-implementa on review of RTI in April and approached stakeholders for their input on a number of points, including what HMRC had done well, what it could have done be er and the ac ons that s ll need to be taken. The ATT and LITRG provided detailed responses, both of which are summarised below.

ATT’s responseWhat HMRC did well during the introduc on of RTIThe decision to defer the implementa on of in-year fi ling penal es un l 6 October 2014 for large employers and to further defer this for small businesses to 6 March 2015 were welcome.

Another welcome move by HMRC was the decision, a er lobbying from the ATT and other professional bodies, to remove from the fi nal FPS the requirement to answer par cular ques ons (which had previously been included on the old form P35). Answering these ques ons by 19 April had been problema c and administra vely burdensome for employers, usually resul ng in the need to submit a further return via an employment payment summary.

What HMRC could have done be erOverall, it was felt that, although there was early consulta on, comments made by stakeholders appeared to be largely ignored ini ally. ATT noted that many issues raised earlier by employers and agents are only now being acknowledged and addressed by HMRC.

How HMRC dealt with disputed charges could have been handled much be er. There should have been a clear procedure in place from the outset that was communicated to agents and employers. Instead, disputed charges appeared to disappear into a ‘black-hole’ for months and a backlog at HMRC’s end rapidly built up.

The issues employers are s ll struggling withATT’s response pointed out that the requirement to fi le ‘on or before’ is con nuing to raise issues for employers. HMRC did introduce a couple of easements to assist employers (for micro employers and also a relaxa on for all employers submi ng within a three-day window of payment). Both of these measures were due to end on 5 April 2016, but, perhaps because there is s ll widespread concern that the educa on provided by HMRC in the interim has not been enough and that employers are con nuing to struggle, HMRC recently announced that both penalty easements will con nue un l 5 April 2017.

Submi ng amendments by an end of year update (EYU) form remains problema c. The ATT has been pushing for the EYU form to be redesigned to report year-to-date fi gures rather than the diff erence between amount submi ed and the correct amount.

The lessons HMRC can learn for the futureIn the ATT’s opinion, the principal lesson that should be taken away from this review is the importance of listening to the people who are on the front line. As the ATT highlighted, this will be a cri cal lesson to carry forward into the Making Tax Digital project.

Further work or ac ons that HMRC should considerThe ATT believes there is now an overwhelming business case for reviewing the ‘on or before’ requirements and moving the fi ling deadline to the fi h of each month. The whole payroll community

would benefi t from signifi cantly reduced burdens. Much of the jus fi ca on for the ‘on or before’ requirements would appear to have less relevance following the Department for Work and Pensions’ (DWP) surplus earnings provisions. These ‘smooth out’ fl uctua ons in earnings when determining the universal credit award, making the exact pay date somewhat redundant.

LITRG’s responseLITRG focused on the me-sensi ve nature of RTI. Despite the genuine diffi culty many smaller employers have in achieving real- me repor ng ‘on or before’ paying their staff , employees who

receive universal credit may rely to a great extent on the employer’s meliness and accuracy. Informa on reported a day or two late may

arrive on the DWP’s systems in the assessment period a er actual payment, which could cause the employee or claimant to be paid too much in one period and not enough in another.

The risk in introducing a system that requires electronic repor ng is that signifi cant numbers may be unable to comply because they do not have the requisite digital access, skills or equipment. However, under reg 67D(11) of The PAYE Regula ons (SI 2003/2682), the HMRC commissioners may exempt an employer from electronic repor ng if they are sa sfi ed that it is not reasonably prac cable for them to do so. LITRG suggested that the exemp on from VAT online fi ling provides some useful criteria for determining whether the ‘not reasonably prac cable’ test is fulfi lled: viz for reasons of disability, age, remoteness of loca on or any other reason – the last category indica ng that there could be other grounds on which a person’s human rights could be breached by being required to fi le electronically.

Since April 2014, HMRC has been using RTI to fi nalise some tax credit claims. Early experience has shown that it is important not to place too much reliance on RTI fi gures when checking income for tax credits purposes. RTI fi gures show the P60 data used for income tax purposes, but not all of those fi gures are correct for tax credits. It is not unknown for the claimant to report the (correct) income fi gure but for HMRC’s systems to override that in favour of the RTI data, which may be incorrect for tax credits. Similarly, an indica on in RTI data that a person has been paid a higher amount in one pay period should not necessarily be extrapolated to give an indica on that their annual household income will be increased overall.

Read ATT’s full response here www. nyurl.com/hpm6vvp.Read LITRG’s full response here www. nyurl.com/gptazwr.

Alison Ward Robin Williamsonaward@a .org.uk [email protected]

CBCR: CIOT comments on EU Commission’s proposals for public reportingINTERNATIONAL TAX

Although the CIOT supports greater transparency by MNCs, it is not clear to us that the EU Commission’s proposals for public repor ng will be helpful. There needs to be clearer ar cula on of the principles governing interna onal corporate taxa on to restore public trust.

The CIOT wrote to the Treasury before an EU working group mee ng in April on the Commission’s proposals for public country-by-country repor ng (CBCR) to relay the CIOT’s views.

We said the CIOT supported greater transparency by mul na onal companies on their tax aff airs as a means to restore

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public trust in the interna onal tax system. However, we said we also held the view that restoring such trust required a clearer ar cula on by governments and ins tu ons, such as the EU, of the principles governing the interna onal corporate tax system, including: the arm’s-length principle; the concept of taxing profi ts not revenue; and the concept of taxing profi t where value is created not where

it is consumed.

We noted that all of these principles were re-affi rmed by the OECD in the BEPS process. This, together with more explana on of modern supply chains by mul na onal enterprises, would allow the public to place informa on such as CBCR in the proper context.

We told the Treasury that we consider there to be limits to the value of the Commission’s proposals on transparency, no ng that sec ons of civil society have already queried their value given that CBCR will be limited to EU states and par cular ‘havens’ and that aggregated data would be provided for the rest of the world. We also noted that, given how much data would be available, it was inevitable that data could be cherry-picked to suggest some companies, or indeed countries, con nue to operate aggressive tax structures or indulge in aggressive tax compe on.

For these reasons we believe it is even more important that governments and ins tu ons such as the EU, as well as companies, ar culate clearly the key principles governing the interna onal tax system so that the public can dis nguish between ‘aggressive structures’ and straigh orward commercial ac vity.

In addi on, we suggested that: The UK should not introduce any compulsory public repor ng

before other countries. The EU should allow two years’ repor ng to tax authori es

before public repor ng is introduced. The EU should not introduce public CBCR un l the BEPS ac ons

are embedded in na onal law. Given the earliest possible date for treaty change is 1 January 2018, it would be best to start on or a er 1 January 2019. The metable built into the dra direc ve assumes fi nancial years star ng a er – at the earliest – autumn 2018.

The le er is available on our website at www. nyurl.com/jb5kkrn.

Sacha [email protected]

Scotland update: meeting with the chief executive of Revenue ScotlandGENERAL FEATURE

In April, representa ves of the CIOT and LITRG had an introductory mee ng with the new chief execu ve of Revenue Scotland, Elaine Lorimer.

Representa ves of the CIOT’s Sco sh technical sub-commi ee, the Scotland Hub and the Low Incomes Tax Reform Group (LITRG) met the new chief execu ve of Revenue Scotland, Elaine Lorimer, in April. Elaine had been in post about four weeks and succeeds Eleanor Emberson, who was the Sco sh tax authority’s fi rst chief execu ve. We had built a good rela onship with Eleanor, and this was an introductory mee ng to start developing a rela onship with the new incumbent.

Because it was an introductory mee ng, the focus was on explaining the role and purposes of CIOT, its sub-commi ees and branches, and LITRG, including how we can help Revenue Scotland, as well as no ng a few of the areas we had already been involved in.

When se ng out what the CIOT is and does, emphasis was placed on the fact that it is a tax-only professional body and an educa onal charity, with a key aim of achieving a be er tax system for all – not only taxpayers and tax prac oners, but for the tax authority too. The role of LITRG was set out, no ng that it was part of CIOT, with a par cular concern for those on low incomes and unrepresented people. The new chief execu ve’s interest in CIOT and LITRG was clear.

Time was also taken to explain the organisa on of the sub-commi ees and the branches and the diff erent roles they play, men oning consulta on responses, branch CPD events and member educa on, including the Scotland branch conference in November.

Other topics of discussion included issues such as digital exclusion, communica ons and the importance of using various diff erent channels, consulta on and the need to ask the right ques ons and consult the right stakeholders, and the importance of a holis c approach.

The mee ng ended with a tour of Revenue Scotland’s offi ce and the chance to meet some of the 50 or so staff .

Joanne [email protected]

Apprenticeship levyEMPLOYMENT TAXES

Appren ceship levy of 0.5% to be introduced from April 2017 on pay bills over £3m to be amended to permit connected companies to split the £15,000 allowance between them.

Connected companies could have found themselves liable to the appren ceship levy even if their combined pay bill did not exceed £3m. The government’s amendment will remove that charge by allowing the allowance to be split between the companies.

Further to our ar cle in April’s Tax Adviser, the government has responded to concerns raised by the CIOT, ATT and others that the levy would not work fairly for ‘connected companies’ whose combined pay bills do not exceed £3m.

The levy is due to apply from April 2017 and be charged at 0.5% of employers’ pay bills. This is subject to a £15,000 levy allowance. As originally dra ed, the legisla on did not provide for any unused levy allowance to be transferred to another connected group company or charity. However, a er feedback on the legisla on and proposals for the levy, the government is to put down an amendment to the Finance Bill to allow a group of connected employers to decide what propor on of the allowance each employer in the group will be en tled to. This decision must be taken at the beginning of the tax year and will be fi xed for that year.

To benefi t from this fl exibility, each connected company must be an employer of staff in its own right, for example a family that owns a number of small businesses each employing their own staff , or a farmer who has diversifi ed and runs diff erent parts of the farming business through separate companies.

Allowing connected companies to share the £15,000 levy allowance will allow them use the allowance in full so that, as long as their combined pay bill does not exceed £3m, they will not have to pay any levy. The government is to also think again about whether to allow an employer (whether connected or not) to split the allowance across their PAYE schemes.

54 June 2016 | www.taxadvisermagazine.com

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TECHNICAL

More informa on on the appren ceship levy can be found at www. nyurl.com/jglfzyj.

Ma hew Brownma [email protected]

A LITRG guide for the armed forcesGENERAL FEATURE, PERSONAL TAX

LITRG has published a guide to help armed forces personnel deal with their tax aff airs, supplemen ng the range of guides already available on its website.

Armed forces personnel can fi nd their tax posi on diffi cult to navigate due to several reasons: the complex system of allowances paid to them; how tax is paid on those allowances, if they are taxable; how they can claim addi onal tax relief on par cular travel payments; their tax posi on when they are posted overseas; the state benefi ts they may be able to claim while serving in or a er leaving the armed forces; and the taxa on of any payments received when they leave the armed forces through re rement, redundancy, ill-health or their contract ending.

As part of an HMRC-funded project, LITRG has produced a guide for the armed forces, covering all of the above points and providing informa on that will be useful for family members and advisers who have clients who are or were in the armed forces. There is also a whole new sec on on the LITRG website devoted to the armed forces and their families. This provides more detailed informa on on these areas as well as capital gains tax and inheritance tax.

The guide may be accessed at www. nyurl.com/zmsmw and the website pages are at www. nyurl.com/go9bwv2.

Gillian [email protected]

Tax engagement letter: joint bodies’ guidance updatedGENERAL FEATURE

The revised guidance on le ers of engagement for tax prac oners was published on 11 April 2016.

What has changed?The three-stage approach remains: a covering le er, schedules of services, and standard terms and condi ons of business. However, amendments have been made so that we now cover: Auto-enrolment

Universal credit Automa c exchange of informa on (AEOI), including FATCA (Foreign

Account Tax Compliance Act) MOSS (mini one stop shop) Consumer clients and cancella on rights

The specimen schedules for prac oners to adapt for the diff erent services they provide are now: Personal tax – individuals, sole traders and couples Trusts and estates Partnerships Limited liability partnerships Companies and associa ons liable to corpora on tax –

pre-tagged accounts Companies and associa ons liable to corpora on tax – tagging services Payroll services Payroll services – auto-enrolment Benefi ts in kind returns and class 1A NIC VAT returns HMRC tax inves ga ons Tax credit claims Specialist tax advisory services

Why bother with an engagement letter?Although not compulsory, issuing engagement le ers is strongly encouraged. Properly dra ed, it is a helpful risk-management tool because it establishes the framework of your working rela onship with a client and should clearly set out the scope of your (and your client’s) responsibili es and any limita ons on liability. If a claim is made against a tax prac oner, the fi rst ques ons that will be asked are: do you have professional indemnity insurance; and what does your engagement le er say?

The impact on indemnity insurance premiumsIncreasingly, insurance providers look at your arrangements in respect of issuing engagement le ers and take this into account when se ng the level of your indemnity premiums.

AgreementMost engagement le ers say that the client needs to sign the duplicate le er and return it. Remember to follow this up. If a signed copy is not returned, try to get some other confi rma on from your client that they have received it, such as an email acknowledgment. However, the most eff ec ve engagement le er is one signed by the client before you begin the work.

The le ers of engagement in the revised guidance, together with specimen schedules of service, standard terms and condi ons of business and le er of disengagement, are intended to be adapted and amended by tax prac oners to suit their own prac ce. Prac oners are encouraged to review their exis ng engagement le ers and update as appropriate.

The guidance is available at www. nyurl.com/ztdpacz (CIOT) or www. nyurl.com/gloqsa8 (ATT).

Charlo e [email protected]

Recent submissions Further informa on Date sent

CIOTCountry-by-country repor ng www.tax.org.uk/ref132 27 April 2016Double taxa on dispute resolu on mechanisms www.tax.org.uk/ref100 10 May 2016ATTRTI post-implementa on review www.a .org.uk/ref107 15 April 2016LITRGRTI post-implementa on review www.litrg.org.uk/ref191 26 April 2016

www.taxadvisermagazine.com | June 2016 55

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Does your fi rm provide your CPD needs? Have you tried a local Branch event before? Would you like the opportunity to meet with CTAs, ATTs and other professionals in your local network? Why not go along to a local Branch event. Below we have listed all the branch events taking place from 15 June to 14 July 2016. For a full list of branches, visit the CIOT and ATT websites: www.tax.org.uk/branches and www.a .org.uk/branches where you will fi nd informa on about each event and where you will be able to book online

BirminghamTuesday 21 JuneFinance Bill update 2016Mark Morton16.15–19.15

Cumbria & S W ScotlandThursday 16 JuneClose company healthcheck Mark MortonPenrith13.30–17.00

EssexWednesday 22 JuneJoint mee ng with Suff olk branchSuccession planning and the family companyPeter Legg Chelmsford17.30–20.00

Mid-AngliaWednesday 15 JuneProperty taxes masterclassPeter RayneyStevenage09.30–14.00

Branch eventsWhere do you get your CPD?

JUNE-JULY 2016

TAXATIONDISCIPLINARYBOARD

Mr Darren MoyseyAt its hearing on 1 April 2016, the Disciplinary Tribunal of the Taxation Disciplinary Board determined that Mr Darren Moysey of Paignton, Devon, a member of the Association of Taxation Technicians, was in breach of a provision of the Professional Rules and Practice Guidelines (PRPG) in that he was engaged in and/or was party to illegal activity, having been convicted on 13 March 2015 on indictment of fraud by abuse of position. Mr Moysey received a

Disciplinary reportsFindings and orders of the Disciplinary Tribunal

sentence of imprisonment for 8 months, suspended for 18 months.

Mr Moysey was also found to be in breach of the PRPG in that he failed to inform the ATT promptly of his convic on.

The Tribunal ordered that Mr Moysey be expelled from membership of the ATT and pay costs in the sum of £2,862.83.

Mr Alan LongAt its hearing on 1 April 2016, the Disciplinary Tribunal of the Taxa on Disciplinary Board determined that Mr

Alan Long of Kirkwall, Shetland, a member of the Chartered Ins tute of Taxa on, was in breach of a provision of the Professional Rules and Prac ce Guidelines (PRPG) in that he agreed to the withdrawal of clients’ monies without wri en authority to do so.

Mr Long was also found to be in breach of the PRPG in that he failed to ensure that clients’ monies were properly accounted for.

The Tribunal ordered that Mr Long be censured and pay costs in the sum of £3,685.10.

56 June 2016 | www.taxadvisermagazine.com

South London & SurreyWednesday 15 JuneHMRCCroydon18.30–20.00

Monday 4 JulyCapital allowancesJohn LovellGuildford18.30–20.00

Wednesday 6 JulyTax and devolu onBill DodwellCroydon18.30–20.00

South West EnglandWednesday 15 JuneCIS and IR35Tim PalmerExeter15.45–19.00

SuffolkWednesday 22 JuneJoint mee ng with Essex branchSuccession planning and the family companyPeter LeggChelmsford17.30–20.00

Page 61: Download June 2016 pdf

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CORPORATE TAX SENIOR MANAGER SOUTH MANCHESTER To £55,000 plus car Dynamic, go-ahead practice seeks to recruit an experienced Tax Manager or Senior Manager. You will manage the corporate tax team and work on a portfolio of OMB clients providing both compliance and advisory services. REF: A2448

PRIVATE CLIENT MANAGER HUDDERSFIELD £ Dependent on experience Highly regarded local practice with an impressive client base is looking for a high calibre experienced private client manager to oversee the department and get involved in interesting advisory work. REF: A2500

IN-HOUSE EXPATRIATE TAXES CHESHIRE Circa £35,000 + benefits A new and rare opportunity for an Expat specialist to make the move to a large in-house tax team. Duties include annual compliance, home and host tax return compliance, managing all global mobility processes. REF: R2501

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PRIVATE CLIENT TAX MANAGER MANCHESTER / NEWCASTLE To £45,000 plus bens This international accountancy firm is looking to further strengthen its private client advisory team with the addition of a high calibre, ambitious manager. The role with have a strong advisory focus with good progression opportunities. REF: A2027

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Step up to PartnerLondon£Six FiguresAn opportunity for a talented personal tax Director to step up to Partnership in a highly respected mid-sized London accountancy firm. Our client is undertaking a succession-planning exercise and offers a clear entry to Partnership with an existing HNW portfolio. No client following is required. Strong Senior Managers seeking Partnership in 12–24 months will also be considered. Ref 4473

Private Client Tax ManagerCityTo £60,000 + BensOur client’s Personal Tax team has significant expertise in advising HNW directors, entrepreneurs (including non doms) and their families. They are now keen to recruit a Personal Tax Manager to oversee an impressive portfolio of HNWIs. Reporting directly to the head of Private Client, they will supervise junior staff, oversee compliance and advise on ad hoc planning. Ref 4466

Tax Investigations SeniorLondonc.£40,000 – £42,000 + BensAn opportunity for a personal tax-focused CTA to join the Private Client Tax Dispute Resolution team of a high profile accountancy firm. Develop your career in the dynamic field of Tax investigations, offering fast-track career opportunities. Previous experience of advising HNWIs on UK personal tax is essential. Some previous experience of assisting with investigations would be helpful. Ref 4474

Senior Tax Manager, Private ClientsWest End£80,000 – £90,000Do you enjoy advising entrepreneurial HNWIs? Fancy working for a smaller, friendly firm offering autonomy, quality work and genuine work/life balance? This independent West End accountancy firm is looking for a Private Client Tax Senior Manager, with UK res non dom expertise. Genuine prospects exist for a talented adviser wishing to progress their career. Ref 4471

Personal Tax ManagerBirmingham£50,000 – £60,000Join one of the Midlands’ strongest Private Client teams at an exciting time in their growth. Advising entrepreneurial UK and international HNWIs, you will gain exposure to a broad range of income and capital taxes work in a thriving and forward-thinking environment. Scope for progression to Senior Manager (and beyond) is excellent, in what is a genuine meritocracy. Ref 4456

Personal Tax SeniorReadingc.£38,000 – £40,000The Thames Valley office of this well-known accountancy firm is looking to bolster its Private Client offering with the addition of a CTA Personal Tax Senior. Oversee a portfolio of HNWIs and new-money business owners, as their first point of contact. Advise on their annual compliance requirements and identify ad hoc planning opportunities. Genuine scope for progression. Ref 4469

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We are a top 20 firm of chartered accountants and registered fiduciaries, whose concept of service is to solve problems, take advantage of opportunities and turn advice into action. For over 160 years, we have provided advice to our clients and, thanks to our distinctive partnership culture, we work together to deliver the very best for them.

We are currently looking for a range of tax professionals across a range of offices including:

Mixed Tax ManagerInverness, Scotland

A new role has arisen in our Inverness Office. From Inverness, we provide advice to a wide range of commercial and private clients, including owner managed businesses, property clients, partnerships, wealthy individuals, families and trusts, charities, other not-for profit organisations and landed estates. Our clients are involved in many areas of the Highland economy, and in many instances we provide a tailor-made service for all aspects of their connected affairs – whether personal, family or business. Our tax team provide a mixed tax service which includes compliance and advisory work. With an interesting and varied client base, we find no two days’ work is the same. We seek a qualified individual (ICAS, ACA or CTA) with experience of managing staff, to review personal, partnership, LLP, trust and corporate tax returns – someone who can recognise and advise on planning points for clients, that might arise from return reviews. You will need to be able to review simple ad hoc advisory work, and will assist partners with requests for information on planning opportunities. You will need to be able to prepare a detailed and technical tax advisory report, and will enjoy dealing with a dynamic and technically challenging work load.

Corporate Tax ManagerHarrogate, West Yorkshire

Harrogate was voted as the ‘Happiest Place to Live’ in the UK 3 years running in 2015, and our growing Harrogate office requires a new Corporate Tax Manager. You will manage the delivery of corporation tax services to a growing portfolio of clients. The ideal candidate must be proactive and driven, with strong client handling, managerial and project management skills. Key responsibilities will include the successful delivery of tax compliance and advisory projects, and working with the

accounts team to provide the necessary corporate and deferred tax disclosure for inclusion in statutory accounts. Tax planning work will include areas such as group tax planning, property planning, capital allowances, R&D tax credits, s455 tax planning and transfer pricing – so there is plenty of variety and interest in your portfolio. Part time or flexible working considered.

Corporate Tax Senior or Assistant ManagerManchester

A qualified CTA (or ICAS or ACA) is sought to join our Manchester tax team. Although the focus of the work will be corporate, given the nature of our client base with a strong focus on owner-managed businesses, a broad interest in and experience of working across the range of taxes will be an advantage. Duties will include: dealing with the compliance aspects of the tax work, including preparation or review of corporation tax returns; computations, running a portfolio of clients; tax advice to clients; and involvement with tax planning and projects. The role provides a variety of work, as the corporate client portfolio is varied and includes OMBs, SMEs and groups (including international groups). This is an opportunity to work direct to partners and to gain considerable client contact.

In return for your experience, we offer a competitive salary and benefits package and a personal and progressive work environment. We provide training and development opportunities for all our staff, as our achievement of the Investors in People accreditation has demonstrated. The firm has also received an award, for the eleventh year running, for being one of Britain’s Top Employers.

For further information, please contact Georgiana Head at Georgiana Head Recruitment on 0113 280 6766 or at [email protected].

All third party CVs will be forwarded to Georgiana.

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Established in 1902, A C Mole & Sons is a longstanding and successful accountancy practice with a rich history. In 1997, it became the first firm to file an electronic tax return, and in 2001, it was the first firm to file via the internet. The practice is multi award winning, including the Best Single Office Tax Practice Category in the 2013 Taxation Awards. Tax partner Paul Aplin won the Tax Personality of the Year award in the 2007 Taxation Awards and won the Outstanding Industry Contribution award at the 2013 British Accountancy Awards. A C Mole & Sons is one of the leading firms for tax in the South West, and 4 of the 8 partners are tax qualified. A key differentiating factor for the practice is the high level of partner-client contact and high ratio of partners to staff.

The practice is looking to the next step in its development, and as such requires a tax partner designate or tax partner. This role would suit an individual who is happy to deal with a mixed tax allocation – someone who is both technically adept and also interested in business development. Day to day, the role will involve:

• Assisting with the management of the tax practice.• Dealing with a wide range of clients, from professional

partnerships to HNW individuals and families, company directors and companies.

• Management of the compliance and reporting for clients.• Wide ranging advisory work, assisting clients with both their

business and personal tax issues, including transaction support and advice on share holder planning and capital taxes.

• Assisting with the development of more junior staff.• Working with the partners to bring in new business. • Building rapport with HMRC and dealing with enquiries.• Marketing of the tax practice, including assisting with press

enquiries and writing of appropriate marketing literature.

While the role is tax focused, an understanding of accounts is a prerequisite.

This role would suit an enthusiastic individual who genuinely enjoys tax work, and who is looking for a long term career in a local, successful practice which ‘punches above its weight’. Someone who will continue the tradition of innovation in the tax practice. You will need to have a relevant professional qualification (ACA, CTA, ICAS). You may be a experienced senior manager looking for a chance at partnership, or an existing partner looking for the right role and location. Mixed tax experience is an advantage, but someone who currently specialises in personal or corporate tax who is keen to broaden their experience would also be considered. In return for your experience, A C Mole & Sons offers a friendly and supportive work environment and an excellent remuneration package.

For further information, please contact our retained recruitment consultant Georgiana Head of Georgiana Head Recruitment on 0113 280 6766 or at [email protected]

All third party CVs will be forwarded to Georgiana.

Partner or Partner DesignateTaunton, Somerset£excellent

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Let us be

Morgan McKinley’s Taxation team in London specialise in placing experienced tax professionals into both in-house and practice roles nationwide.

We provide permanent, temporary and interim solutions at all levels of seniority. Our mission is

to be your Career Ally™, helping you realise your ambitions and discover your true potential.

And whether you are actively seeking a new role or simply looking for advice on your career, we are here to help you at every stage of the journey.

morganmckinley.co.uk

If you would like to find out more about our services, please contact:

Archie Forbes Adam (Manager, People Services Tax) [email protected] 092 0142

William Hepworth (Manager, In-house Tax) [email protected] 092 0030

Ian Palmer (Director, Tax) [email protected] 092 0029

Ref: 89607

Senior Manager/Director – Big 4Bristol/Reading | £70,000 - £120,000 dependant on experience

This is a leadership role that offers excellent opportunities for the successful candidate to manage the efficient delivery of expatriate tax services, ensuring technical and practical excellence. Further to this the position will involve managing client relationships, proactively winning new clients and the control of the overall quality of client satisfaction. The ideal candidate will be CTA or ATT qualified, have substantial expatriate tax and leadership experience and be confident enough to aid in developing new business, whilst at the same time developing staff.

For further information: Matthew Hemsley on 0207 092 0277 [email protected]

Senior Manager - Energy and Natural ResourcesLondon | £70,000 - £110 000 dependant on experienceThis firm is looking for an accomplished Transfer Pricing specialist with experience in the energy sector. The role is predominantly focused on advisory and excellent delivery to existing clients. The team has experienced growth in clientele and need help with managing their current portfolio.

The team is well established in the market and this role would offer anybody an opportunity to become a specialist within this sector.

If you have got an experience in this sector and understanding of transfer pricing or tax then this role would be right for you.

For further information: Eva McMahon on 0207 092 0006 [email protected]

Ref: 625681

Manager, Tax Management Consulting - Big 4London | Up to £70,000 per annumThis new role is consulting on some major accounts; implementing new processes and looking at clients holistically. You’ll be working with partners and clients within a forward thinking, innovative culture where colleagues are passionate about what they do - an environment where progression is based on merit and not time served. This is an exciting new opportunity to join a Tax Management Consulting Team, with a leading reputation and demand for its services growing rapidly.

For further information: Visko Matich on 0207 092 0143 [email protected]

Ref: 625107

Group Tax Manager - Banking London | £75,000 + bonus + benefits

An established financial services organisation is recruiting for a Group Tax Manager to join their existing team, reporting into the EMEA Head of Tax. The role will cover a broader range of tax issues including corporate tax, VAT and transfer pricing. You will take responsibility for the review of the group’s tax compliance and reporting as well as getting involved in ad hoc advisory and project work. The role is being recruited with succession planning in mind for the right individual.

For further information: Will Hepworth on 0207 092 0030 | [email protected]

Ref: 609250Transfer Pricing

In-House Tax

Corporate Tax

Expatriate Tax

Personal Tax Manager - Big 4 London | £52,000- £70,000 + bonus + benefits This is an advisory role requiring a manager with significant previous private client experience, Additional experience in M&A work for individuals would be advantageous. Ensuring the delivery of a high quality personal tax service to the firm’s clients, the role holder will be managing a portfolio of complex clientele, including partnerships, providing tax advice on a wide range of assignments including inheritance tax, capital gains tax and income tax. The successful applicant will be CTA qualified possessing a deep technical understanding of the issues facing private clients.

For further information: Maddi Aldir on 0207 092 0213 [email protected]

Ref: 623177Personal Tax