It is my unvarying habit to attend the CIOT's twice-yearly conferences, and to brief our staff on topical matters arising. I attach below my briefing notes on this month's conference.
CHARTERED INSTITUTE OF TAXATION CONFERENCE
QUEENS COLLEGE CAMBRIDGE, 3 TO 5 APRIL 2009
NOTES re: LECTURE MATERIAL
- BUSINESS TAX ISSUES ARISING IN A CHALLENGING ECONOMIC CLIMATE
- Use of losses – individuals
The new development in this respect is the ability to set off trading losses against general income of the 3 years preceding the loss where the accounting period ends between 6 April 2008 and 5 April 2010 inclusive, but restricted to a maximum of £50,000.
- Use of losses – companies
There is a similar relief for companies in respect of trading losses arising in accounting periods ending between 24 November 2008 and 23 November 2010 inclusive.
- New Companies Act capital reduction procedures
It is now possible for private companies to reduce their share capital using a solvency statement procedure. The tax implications of such a reduction are varied, as follows:
a. Shares originally subscribed for: shares paid for at nominal value
The repayment of capital is dealt with under CGT principles, and original subscriber shareholders have no gain and no loss.
b. Shares originally subscribed for: shares not paid for
No gain no loss, and the full base cost of the shares now applies to the remaining shares.
c. Shares arising from a bonus issue
Distribution treatment.
B. NEW HMRC POWERS AND PENALTIES
- Administration
Mandatory electronic filing timetable
PAYE – 50+ employees – in-year forms - April 2009.
PAYE - <50 employees – in-year forms – April 2011.
VAT – turnover > £100k and all new traders – file and pay online from April 2010 (at the earliest).
CT – online filing and payment using XBRL standard mandated form from April 2011.
CT – joint filing facility with Companies House by 2011.
- New penalty regime
Applies to income tax, corporation tax, capital gains tax & VAT.
‘Behaviour-related’ penalty regime.
Applies to documents for return periods beginning on or after 1 April 2008, due to be filed on or after 1 April 2009.
Three requirements for a penalty to arise:
i. A return document is delivered to HMRC.
ii. The document contains an inaccuracy that leads to an understatement of tax, an overstatement of a repayment claim or an inflated loss claim.
iii. The inaccuracy was careless or deliberate.
A careless inaccuracy arises from a taxpayer failing to take reasonable care.
A deliberate but not concealed inaccuracy is deliberate but the taxpayer did not take active steps to conceal it.
A deliberate and concealed inaccuracy is deliberate and the taxpayer made active arrangements to conceal it (for instance by producing false evidence in support of an inaccurate figure).
Different inaccuracies may be classified differently in particular cases.
Failure to notify HMRC of an error that is not careless or deliberate is likely to bring the inaccuracy within the penalty regime.
The regime also applies to failure to notify HMRC of an under-assessment by them within 30 days of the assessment being issued.
Reasonable care
No penalties will be levied if inaccuracies arise despite ‘reasonable’ care being taken. This would include:
Holding a reasonably arguable view of a situation that is not ultimately upheld.
Arithmetical errors that are not obvious in the context of the return figures.
Following inaccurate advice from HMRC.
Acting on inaccurate advice from a competent adviser.
Having robust systems in place where inaccuracies arise due to human error that are not significant in relation to the tax liability for the relevant period.
Careless
This is defined as ‘failure to take reasonable care’, which will be defined by reference to the specific taxpayer’s abilities and circumstances. If he or she were uncertain about how to treat a particular transaction it would be reasonable to seek appropriate advice or to disclose the matter to HMRC when submitting the relevant return.
Carelessness can be seen as tantamount to negligence, and will be judged by reference to what a reasonable person of the abilities and in the circumstances of the taxpayer would have done.
Concealment
In HMRC’s view this requires active steps to be taken to hide the inaccuracy from them, such as production of false documents. Simply hoping that HMRC will not identify an inaccuracy is not concealment.
Starting points for penalties
Reasonable care taken No penalty
Accepting an under assessment 30% penalty
Careless action 30% penalty
Deliberate but not concealed 70% penalty
Deliberate and concealed 100% penalty
There is then provision for penalties to be discounted for ‘disclosure’ of the offence.
The procedure for calculating penalties will be as follows:
- Fix a penalty for the nature of the action
- Base the penalty on the potential lost revenue
- Take into account whether the disclosure was prompted or unprompted
- Consider the quality of the disclosure (see below).
Potential lost revenue from delayed tax (i.e. inaccuracies giving rise to deferrals of tax) will be calculated as 5% per annum of the delayed tax.
Disclosure
Unprompted disclosure is made at a time when the taxpayer has no reason to believe that HMRC has discovered or is about to discover the inaccuracy. Any other disclosure is prompted.
A disclosure involves the taxpayer telling HMRC about the inaccuracy, giving them reasonable help in quantifying it and allowing HMRC access to records to allow the inaccuracy to be fully corrected.
There are irreducible minimum penalty levels for different types of inaccuracy and levels of disclosure, as follows:
Maximum penalty |
Type of disclosure |
Irreducible minimum |
|
|
|
|
|
30% |
Unprompted |
0% |
|
30% |
Prompted |
15% |
|
70% |
Unprompted |
20% |
|
70% |
Prompted |
35% |
|
100% |
Unprompted |
30% |
|
100% |
Prompted |
50% |
The weighting to be given to the three elements of disclosure listed above is as follows:
Element of disclosure |
Percentage |
|
|
|
|
Telling |
30% |
|
Helping |
40% |
|
Giving access |
30% |
|
Total |
100% |
It will be possible for HMRC to suspend penalties for careless inaccuracies for up to 2 years. Provided the taxpayer is compliant during the suspension period the penalties will be waived at its conclusion.
There will be an appeal procedure to the Tribunals in respect of penalties.
There are provisions for penalties to be levied on officers of companies where inaccuracies arose due to their deliberate actions.
C. TERMINATION PACKAGES
HMRC will analyse packages to seek to identify the taxable elements and those eligible for the £30,000 tax exemption.
Included in taxable income from employment are:
Contractual pay
Bonuses
Overtime
Holiday pay
Sick pay
Deferred pay
Actual and implied contractual payments
Garden leave
Payments for restrictive covenants
It is possible that employer contributions to retirement benefit schemes for employees near retirement age could be regarded by HMRC as creating a pension scheme rather than being eligible for the £30,000 exemption.
Other payments may be eligible for the £30,000 exemption. This includes benefits continuing post-termination. Payments that are eligible for the exemption do not suffer national insurance, even if they exceed the £30,000 exempt limit.
Payments on termination due to injury or disability may be totally free of tax and national insurance without limit, provided the injury or disability is the sole motive for making the payment and there is a medical condition that prevents the employee from carrying out the duties of the employment.
Outplacement counselling can be an exempt benefit if the main reason for the provision of counselling is to help the employee to adjust to the termination or find alternative work.
Legal fees in respect of compromise agreements paid on behalf of the employee by the employer are exempt, over and above the £30,000 limit.
Compromise agreements always refer back to the original employment contract, and HMRC will consider the tax status of payments under the agreement in the context of the contract. Associated documents such as staff handbooks can also be relevant in this context. This may require the analysis of a termination payment into different constituent parts, which may or may not be specified in the compromise agreement.
Contractual payments in lieu of notice (PILONs) are taxable. If PILONs are always paid by the employer, HMRC will regard them as contractual. In order to avoid PILONs being treated as contractual, they need to have the characteristics of damages. This means that there must be an identifiable breach of contract (usually failure by the employer to honour the notice period) and the potential for mitigation of the PILON, notably if the employee finds a job within the notice period. Also, the Gourley principle would need to be applied to the PILON; i.e. it would need to be computed net of the tax and NI that would have applied had the salary for the notice period been paid.
Where there is a bonus pending to which the employee has lost his or her rights due to termination, ensure that the agreement makes it clear that the payment does not include any element of that bonus.
Planning
Employer pension contributions paid as part of a termination package can be exempt in excess of the £30,000 limit. It may be possible with great care to structure such contributions on a salary sacrifice basis.
Ensure that payments of damages for breach of contractual notice period have the correct characteristics.
It may be possible to spread payments in respect of termination over two tax years to save tax for employer and employee.
Taxable payments made after the P45 is issued are subject to basic rate tax deduction only.
D. CAPITAL ALLOWANCES – THE SPECIALIST SURVEYOR’S EXPERIENCE
Long funding leases
The legislation allows the lessee to claim capital allowances on plant and machinery in the let property instead of the lessor.
However, there are exclusions for leases of ‘background’ plant and machinery and for leases of plant and machinery with a low percentage value leased with land.
‘Background plant and machinery includes the following:
Heating and air-conditioning
Plenum ceilings
Hot water installations
Electrical installations providing power
Automatic controls for doors, windows and vents
Escalators and passenger lifts
Window cleaning installations
Cupboards, blinds, curtains etc.
Demountable partitions
Protective installations
Building management systems
Lighting installations
Telephone, audio visual and data systems incidental to building occupation
Computer networks incidental to building occupation
Sanitary appliances, counters, partitions, showers and lockers
Kitchen and catering facilities
Fixed seating
Signs
Public address systems
Intruder alarms and surveillance equipment
Industrial Buildings Allowances
Are in the process of being phased out. Balancing allowances have already gone; the purchaser stepping into the vendor’s shoes for IBA purposes. Also applies to Hotel Buildings and Enterprise Zone allowances.
Capital allowances changes
April 2008 – main pool WDA reduced to 20% from 25%. NB new 40% FYA for 2009-10.
Long life assets WDA increased from 6% to 10%.
100% Annual Investment Allowance on first £50,000 of plant and machinery expenditure.
100% FYA for items qualifying under the new Enhanced Capital Allowances regime
Integral features
These go into the 10% capital allowances pool, and include:
Electrical systems, including lighting systems, unless specific to the requirements of the particular trade.
Cold water systems
Space or water heating systems
Powered ventilation, air cooling or air purification systems, together with floors or ceilings comprised in such systems
Lifts, escalators and moving walkways
External solar shading
Particular care needs to be taken with integral features on purchase and sale of buildings.
Where expenditure on ‘repair’ of an integral feature within a 12 month period exceeds 50% of the cost of replacing it, the cost must be capitalised rather than expensed.
Business Premises Renovation Allowances
Effectively this is a mirror of the flat conversion allowances regime for commercial premises, and offers a 100% initial allowance for the costs of renovating vacant commercial premises in disadvantaged areas (as defined).
Enhanced Capital Allowances
The scope of these 100% allowances has been extended by the addition of:
Waste water recovery and reuse systems
Compressed air master and flow controllers
Heat pump dehumidifiers
White LED lighting
Uninterruptible power supplies
Air to water heat pumps
Close control air conditioning systems.
It is now possible to surrender the right to allowances for a 19% tax credit where the company concerned is loss making.
- TOPICAL TAX ISSUES
Many items covered in this session have been updated by the 2009 Budget and are thus covered in my detailed notes on that subject.
It is now a tax-free benefit for an employer to provide medical check ups to employees.
Dividend waivers can constitute a settlement under the relevant legislation, particularly where the dividend waived could not have been paid out of available reserves.
In order to obtain entrepreneurs’ relief on a sale of business assets, it is necessary for a taxpayer to make a ‘material disposal of business assets’, which involves a disposal of all or part of his partnership interest or shares in a company), and the disposal of the asset must be made as part of a withdrawal by him from participation in the business carried on by the partnership or company.
The reference to a withdrawal from participation is confirmed by HMRC to relate to a reduction in equity interest, not time spent in the business. A 1% reduction is sufficient in this respect according to HMRC, although it may be advisable to look to a minimum 10% reduction where there is a tax planning motive to the transaction.
Inheritance tax business property relief on furnished holiday lettings may not in fact be available except in cases where the owner directly or indirectly provides a significant level of services to the tenants. The importance of this may be somewhat reduced by the disclosure in the Budget that from 6 April 2010 the quasi-trade tax treatment given to furnished holiday lettings is to be withdrawn.
F. TAX PLANNING FOR WEALTHY INDIVIDUALS
This session covered a variety of issues, including:
1. The new non-domicile tax charge and remittance basis
It is possible for significant capital gains to arise on assets denominated in a currency other than sterling simply because of the recent movement in exchange rates, particularly in respect of the Euro.
Segregation of non-UK funds between capital and income must be undertaken rigorously in order to avoid remittance issues.
Nominated income must never be remitted to the UK – this is the element of non-UK income or gains nominated in respect of the £30,000 remittance basis charge, which can provide double tax relief opportunities elsewhere in the world for the charge.
It is still possible to alienate non-UK income for remittance basis purposes by gifting it to adult children or parents.
2. UK residence status and how to determine it
There is currently a distinct lack of clarity as regards the rules on UK residence, following a number of recent cases in which HMRC has ignored its own advice (per IR20) in arguing before the courts.
To summarise the law as it currently appears to be:
- ‘Reside’ means to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place”.
- Physical presence in a particular place does not necessarily amount to residence in that place, where for example a person’s physical presence there is no more than a stop-gap measure.
- In considering whether a person’s presence in a particular place amounts to residence there, one must consider the amount of time that he spends in that place, the nature of his presence there and his connection with that place.
- Residence in a place connotes some degree of permanence, some degree of continuity or some expectation of continuity.
- However, short but regular periods of physical presence may amount to residence, especially if they stem from performance of a continuous obligation (such as a business obligations) and the sequence of visits excludes the elements of chance and of occasion.
- Although a person can have only one domicile at a time, he may simultaneously reside in more than one place or in more than one country.
- Ordinary residence refers to a person’s abode in a particular place or country which he has adopted voluntarily and for a settled purpose as part of the regular order of his life whether of long or short duration.
- Just as a person may be resident in two countries at the same time he may be ordinarily resident in two countries at the same time.
- It is wrong to conduct a search for the place where a person has his permanent base or centre adopted for general purposes; or in other words to look for his real home.
- There are only two respects in which a person’s state of mind is relevant in determining ordinary residence. First the residence must be voluntarily adopted, and second there must be a degree of settled purpose.
- Although residence must be voluntarily adopted, a residence dictated by the exigencies of business will count as a voluntary residence.
- The purpose while settled may be for a limited period; and the relevant purpose may include education, business or profession as well as a love of a place.
- Where a person has had his sole residence in the UK he is unlikely to be held to have ceased to reside in the UK (or to have left the UK) unless there has been a definite break in his pattern of life.
- A taxpayer can become non-resident even if his intention was to mitigate tax.
- There is a difference between the case where a British subject has established a residence in the UK and then has absences from it and the case where a person has never had a residence in the UK at all.
- The availability of living accommodation in the UK is a factor to be borne in mind in deciding if a person is resident here.
- No duration is prescribed by statute and it is necessary to take into account all the facts of the case; the duration of an individual’s presence in the UK and the regularity and frequency of visits are facts to be taken into account; also birth, family and business ties, the nature of visits and the connections with this country may all be relevant.
The concept of a ‘definite break’ is confused. There appears to be no statutory support for the concept, but HMRC appear to be attached to it, and it is thus likely to feature in the anticipated revised IR20 guidance.
The statutory provisions are also confused, and the confusion has been made worse by recent cases. HMRC would presumably argue that someone who had taken up ‘occasional residence abroad’ remained subject to UK tax, but they have to have left the UK for that concept to apply, and HMRC would also argue that without a ‘definite break’ in the pattern of life the taxpayer had not left the UK at all! This appears to be HMRC wanting it both ways, and indeed getting it both ways in at least one recent case.
We also have legislation in respect of temporary visits, among other purposes for work, but recent case law tells us that visits for work cannot be temporary The relevance of available accommodation to residence status is also unclear; it is only irrelevant for deciding whether someone is in the UK for a temporary purpose.
We also have the night count for temporary visits and the 183 day test, but HMRC also use it for the 91 day average test.
Current practice is even more confused. IR20 is being revised, there are extra-statutory concessions and other HMRC publications, none of which it appears can be relied upon at present. HMRC has effectively abrogated IR20 in the form in which it stood for many years, and we await its replacement.
Leaving the UK is also confused, and HMRC will no longer give rulings in response to submission of Form P85. It is for the taxpayer to self-assess as he believes to be right.
HMRC will advance the following arguments against taxpayers claiming to have left the UK:
You have been here for more than 90 days on average
We can count hours and minutes, not nights
Even if your visits are less than 90 days they were not temporary
You have not made a distinct break
Even if you are out of the UK for a whole year, you were not abroad for the purpose of continuous and settled residence elsewhere (and even if you were, you still had a settled presence here) so you remain resident.
Even if you satisfy all this, we are not prepared to accept your version of the facts so the matter will need to be decided by the Special Comissioners.
Thus becoming non-UK resident is now much more difficult than it once appeared to be, and taxpayers need to have regard to all of the above factors in considering the matter.
The use of offshore structures in tax planning
Still relevant for non-domiciled residents looking to shelter capital gains.
Inheritance tax: business property relief and excluded property
Provided a company is mainly a trading company, it can also carry on property and investment business and still be fully eligible for 100% business property relief.
Business property relief can be available on lifetime gifts of assets used in a business, contrary to previous understanding of the position. Provided the value transferred (being the diminution in value of the transferor’s estate) is attributable to the value of assets used in the business, then business property relief is due.
Foreign domiciles holding non-UK property are able to exclude its value from their estate for IHT purposes. Although they will become deemed-domiciled after 17 years’ UK residence, provided they settle the non-UK property in an offshore trust before they become deemed domiciled, the property will remain excluded for IHT purposes.
UK domiciled but non-ordinarily resident individuals can invest in UK gilts, which are excluded property in their hands for IHT purposes.
Use of family partnerships in tax planning instead of trusts
Creating trusts can now be a problem for UK domiciled individuals, with chargeable lifetime transfer status and 10-year charges, not to mention ever-rising income tax rates. Use of a family partnership (not to include minors) can avoid these problems, and use of an LLP can be particularly attractive in such cases.
It is necessary either for all members to participate in management or for management to be delegated offshore, otherwise the management will need FSA authorisation.
Qualifying recognised overseas pension schemes
There are considerable risks here regarding the satisfaction of the various conditions for QROPS status; failure to satisfy these will result in a 55% tax charge on assets transferred to the QROPS. HMRC are keen on denying recognition to QROPS on a variety of grounds, and great care thus needs to be taken.
G. VAT AND PARTIAL EXEMPTION
The main point that came out of this session was the need to look at special methods of partial exemption where appropriate to the business, and to think carefully about the attribution of input VAT to the taxable, exempt and pool categories. Examples of potentially acceptable bases for special methods are floor area, inputs, staff numbers and transaction numbers, but there is no alternative to a case-by-case approach.
Other key points made were that partial exemption becomes relevant to housebuilders who temporarily let unsold stock, and that flat rate scheme percentages apply to exempt supplies as well as taxable supplies.
H. THE NEW OFFSHORE TRUST LANDSCAPE
This was a particularly ‘heavy’ technical session dealing with material that we will rarely meet in practice, so I have spared you the details!
Mark Simpson
23 April 2009
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