1. General news
1.1 Revenue Scotland and LBTT
Revenue Scotland has created an area of its website covering updates to the land and buildings transaction tax (LBTT). The most recent postings cover further worked examples on leases (12 January 2016) and the relief for OEICs and alternative investment finance (8 November 2015).
www.revenue.scot/land-buildings-transaction-tax/lbtt-updates
1.2 Social investment tax relief: accreditation for SIB contractors
Government guidance and the application form for the accreditation scheme for Social Impact Bond(SIB) contractors eligible for Social Investment Tax Relief were updated in January 2016.
Changes to the Social Investment Tax Relief (Accreditation of Social Impact Contractors) Regulations 2014 simplify the accreditation process for social impact contractors with multiple contracts by eliminating the need for separate accreditation for each contract.
SI 2015/2051 amends the 2014 Regulations (SI 2014/3066) to allow contractors to enter into more than one social impact contract under the same accreditation where the contractor's investors wish to claim tax relief under the social investment tax relief scheme (ITA 2007 Part 5B).
www.gov.uk/government/publications/social-investment-tax-relief-accreditation-for-sib-contractors
http://www.legislation.gov.uk/uksi/2015/2051/pdfs/uksi_20152051_en.pdf
1.3 Information and inspection powers
FA 2008 Sch36 requires HMRC to give the third party from whom the documents are requested the opportunity to make representations to HMRC about the notice, and to inform the taxpayer concerned about the summary reasons for the issue of the notice, unless the Tribunal disapplies this requirement.
The provisions do not give the third parties the opportunity to appear at the First-tier Tribunal (FTT) from which HMRC requests approval of the notices, nor do they require HMRC to give the opportunity to the 'taxpayers' concerned to make representations to either HMRC or the FTT.
The information notices in this case arose out of a request from the Australian Tax Office (ATO) concerning entities connected with individuals and UK corporate entities connected with them, whom the ATO considered had undeclared Australian tax liabilities. This was either through the entities being tax resident in Australia through central management and control, or by the fact that interest deductions claimed by Australian resident individuals were not properly deductible, or those individuals should have declared taxable income that had been routed through offshore companies.
The court noted that judicial review is always open to a 'taxpayer' to contest the application of these provisions, though in this case the taxpayer's judicial review case failed. It was held that the notice did not breach the human rights of those affected.
The provisions in FA 2008 Sch36 give wide powers to HMRC to request and obtain information and, for third party notices, offer little opportunity for the taxpayer to object to the requests. This is clearly intended by Parliament.
www.bailii.org/ew/cases/EWCA/Civ/2016/15.html
1.4 Update to the UK Germany double tax convention
The UK Germany double tax convention has been updated with effect from 1 or 6 April 2016 in the UK and for periods beginning on or after 1 January 2016 for Germany.
- Article 7 (business profits) is amended to bring it in line with the OECD model tax treaty. Current paragraphs 1-6 are replaced with revised paragraphs, which clarify that in identifying the profits of an enterprise to be taken into account, consideration will need to be given to the functions performed, assets used and risks assumed by permanent establishment. The new text also specifically refers to the fact that where the countries disagree on the allocation of profits they will endeavour to eliminate any double taxation arising by mutual agreement.
- Articles 18 (Government services) and 30 (members of diplomatic missions and consular posts) are amended to harmonise the taxation rights under the government service and diplomatic missions articles with Article 14 of the Consular Convention of 30 July 1956 between Germany and the UK.
www.gov.uk/government/publications/germany-tax-treaties-in-force
2.Private client
2.1 Whether buying and selling shares was trading
The First-tier Tribunal (FTT) has held that losses sustained in four consecutive years from buyingand selling shares were trading losses that could be set off against general income of the individualconcerned, Mr Ali.
Mr Ali ran a pharmacy business and had done so for 30 years, with annual profits being between around £200,000 and £280,000 in the years 2009/10 to 2012/13. He began buying and selling shares in 1995 alongside his pharmacy activities, buying listed shares, holding them for a few months and selling them with a view to making a profit. His activity and confidence grew and he increased his activities and started trading in options. He considered that between 2000 and 2005 his activities moved from investing to trading.
In 2005 he became a day trader, having live online access to share prices. He undertook these activities in the same building from which he ran the pharmacy business. For the tax years 2006/07 to 2011/12 he undertook around 1,000 transactions per year. Although there was no formal written business plan for the share trading activities, Mr Ali maintained he did have one.
He made losses in the share dealing activities in the years 2009/10 to 2012/13 of £61k, £273k, £69k and £243k, which he claimed to offset against the profits of his pharmacy business, on the basis they were trade losses.
The FTT considered on the facts that Mr Ali's share trading activities did represent the carrying on of a trade. They also found it was carried on commercially and with a view to profit (even though there were sustained losses). As a result the FTT held he had met the requirements of ITA 2007 s.64 and s.66 and that the share trading losses could be offset against Mr Ali's general income.
www.bailii.org/uk/cases/UKFTT/TC/2016/TC04816.html
2.2 Disclosure and discovery assessment: Court of Appeal reviews level of disclosure
The Court of Appeal dismisses an appeal from a taxpayer over inadequate self-assessmentdisclosure where the taxpayer argued HMRC knowledge could be inferred.
In 1997, the taxpayer entered into a tax scheme that used matched derivatives to create a capital gains tax loss. The scheme did not work. The scheme was investigated by HMRC's Special Compliance Office who obtained a list of the scheme users, including Mr Sanderson. His file was forwarded to one of the officers of the SCO team (Mr Thackeray).
Mr Sanderson filed his relevant return in 2003. No enquiry was raised before April 2004 by Mr Thackeray so HMRC's only hope of assessing was through discovery assessment.
The issues narrowed to whether or not the taxpayer's disclosure of the scheme was adequate. If it was inadequate HMRC could raise a discovery assessment.
The taxpayer's argument was that his participation in the scheme was well known to HMRC long even before he submitted his return and that by the time he did submit it, HMRC was already of the view that the scheme was ineffective.
In addition to the knowledge a hypothetical HMRC officer would derive from the actual disclosure there is also the question of what knowledge is imputed to him. Patten LJ endorsed the previous Upper Tribunal (UT) decision of inCharlton(Charlton v HMRC[2013] STC 866) but with a different outcome. InCharltonthe existence of a DOTAS number on the face of the return was adequate disclosure for the taxpayer. This case pre-dated the DOTAS regime.
The correct test is that the hypothetical officer should be able to infer the information, but that inference needs to be reasonably drawn and must be related to the insufficiency of tax and it can only be drawn from the return. Here, it was entirely speculative, rather than a matter of inference from the return, for the notional officer to have concluded that another branch of HMRC might have relevant information on the effectiveness of the scheme. There was no basis on which the existence of such information could reasonably be expected to be inferred from the limited actual disclosure in the return.
The upshot, therefore, of this case is that, even where the actual officer involved in the case has the knowledge he requires to raise an enquiry, it is not his knowledge that is relevant but that of a hypothetical officer.
Mr Sanderson may not be seen as a meritorious appellant, since it was acknowledged that the scheme failed. Although the decision appears correct, however, many will find it counterintuitive that there is no defence for the taxpayer where the actual relevant HMRC officer had the knowledge he needed to raise the enquiry into the return.
Sanderson v HMRC[2016] EWCA Civ 19
www.bailii.org/ew/cases/EWCA/Civ/2016/19.html
3.Business tax
3.1 IAS12 amended for the accounting for deferred tax on unrealised losses
The International Accounting Standards Board (IAS) has issued amendments to IAS 12 (Income Taxes)to clarify how to account for deferred tax assets related to unrealised losses on debt instrumentsmeasured at fair value. Entities affected are required to apply the amendments for annual periodsbeginning on or after 1 January 2017. Earlier application is permitted.
The amendments relate to differences in practice where a debt instrument was fair valued below cost and where its tax base remained at the higher original cost, but the entity intended to continue to hold the instrument to maturity and in fact thought that the original cost of the principal would be recovered at maturity. The IAS felt that even if this was the case, the assessment of economic benefits should be at the balance sheet date (represented by the fair value amount) and not at the date of maturity, hence the difference between fair value and tax base did give rise to potentially tax deductible temporary differences. As a result, further text and examples clarifying these views have been added to the standard.
www.ifrs.org/Alerts/PressRelease/Pages/IASB-issues-narrow-scope-amendments-to-IAS-12.aspx
3.2 Bank charges for dealing with direct recovery of debts
SI 2016/44 specifies a maximum charge of £55 that a deposit taker can levy from an account holder for administrative costs it is obliged to incur to comply with its obligations arising from HMRC's actions under the direct recovery of debt (DRD) provisions (F(No.2)A 2015 Sch8). It can only be levied once the final payment specified in the deduction notice has been made.
The regulation comes into effect on 10 February 2016 and applies to England, Wales & Northern Ireland only as the new DRD provisions do not apply in Scotland (see Sch 8 para 24). This is because HMRC already has power in Scotland to recover debts in a similar way to DRD. Under FA2008 s.128 HMRC has had recourse to the summary warrant procedure in Scotland. This allows HMRC to apply for a warrant to enforce the debt, with the enforcement carried out by Sherriff Officers, and can include arrestments on bank accounts.
www.legislation.gov.uk/uksi/2016/44/pdfs/uksi_20160044_en.pdf
4. VAT
4.1 VAT exemption for the provision of education services
The Court of Appeal has rejected Finance and Business Training Limited's (FBT) appeal that itseducation services provided to students should be treated for VAT purposes similarly to thoseprovided by universities. FBT was concerned with education services it was providing in connectionwith obtaining a degree from the University of Wales.
The question considered was whether FBT was entitled to the education exemption as an 'eligible body' for courses it provided that led to the grant by the University of Wales of degrees. The contention was that the latest CJEU case law (Case C-319/12Minister Finansow v MDDP sp z oo Akademia Biznesu, spkomandytowa), a Polish case, appeared to permit a wider application of the exemption than is permitted in the UK.
The Court of Appeal considered, however, that the UK had implemented the education VAT exemption in line with EU law and the CJEU decision in case C-319/12 did not affect the application of the exemption in the UK.
Member states had to specify the conditions that would lead to VAT exemption for education services, but they had discretion as to what those conditions were. In the case of university education, the UK has exercised a member state option to recognise as non-public law bodies carrying on qualifying educational activities a small group consisting of college and halls of universities that are integrated into the university's activities. FBT failed to meet this EU law-compliant 'supplier condition' for the education exemption.
www.bailii.org/ew/cases/EWCA/Civ/2016/7.html
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