In her blog on 14 April 2008 Cathy Corns highlighted the risk that some businesses could lose their gross payment status if they are not fully up to date with all their tax compliance. We are now starting to see the results of HMRC’s review of the first 12 months of the new CIS and they appear be applying their rules quite ruthlessly.

HMRC said they would not impose penalties for late returns provided all returns for the first 6 months of the new scheme were submitted by 19 October 2007. Some people may have interpreted this to mean that there was a general amnesty for this first 6 month period and, provided businesses kept up to date after that, they would not risk losing their gross payment status. This is not the case. Our understanding is that HMRC’s amnesty (if it can be called that) applied only to the first 3 months and any late returns made after June 2007 will result in the business being transferred to a net payment status. This could have a disastrous effect on cash flow, especially if the tax deducted cannot be recovered in full until after the end of the tax year.

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The recent Budget announced changes to the rules for opting to tax property interests. Further details have now been published (BB24/08 and 03/08). The changes are due to come in on 1 June 2008 when the new legislation (rewritten Schedule 10 VAT Act 1994) becomes effective.

The changes are designed to simplify the complex rules and address some of the practical issues which have arisen since the option to tax was first introduced in 1989.

A summary of the main changes are:

• New rules for relevant associates (VAT groups)
• Certificates to disapply an option to tax for land sold to housing associations and buildings converted into dwellings
• New rules for intermediaries supplying buildings to be converted into dwellings
• Introduction of a “real estate election” (new way to opt to tax multiple property interests)
• Changes to the “cooling off” and revocation period
• Changes to the rules for obtaining permission prior to opting to tax
• Revised definition of “occupation”
• Changes to the scope of the option to tax
• New appeal rights
  

The new rules and changes are quite detailed and will mean that businesses should review their internal procedures, particularly those with large property portfolios. Further simplification changes are also expected.

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Under the old rules, where an individual acquired shares on more than one date, the legislation specified which shares were treated as sold for CGT purposes on a part disposal. Shares were generally matched on a ‘last in, first out’ basis, (with exceptions for “bed and breakfasting” within 30 days).

As part of the simplification of CGT, the rules for disposals after 5 April 2008 have changed and could produce some unfortunate results. From that date the cost of all shares in any one company will be averaged.

Assuming an increasing share price over the period in which shares have been acquired, the taxable gain on the first disposals made after 5 April 2008 could be considerably higher than would have been the case under the previous legislation.

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The European Court decision in Securenta has again cast doubt on the recovery of VAT on share issues and focused attention on the VAT position of holding companies.

Securenta was a German investment company dealing in land, acquiring financial holdings in other businesses and managing various other investments. It raised the necessary capital partly by means of an issue of shares. The ECJ ruled that VAT on the costs connected with the issue of shares was allowed only to the extent that the expenditure was attributable to economic activities. Non-economic activities where there was no right to deduct presumably included much of the investment activity undertaken such as acquiring, holding and selling shares and bonds.

Guidance on how HMRC will apply this decision is still awaited. Holding companies often incur significant legal and accountancy costs when issuing new shares and this case may make it more difficult to recover all of the VAT involved. Wherever possible holding companies should be part of a VAT group with their trading subsidiaries as this hopefully should minimise the impact of the decision.

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Apparently, such arrangements do not meet the new requirements that are being introduced from 6 April 2008.

HMRC is aware that over the years some employers have reached agreements with their local tax office, for example with regard to:

• Using substitute forms P46. 
• Not following the P46 procedures where forms P45 not received. 
• Not using tax code BR (Basic Rate) as the form P46 default tax code. 
• Sending data on CD-ROMs.

These local agreements are now being ended and may lead to the rejection of the information submitted.

HMRC is reviewing all local arrangements with a view to terminating them and any affected business should urgently conduct a similar review to avoid having your data rejected.

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HMRC has recently increased the guideline rate for tax and NIC free payments to employees who work at home. This is the amount the employers can pay without the employees keeping records. From 6 April 2008 the rate is increased from £2 to £3 per week.

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HMRC has published new guidance on the new penalty provisions that will apply from April 2008.

HMRC states that it has designed the new penalties so that:

• If people take reasonable care when completing their returns they will not be penalised.
• If they do not take reasonable care errors will be penalised, and the penalties will be higher if the error is deliberate.
• Disclosing errors before HMRC find them will substantially reduce any penalty due.

The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm  

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In a response to an EU consultation, the ICAEW has called on the EU to reduce the administrative burdens on SME’s. One of the key areas of focus is VAT.

Whilst welcoming a number of recent changes which assist SME’s, the ICAEW highlights that VAT is the “single most burdensome tax area” according to a study carried out in 2006 by KPMG on behalf of HMRC.

In particular, the ICAEW has called for immediate action in relation to cross border services (extension of “one stop shop” principle recently introduced for certain services). It has also called for a resolution to the double taxation issues currently experienced by many SME’s.

The EU is due to finalise its proposals in June 2008.

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There was general rejoicing when the Chancellor announced that the Income Shifting provisions would not be introduced from 6 April. However, at least for the moment this is a postponement and not a cancellation. The Red Book shows that the Government intends to raise significant amounts of revenue from income shifting legislation from 2009 onwards. This is unlikely to go away so we must make the best of the opportunity that we have been given and sort things out over the next year.

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