When looking at whether companies are “associated”, the Revenue has historically been able to include the rights of people in partnership. This has meant that two companies, controlled by people in partnership – but with no other link to one another – could be treated as associated and find that their tax bills rose as a result.

With effect from 1 April 2008, the definition of common control will be revised, so that business partners will only be taken into account where “relevant tax planning arrangements” (put in place to reduce tax liabilities) are in place.

Further detail is awaited, but this presumably means that individuals in “genuine” partnerships will no longer have to include companies owned by their fellow partners when counting the number of associates for their own companies if there is no other commercial connection. If this proves to be the case, it will be a very welcome change.

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A Revenue Statement of Practice first published in 1975 sets out how the CGT rules are to apply to partnerships. HMRC has now decided that the statement is deficient, and have recently issued Revenue & Customs Brief 03/08 to “clarify” the position. 

The specific point at issue relates to assets which are transferred to a partnership by means of a capital contribution. Previously, where no cash or money’s worth was received, the partner would not be treated as having disposed of their asset. HMRC now consider this to be incorrect. Their current view is that there will be a partial disposal equal to the fractional share in the asset which passes to the other partners, and that a sum credited to the partner’s capital account represents consideration for the partial disposal.

The Revenue will not go back on any decisions made on past events, but will apply the “correct treatment” to all other cases.

This “clarification” represents a major change for partnerships and needs to be considered carefully.

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Below is a brief update on the Arctic Systems case from Lisa Spearman, Mercer & Hole Partner and Tax Plus Blog contributor.

An announcement has been widely expected and commented on in this and other blogs following on from the Revenue’s defeat in the House of Lords. This is a case of the dog that didn’t bark or at least not yet.

Continue Reading...

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The Chancellor of the Exchequer, Alistair Darling, will be presenting his 2007 Pre-Budget Report and the outcome of the Comprehensive Spending Review on the afternoon of Tuesday 9th October.

I will post details of important announcements here shortly after the end of his speech.

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There has been a lot of press speculation recently that, following the calls for a shake up in the tax breaks enjoyed by the private equity industry, the Chancellor may change capital gains tax for everyone. Continue Reading...

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The House of Lords issued their judgement in the case of Jones v Garnett (also known as the “Arctic Systems Ltd” case) on 25 July 2007. To much rejoicing the case was decided in favour of Mr and Mrs Jones. However, the Revenue is a bad loser.

On 26 July a written Ministerial statement was issued by the Exchequer Secretary to the Treasury, announcing the intention to change the law.

Using the standard “the Government is committed to maintaining fairness in the tax system” statement the Government now believes it needs to do something to “ensure that there is greater clarity in the law regarding its position on the tax treatment of income splitting”. Actually, in my opinion, the law is now clear – it may not say what the Revenue wants it to, but that is unfortunate (for them) rather than unclear.

Continue Reading...

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The long awaited decision on Arctic Systems

This all seems to have been going on for so long you may need reminding of what all the fuss is about; so

- Mr and Mrs Jones ran a small IT company of which Mr Jones was the sole director. They each owned one share in the company took a small salary and extracted the majority of their required funds by way of dividend. These, of course, were paid in line with the shareholdings, on a 50:50 basis.

Nothing out of the ordinary there so what was the problem? It seems to be that Mr Jones paid tax at higher rates and Mrs Jones did not. HM Revenue & Customs (HMRC) argued that the settlements legislation should apply to the dividends paid to Mrs Jones such that they should actually be taxed (at the higher rate) on Mr Jones.

The Special Commissioners and the High Court (April 2005) agreed with HMRC, however the Court of Appeal (December 2005) rejected HMRC’s argument.

The result of all this is that there has been significant doubt about the correct tax treatment and obligations to report income and dividends in such circumstances.

The House of Lords unanimously decided in favour of the taxpayer. The key issue appears to be that an ordinary share is not “wholly … a right to income” and therefore the dividends are not caught by the settlements legislation.

This represents a resounding success for taxpayers and gives them back the right properly to plan their affairs in companies and partnerships.

If you were waiting for this judgement to instigate any planning or indeed need help on amending returns for earlier years, please contact any member of our tax team

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HMRC has recently set out its strategy on tax litigation and settlement - what does this mean for your business?

Following the merger of HM Revenue & Customs, the old Inland Revenue appears keen to get its hands on the extra powers previously enjoyed by Customs and Excise. This is clear from HMRC’s latest guidance on its “Settlements and Litigation Strategy”.

This sets out the principles HMRC aims to follow for avoiding tax disputes and

Continue Reading...

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After the media reports that around a million people are paying the wrong amount of tax this may not be the perfect time for HMRC to propose they are given an automatic right to collect unpaid (in their opinion!) tax by various measures including offset from other tax credits or repayments; direct from bank accounts; or by set off from salary - all without the need for any court order. Apparently, they say, this will reduce collection costs and bring forward payment dates. I have to say I believe that statement is accurate. I do also have to say that without a hearing you – the taxpayer – will have no right to defend your position.

Are HMRC always correct in the amounts of tax they request? Patently not, but if the tax is forcibly extracted from you how hard will it actually be to get it back? I accept that legally possession is not really 9/10ths of the law but in practise possession is, even if only temporarily, 100% entitlement! HMRC say that they will employ their powers responsibly; I am tempted to point out that they would say that or they may not get them.

Just imagine Continue Reading...

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H M Revenue & Customs have announced new advisory fuel rates which can be used by businesses to reclaim VAT on employees mileage allowances for business travel.

The new rates which apply to all journeys on or after 1 August 2007 are as follows:-
Continue Reading...

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The Government talk about ensuring that people pay “the right amount of tax”. However, the tax system is so complex that the “right amount” is not always easy to determine. One of the responsibilities of the Revenue is to help people calculate their tax liabilities accurately and they have recently been testing new ways in which they might do this.

First came “enabling letters”. These were sent to sole traders, with certain types of businesses being specifically targeted. Revenue research indicated that a significant number of expense claims are incorrect. These letters therefore covered “common errors that lead to understatements of business profits”. The Revenue say that the issue of a letter does not necessarily mean that they think something is wrong – but receiving one can be worrying.

If you receive such a letter you should contact your tax agent as soon as possible. If nothing else, it is a good opportunity to check that:-

• business records are adequate
• any estimated figures are accurate
• business expenses claims are technically correct
• all income is included
• The second approach tried by the

Revenue involved “interventions”. Again these were aimed at selected unincorporated businesses and ranged from brief telephone calls to visits to the business premises for a review of accounting records. You have the right not to co-operate as these interventions are outside the normal Revenue powers of enquiry – but did you know this is the case?.

One feature of these interventions which was particularly controversial was the inclusion of questions relating to income which may or may not have been received in earlier tax years where the deadline for a formal Revenue enquiry had passed. You are recommended not to provide this information. If the Revenue have sufficient information to make a “discovery” about past years, then they should follow the procedures set down in law – thus ensuring that the you have rights of appeal and all other protections provided by that law.

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An Englishman’s home is his castle – well maybe, but HMRC are looking to storm the drawbridge. In a recent consultative document HMRC put forward some plans - unannounced visits to private homes.

In HMRC’s view private residences come in three guises:

Continue Reading...

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The “white van man” may be a menace, or a saviour (depending on your opinion) on the roads in the UK, but he has received quite favourable treatment from the taxman. This changed from 6 April 2007.

It is quite common for work vans to be taken home at night – this enables the employee to start work immediately in the mornings without having to go to a central depot to pick up their vehicle. If they are prohibited from using the vehicle for any other journeys, and there is no personal use of the van, then no taxable benefit arises.

However, if the van is made available for personal use, either in the evenings or at weekends, then that use is taxable.

Historically van drivers have been treated as receiving a benefit-in-kind of £500 to cover this personal use. For a basic rate taxpayer this was a tax cost of only £110 – reducing to £77 if the van was more than 4 years old.

For 2007/08 the taxable benefit will increase by 700% to £3,500 – a tax cost of £770 at a basic rate of 22%. If fuel is provided for private use there will be an additional benefit of £500.

Employers will also face increased costs as they have to pay 12.8% Class 1A National Insurance on all benefits provided to employees. To reduce costs, employers therefore need to review their company van policies and, if not already done, issue clear guidelines and restrictions on how and when those vehicles are to be used.

 

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Do you remember “the lump”?

The lump was made up of casual labour, working for cash in hand, often migrant workers who would take the money home without paying any UK tax. In an attempt to combat this avoidance the first Construction Industry Scheme (“CIS”) was created in 1972.

CIS2 followed in 1999 with a tightening up of the rules on who could register to be paid gross under the scheme. This scheme required contractors and sub-contractors to register with HM Revenue & Customs (HMRC) and obtain CIS registration cards. These cards were then used to prove to the contractor whether payments could be made gross or under deduction of tax.

A new CIS scheme will start on 6 April 2007 to bring CIS into the internet age. From this date the old system of CIS cards, certificates and vouchers will cease. Subcontractors will still need to be registered with HMRC but they will not need a plastic card to evidence this – instead the contractor will “verify” them with HMRC, either online or by telephone. HMRC will tell the contractor whether they can pay the sub-contractor gross, or under deduction of tax.

Contractors will have to make monthly returns to HMRC either on paper or via the internet. Nil returns will have to be submitted when there are no payments in any month and there will be a system of penalties for failing to submit any returns.

The monthly return is no longer just a report of money paid and tax deducted with the deadlines imposed and penalties for non-compliance that, in itself, would be onerous. Much more worryingly, by signing the form a contractor is confirming that they have considered the status of all workers paid within CIS and that none of them is an employee. Once again, failure to correctly identify employees may give rise to penalties in addition to having to pay the tax and NI that should have been deducted from payments made.

This is potentially a major problem.

It is vital that all contractors review the terms on which sub-contractors work for them. The Revenue have developed an Employment Status Indicator for employers to use and this can be found on their website at:

www.hmrc.gov.uk/calcs/esi.htm

 
Further information on New CIS can also be found at their website at:

 
www.hmrc.gov.uk/new-cis

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The 2007 Budget continued a trend that started in 1997 with Gordon Brown’s first Budget that targeted property investment by increasing stamp duty.  This time round, in his eleventh budget, he has taken away and/or reduced capital allowances on industrial hotel and agricultural buildings as well as on plant and machinery and on fixtures integral to buildings.

Property investors will have to cope with the financial impact of the changes together with the proposed 2009 introduction of Planning Gain Supplement.

These changes will impact all UK businesses that own property – if you are interested and want to know more

Continue Reading...

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Although the taxable benefit for using your employer’s van for private journeys is to increase by 700% from 6 April 2007, a company van may still be substantially cheaper than a company car. For example, the benefit of a car could be as high as 35% of the original list price – for a £30,000 vehicle with high CO2 emissions the benefit would be £10,500, compared with a fixed rate benefit of £3,500 for a van.

Or course, doing the supermarket dash in a transit van is not as classy as turning up in the latest German-made saloon. Children may also be less than impressed when dropped off at school from the back of a pickup truck.

But what if there was a truck that offered the performance and luxury of a car with the taxable benefits of a van? Does such a vehicle exist? Sadly no.

Several clients have approached us with the idea of buying a double-cab pickup to replace their usual family car. These vehicles have an extra row of seats and sometimes have 4 doors capable of being opened independently.

In the words of the Revenue “there is nothing about these vehicles that renders them unsuitable for private use”. Therefore, unless they are designed primarily for carrying goods or burden, the Revenue are unlikely to accept that they are vans for the purposes of the benefit-in-kind charges and the normal car benefits will apply.

Nonetheless as a second vehicle is the van worth a second look?

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You are probably already aware that the Revenue has strict guidelines on time limits for raising enquiries.  If a deadline has passed there has to be good reason to go back to a closed year.  However, possibly because of this, in several enquiries recently the Revenue has asked for comparative figures. Once they have the analysis for earlier years they are then using this to start an enquiry into a return that otherwise would be out of time.
 
So what do you do if you are asked for this type of information?  Firstly – do not automatically comply.  Secondly, ask for a full explanation and justification as to why the Revenue is seeking to go back to earlier years. Always point out that you are not being deliberately uncooperative but just want to be sure that the enquiry is not out of time.

 

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The Revenue has historically tended to concentrate on the usual areas - requests for analyses of repairs and renewals, fixed asset additions and professional fees. One obvious way to avoid this type of enquiry is to provide the information as a matter of course showing enough detail to make your position clear i.e. not just the name of the solicitor but a narrative e.g. “legal advice on staff contracts”.

So - what’s changed? The Revenue is now adopting publicity techniques to make all businesses aware of its focus on specific areas. One example of this is its focus on shoots where a team of specialists is operating nationally. With this approach all you can do when you are selected is make sure that your records are in order and you can demonstrate compliance.

Sadly, however, the selective approach does not mean that the “scattergun” approach has disappeared. The Revenue’s current theme is to enquire into balance sheet entries such as stock and / or provisions. Again full disclosure can pre-empt an enquiry. If there is a provision for, say, redundancy, show the details and the reason it is deductible on the computation.

New legislation creates new opportunities for business eg research and development relief but also then creates new enquiry opportunities. Again provision of full details and the back up to the claim may help.

There has been a survey of current enquiry topics – the list is, in order:

1. Associated companies – mainly generated by the targeting of investors in film partnerships.
2. Capital allowance claims – analysis and rates claimed.
3. Provisions.
4. Debtors, creditors and accruals– when looking at this remember to consider the transfer pricing regime on inter-company balances.
5. Analysis of expense items e.g. Legal and professional fees, repairs and entertaining (on the latter does the total in the accounts agree to that shown on forms P11d for example).
6. Stock – generally on valuation / provision issues.
7. Research & Development
   
   You can tell form the above list that some forethought and additional work up front can reduce the scope of the enquiry.
   

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The new rules on partnership losses may have been designed to stop avoidance schemes but many “innocent” businesses may also be caught.

The changes are wide-ranging and could affect transactions where no actual tax avoidance is involved. Of particular concern is the limit of £25,000 per year on the availability of relief on losses from trading partnerships for “non-active partners”.

The changes apply to conventional partnerships, Limited Liability Partnerships and Limited Partnerships.

The key issue is what is a “non-active partner”? Basically a partner who spends an average of less than ten hours a week personally engaged in carrying out the partnership’s trading activities is regarded as non-active.

The loss restriction is actually capped at £25,000 per year regardless of how many partnerships you are in.

Any excess losses over £25,000 are carried forward to be allowed against future trading income from the trade in which the loss arose.

The rules are likely to affect husband/wife and civil partner partnerships where one member is actively involved and the other works elsewhere. Similarly it will affect entrepreneur investors and, potentially, retiring partners who have scaled back their hours.

It is important to remember that the issue is hopefully one of timing – losses will not disappear; they will be available as and when (or if) the business makes a profit.

If you are involved in partnerships on a part-time basis you may need to review your position if there is a bad year to make sure relief is claimed correctly.

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