1 General news
Summer Budget 2015 1.1
The Chancellor presented his first budget of the new Parliament on 8 July. A number of consultation documents were also issued last week. We have noted the key ones below.
Smith & Williamson's commentary of the budget can be found on the Smith & Williamson website, www.smith.williamson.co.uk. Our Budget commentary is at:
www.smith.williamson.co.uk/publications/2129-summer-budget-2015-overview
Consultation: Incentives to save and pension tax relief 1.2
Recognising the general increase in longevity, the prevalence of defined contribution schemes, and the current costs to Government of the existing system, a consultation has been issued on suggestions for strengthening the incentive to save and the future of pensions tax relief. The consultation is open until 30 September 2015. The Government is keen to ensure the system for providing for retirement takes account of current and future trends and is sustainable.
The current system operates by exempting from tax initial contributions by individuals and employers, exempting the growth in pension funds and taxing pension withdrawals (exempt-exempt-taxed).
Comments are invited on change that could range from a fundamental reform of the system to less radical changes, as well as options in between.
An example of fundamental reform could be a move to a system which is 'taxed-exempt-exempt', similar to the treatment of ISAs, and providing a government top-up on contributions. An example of less radical change could be retaining the current system and altering the lifetime and annual allowances. While no preferences are expressed, responses on possible future reforms are requested that take into account the following:
- simplicity and transparency;
- personal responsibility;
- the early success of auto-enrolment; and
- sustainability.
2 Private client
Consultation: ISAs and crowd funding 2.1
A consultation has been issued exploring the case for permitting some investments made through a crowdfunding platform within ISAs. Responses are requested by 30 September 2015.
The consultation is framed around the principles for ISA products, which are noted as:
- a trusted savings brand;
- protection for the consumer;
- supporting a sustainable tax system; and
- simplicity of administration
3 PAYE and employment
Consultation: Tax treatment of sporting testimonials 3.1
HMRC has issued a consultation, open until 2 September 2015 on the tax treatment of sporting testimonials. It considers the possibility of introducing an exemption or a de minimis amount not subject to tax, and making changes to the tax treatment of testimonial committees, which organise testimonial matches and which are generally independent of the sports club that employ the individual.
It is recognised that the existing HMRC guidance on receipts from sports testimonials needs to be updated. The consultation gives consideration to introducing a partial exemption or de minimis amount that is not subject to tax or NICs.
It considers whether such an exemption or a de minimis amount should be available once only during the individual's career, or be available in relation to each club the individual plays for.
Consideration is also given to the fact that an independent testimonial committee is subject to corporation tax but cannot deduct costs of payments to the individual against company profits for the purpose of calculating corporation tax. This is because the committee is not legally the employer, even it is required to operate PAYE. This could be alleviated by introducing legislation that deems an independent testimonial committee to be the legal employer for the purposes of sporting testimonial matches.
Consultation: Employment intermediaries - travel and subsistence 3.2
In response to the increasing use of employment intermediaries, such as umbrella companies and personal service companies, the Government has issued a consultation looking at proposals to remove tax relief for home-to-work travel and subsistence claims made through these types of entity. The consultation is open until 30 September 2015.
The consultation comments:
'If the workplace is attended for a temporary purpose or a task of limited duration, but the worker goes to the same workplace for all or almost all of the time for which the worker is likely to hold, or continues to hold, the same employment, then it is considered a permanent workplace. This will normally be the case if the worker is employed to work at one place on a fixed term contract and means that a temporary worker should not be eligible for tax and NICs relief on the costs of their ordinary commute.
'The government's intention is that where a worker is employed through an employment intermediary, then they will not be entitled to tax and NICs relief on travel and subsistence expenses incurred for home-to-workplace travel.'
It appears from the consultation document that the entitlement will only be restricted where the individual is supplying personal services to an engager being the end user of the services, and under the right of supervision, direction or control of any person. There are also proposals to place an obligation on the engager to either ensure or confirm the tax treatment of travel and subsistence reimbursements are correct.
The government plans to introduce new legislation in Finance Bill 2016, with the intention that any changes (for both income tax and NIC) to the travel and subsistence regime will come into force from 6 April 2016.
4 Business tax
Consultation: Performance linked rewards for asset managers 4.1
The Government is consulting on using a test to determine the extent to which asset managers can be subject to capital gains tax treatment instead of income tax treatment on their reward for performance. The consultation is open to 30 September 2015, with an aim of including any statutory measures in Finance Bill 2016 for commencement from April 2016. The options considered include looking at particular activities undertaken by the fund, or the length of time fund investments are held.
The activities of many alternative funds are viewed as a trade for tax purposes and the investment manager exemption (the IME at CTA10 s.1146) is designed to make the UK an attractive place for fund management activities. It permits a fund that is trading to appoint a UK based investment manager without creating a risk of UK taxation for the fund via a permanent establishment.
While fees for the individual performance of asset managers have historically been assessed to income tax, some managers have been contending the funds they manage are investing and that their individual performance fee reward is capital rather than income.
If successful this tax treatment would be similar to that for carried interest (ie capital gains tax treatment).
The Government is proposing to define more precisely the boundary between when an individual's investment performance fee will be charged to income or capital gains tax. This will not affect the income tax treatment of managers who are employees. The consultation invites comments on two alternative options.
- A list of particular activities which, in the Government's view, are clearly investment activities and where management performance fees may be taxed as chargeable gains provided certain conditions are met.
The proposed list of investment activities includes:
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- controlling equity stakes in trading companies intended to be held for a period of at least 3 years;
- holding real property for rental income and capital growth where, at the point of acquisition, it is reasonable to suppose that the property will be held for at least 5 years;
- purchasing debt instruments on a secondary market where, at the point of acquisition, it is reasonable to suppose that the debt will be held for at least 3 years; and
- equity and debt investments in venture capital companies, provided they are intended to be held for a specified period of time.
- A focus on the length of time for which the underlying investments are held. A graduated system is proposed. Here the proportion of gain as an individual's performance fee would be chargeable to capital gains tax according to the length of time the investment is held as follows:
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- 6 months – 0%;
- At least 6 months but less than 12 months – 25%;
- At least 1 year but less than 18 months – 50%;
- At least 18 months but less than 2 years – 75%;
- Two years or more – 100%.
The rules, once implemented, would not apply to any genuine co-investment in the fund made on the same terms as those made by third party investors. It will also have no impact on the treatment of the investment vehicle or investors (for example, as regards the IME or the Offshore Funds rules).
Consultation: Extending the length of time for farmers averaging 4.2
A consultation has commenced on the extension of the period over which farmers' trade profits are averaged from two to five years with effect from the tax year 2016/17. The consultation is open until 7 September 2015.
The averaging period will always be a period of five consecutive tax years ending with the year of claim unless there are fewer than four tax years eligible for averaging before the year of claim. Some aspects of the existing regime will be retained. Transitional rules will apply for newer businesses.
The consultation asks for responses on the main points below.
- Whether the current profit volatility test should be retained.
- Whether averaging should be automatic or optional.
- What transitional rules should apply.
Partnership tax avoidance scheme loses at First-tier Tribunal 4.3
A tax avoidance scheme designed to take advantage of investment in medical research through investing via a trading partnership by claiming losses from capital allowances in respect of scientific research has been held to fail by the FTT.
The Brain Disorders Research Limited Partnership and Neil Hockin v HMRC 2015 UKFTT 325 (TC)
The scheme was devised by Matrix-Securities Limited and was similar to another scheme that had already failed in the courts, reported as Vaccine Research Limited Partnership and Anor v HMRC [22013] UKFTT 73 and [2014] UKUT 389 (TCC)
In essence, the claims were in respect of far greater amounts than were actually expended on research. Partners were invited to borrow substantial amounts from commercial lenders and themselves contribute a small proportion of cash to the limited partnership. The partnership then onward invested in a special purpose vehicle (Numology Limited) that undertook to carry out research, which in it in turn sub-contracted to an Australian company BRC Operations PTY Limited (BRC). The partners claimed capital allowances in respect of the full amount invested by them on research being their investment in Numology.
The actual amount paid under the sub-contract arrangement was a small fraction of the partnership contribution. There was also a licence of BRC's intellectual property to Numology and indirectly to the partnership for £1 that was then licensed back first to Numology for royalties and then sublicensed back by Numology to BRC for a percentage of fluctuating royalties. The net effect of this plan was that Numology would acquire various deposits or financial instruments with its surplus retention. As a result, the partners actually had little risk if the research failed as their position was covered by tax relief.
The court found the partnership was not trading so the various reliefs claimed for interest and capital allowances failed.
www.bailii.org/uk/cases/UKFTT/TC/2015/TC04510.html
Tax credits on dividend income and time limits for tax claims 4.4
The Court of Appeal has determined that the Trustees of the BT Pension Scheme (BTPS) were time barred from claims for recovery of tax on cross-border dividends not paid as foreign income dividends (FIDs) (known as the Manninen claim, totalling £123.5m). It also concluded that while the majority of the Trustees' claims in respect of tax credits on FIDs, with a claim totalling £12.5m, were also out of time, the claim in respect of 1997/98 (£1.6m) was within time.
There were, however, questions to be referred to the CJEU to determine if the non-availability of payable tax credits on these FIDs infringed the Trustees' EU right to freedom of movement of capital.
The points of uncertainty, which the Court of Appeal considered needed to be referred, concerned the claim by a shareholder that the dividends it received from a UK company that were FID's, entitled the shareholder to EU freedom of movement of capital rights in relation to the UK company's investment of that capital in non-UK subsidiaries. Previous CJEU case law covered only claims by the parent company investing in non-UK companies.
While the Court of Appeal considered the Manninen claims to be dismissed as out of time, they did comment that if they had been within time, they would have had to refer further questions to the CJEU. This was because a tax exempt shareholder was at an advantage to a taxable UK shareholder with respect to the taxation of dividends, as the exempt shareholder could recover ACT from HMRC, whereas the taxable shareholder could not (unless not taxable). It was therefore not clear that the EU law freedom of movement of capital principles applied to a tax exempt shareholder.
The form of the questions to be referred to the CJEU was not included in the Court of Appeal's decision.
www.bailii.org/ew/cases/EWCA/Civ/2015/713.html
5 VAT
Whether conditions met for transfer of a going concern (TOGC) treatment 5.1
The Upper Tribunal (UT) has reversed the First-tier Tribunal (FTT) decision and confirmed that the transfer of a business of providing bank processing systems, to a VAT group, met the TOGC conditions where the group used it to provide its own banking platform,. As a consequence, it is possible for a business to be transferred to a company within a VAT group as a TOGC where the company only provides services within the VAT group. The TOGC provisions apply to treat the transfer as outside the scope of VAT.
The FTT had considered that the transfer was outside the TOGC provisions. This was because the bank process system was provided from one company in the VAT group to another. These were intragroup services to be disregarded for VAT purposes. As a consequence, in their view, the acquirer did not carry on the same kind of business as the vendor, as required by IS 1995/1268 reg 5. The UT considered the UK requirements of those provisions that the transferee carry on '....the same kind of business, whether or not as part of any existing business...' and considered this condition was consistent with the EU law provisions (sixth directive article 19). It was accepted by HMRC that:
- banking platform services provided internally within the acquirer's group were an integral element of the retail banking services provided by that group; and
- the activities of the acquiring company contributed directly to the economic activity of the group as a whole.
As a consequence, the UT considered the VAT group was the acquirer for VAT purposes and as it carried on the transferor's business as part of its overall business, the conditions for a TOGC were met.
The issue of the relevance of intragroup supplies for VAT purposes was raised in the Advocate General's opinion in the CJEU case of Larentia and Minerva (cases C-108/14 and C-109/14). The Advocate General's opinion in this area may be clarified when the decision is released on 16 July 2015.
www.tribunals.gov.uk/financeandtax/Documents/decisions/Intelligent-Managed-Services-v-HMRC.pdf
VAT on gaming machines 5.2
The Supreme Court has agreed with the conclusion of the Court of Appeal, though for somewhat different reasons, and dismissed Rank Group's appeal. As a result, it was held that gaming machines involving a random number generator providing numbers to a range of terminal machines, were gaming machines within the definition of the exclusion from VAT exemption in note 3 to item 1 of VATA 1994 Sch9 group 4 as at the relevant time. Machine takings for the period 1 October 2002 to 5 December 2005 were therefore subject to VAT.
www.bailii.org/uk/cases/UKSC/2015/48.html
We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015
