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2020 Tax Update Webinar – February 2017

2020 – Monthly Tax Update Webinar – February 2017

1. DRAFT FINANCE BILL 2017 CLAUSES ........................................................................ 4

1.1 Consultation on Draft Finance Bill 2017 clauses ..................................................... 4 1.2 Workers “Off Payroll” in Public Sector ...................................................................... 4 1.3 Salary Sacrifice Schemes Restricted ....................................................................... 5 1.4 Time Limit for Making Good Employee Benefits ...................................................... 5 1.5 Lower Car Benefits for Electric Cars ........................................................................ 5 1.6 Private Use Of Assets by Employees....................................................................... 5 1.7 Pensions advice for employees ................................................................................ 6 1.8 Deduction for Employee liabilities ............................................................................. 6 1.9 Termination Payments ............................................................................................. 6 1.10 Simplification of PAYE Settlement Agreements (PSAs) ......................................... 6 1.11 Overseas Pensions ................................................................................................ 7 1.12 More interest to be paid gross................................................................................ 7 1.13 Changes to Partial Surrenders of Life Insurance Policies....................................... 7 1.14 EIS and SEIS – no pre arranged exits ................................................................... 7 1.15 Employee Shareholder Share Scheme Ends ......................................................... 8 1.16 New Tax Free Allowances ..................................................................................... 8 1.17 Disguised Remuneration Schemes – Anti-avoidance ............................................. 8 1.18 New Deemed Domicile Rules for Income Tax, CGT and IHT ................................. 9

1.18.1 Protection for overseas trusts ........................................................................ 10 1.18.2 CGT - Rebasing to 5 April 2017 value ............................................................ 10 1.18.3 Mixed Funds ................................................................................................... 11

1.19 Non Doms with UK Property Owned Offshore ..................................................... 11 1.19.1 Any right or interest in a close company ......................................................... 11 1.19.2 Interest in a partnership. ................................................................................ 11 1.19.3 Loans ............................................................................................................. 12

1.20 Business Investment Relief .................................................................................. 12 1.21 New Corporate Loss Relief rules from April 2017 ................................................ 12 1.22 Relief for Contributions to Grassroots Sports ....................................................... 13 1.23 Amendments to Patent Box Rules ....................................................................... 13 1.24 100% FYA for Electric Vehicle Charging Points ................................................... 13 1.25 Substantial Shareholdings Exemption (SSE) Relaxed ......................................... 13 1.26 Tax Relief for Museums and Galleries ................................................................. 14 1.27 Insurance Premium Tax (IPT) to increase to 12% ................................................. 14 1.28 “Requirement to Correct” Offshore Tax Non-compliance ...................................... 14 1.29 Enquiries – Partial Closure Notices ....................................................................... 14 1.30 Tax Avoidance - Errors in Taxpayers Documents ................................................ 14 1.31 Penalties for Enablers of Defeated Tax Avoidance Schemes .............................. 15 1.32 Customs Powers to Search Vehicles and Containers .......................................... 15 1.33 Pensions – Money Purchase Annual Allowance reduced to £4,000 ...................... 15 1.34 New 16.5% VAT Flat Rate for “Limited Cost” Traders ........................................... 15 1.35 New ATED Rates from 2017/18 ............................................................................ 16

2. MAKING TAX DIGITAL (MTD) UPDATE: ................................................................... 16

2.1 Bringing Business Tax Into The Digital Age ..................................................... 16 2.2 Tax Administration/ Penalties ............................................................................ 17


2.3 Simplifying Tax For Unincorporated Businesses ............................................. 18 2.4 Unincorporated Property Businesses ............................................................... 18 2.5 Voluntary Pay As You Go ................................................................................... 18 2.6 Transforming The Tax System Through The Better Use Of Information ........ 18

3. HMRC ANNOUNCEMENTS AND OTHER RECENT TAX DEVELOPMENTS ............. 20

3.1 HMRC Guidance on Public Sector Off-payroll working changes ........................... 20 3.1.1 Deciding if the rules apply .............................................................................. 20 3.1.2 Payments received from the fee-payer........................................................... 20 3.1.3 Paying yourself through your company .......................................................... 21

3.2 HMRC Guidance on Transactions in UK Land ...................................................... 22 3.3 HMRC List Top Ten “Dodgy” Expense claims ....................................................... 26

4. RECENT TAX CASES AND TRIBUNAL DECISIONS ................................................. 27

4.1 Directors Not liable for unpaid PAYE and NICs ..................................................... 27


2020 TAX UPDATE WEBINAR – February 2017 In this monthly webinar we will focus on draft Finance Bill clauses published for consultation on 5 December 2016 and further clauses issued in January 2017. The other topics to be included this month have been taken from the following source material:

The government response to the Making Tax Digital consultation

HMRC announcements and other developments

Recent tax cases and Tribunal decisions

1. DRAFT FINANCE BILL 2017 CLAUSES

1.1 Consultation on Draft Finance Bill 2017 clauses

A number of draft clauses were published on 5 December 2016 for consultation prior to inclusion in the 2017 Finance Bill. Many of the matters covered had been announced earlier in the year and had been the subject of detailed consultations over summer 2016. The closing date for comments on the December draft legislation was 1 February 2017.

In addition the following revised draft legislation for Finance Bill 2017 was published on 26 January 2017. Consultation on the drafts closes on 23 February 2017:

1. Corporation tax relief for carried-forward losses – the revised Schedule (Sch 6) includes rules for insurance companies and the creative industries, and additional anti-avoidance rules.

2. Corporate interest restriction – to restrict the amount of interest and other financing amounts a company may deduct in computing its profits for corporation tax purposes; a number of detailed changes have been made following the initial consultation.

3. Deemed UK domicile rules for income tax, CGT and IHT purposes – the revised Schedule (Sch 12) contains an exception for protected foreign-source income of overseas trusts and additional conditions for transfers from overseas mixed funds.

4. Social investment tax relief – new draft legislation to enlarge the social investment tax relief scheme with effect from 6 April 2017. The changes will include an overall lifetime investment limit of £1.5m available to new businesses for seven years after their first commercial sale, and will reduce to 250 the maximum number of employees for a qualifying business, and also extends the excluded activities list

The draft Social Security (Miscellaneous Amendments) Regulations 2017 was also published for consultation. This sets out changes to the NICs rules where services are provided to a public authority through an intermediary, including the calculation of deemed earnings and moving responsibility for operating the “off-payroll” rules to the public authority).

The main clauses to be consulted on include:

1.2 Workers “Off Payroll” in Public Sector Clause 1 and Sch 1 Following consultation over the summer, the government will legislate in Finance Bill 2017 to reform the off-payroll rules (often known as IR35) in the public sector. Responsibility for operating the off-payroll working rules, and


deducting any tax and NICs due, will move to the public sector body, agency or other third party paying an individual’s personal service company (PSC). The change will come into effect from 6 April 2017 and apply across the UK. As a result of feedback received during consultation, the 5% tax-free allowance for general business expenses, available to workers currently applying the rules, will be withdrawn for PSCs working in the public sector.

1.3 Salary Sacrifice Schemes Restricted

Clause 2 and Sch 2

From 6 April 2017 the Income Tax and employer NICs advantages of salary sacrifice schemes will be removed for certain arrangements. The taxable value of benefits in kind where cash have been forgone will be fixed at the higher of the current taxable value or the value of the cash forgone. This includes benefits that are currently tax exempt. As outlined in the consultation, the new rules will not affect pensions saving, employer provided pensions advice, childcare, or Cycle to Work. Following consultation, the government has also decided to exempt Ultra-Low Emission cars (ULEVs), with emissions under 75 grams of CO2 per kilometre, to incentivise the take-up of these vehicles.

Transitional provisions apply where the salary sacrifice arrangement was in place before 6 April 2017. The tax efficient nature of these arrangements is preserved for a further tax year, with the main changes delayed until 6 April 2018 (with a further extension until 6 April 2021 for existing longer-term agreements covering cars, vans, living accommodation and school fees).

If the existing arrangement is varied or renewed after 6 April 2017, this will be treated as a new arrangement for the purposes of the legislation and will not be protected by the transitional provisions. However, if the variation is necessary due to the need for a replacement outside the employee's control (eg the car subject to the arrangement is stolen) or the arrangement is suspended due to statutory leave, this will not trigger the new rules.

1.4 Time Limit for Making Good Employee Benefits Clause 3

The government will legislate in Finance Bill 2017 to align the dates for making good on benefits in kind at 6 July , where an employee makes a payment in return for the benefit in kind they receive. This has the effect of reducing the taxable value of the benefit in kind, often to zero and will apply from 2017/18 onwards.

1.5 Lower Car Benefits for Electric Cars Clause 4

As announced at Autumn Statement 2016, and following consultation, the government will legislate in Finance Bill 2017 for new, lower bands for the lowest emitting cars from 2010/21. For cars with emissions below 50 gCO2/km bands will be based on the electric range of the car. The relevant percentage for cars emitting greater than 90 gCO2/km will rise by 1 percentage point.

1.6 Private Use Of Assets by Employees Clause 5

Finance Bill 2017 will include a detailed method for calculating the taxable value (cash equivalent) of an asset provided to the employee which is made available for private use.


This means that employees will just pay tax for those days on which the asset is available for private use. This will provide clarity for both employees and employers. The changes will take effect from 6 April 2017.

1.7 Pensions advice for employees Clause 6 This clause introduces a new income tax exemption to cover the first £500 worth of pensions advice provided to an employee (including former and prospective employees) in a tax year. It will allow advice not only on pensions, but also on the general financial and tax issues relating to pensions, allowing individuals to make more informed decisions about saving for their retirement. The changes replace existing provisions which limited the exemption solely to pensions advice and was capped at £150 per employee per year.

1.8 Deduction for Employee liabilities Clause 7 This clause ensures that employees (or former employees) who may require legal advice or indemnity insurance which is funded by their employer, for example in preparation for an appearance before a public enquiry, will not be taxed on the benefit provided by virtue of a deduction being available from earnings.

Currently, when an employer funds legal support or pays a premium for legal indemnity insurance for their employees to cover costs connected with proceedings related to their employment, it is only tax-free for employees who have had allegations made against them in their capacity as an employee (a liability). There is no equivalent deduction or relief in relation to proceedings where no allegation is made against the employee.

1.9 Termination Payments Clauses 8 and 9 Clause 8 extends existing reliefs for individuals on termination of employment (or for individuals now deceased) who may receive a benefit or payment in respect of legal advice or indemnity insurance which is funded by their employer. Currently, such costs are only deductible if they have first been paid by the individual with a termination arrangement, or, in the case of a deceased person, by the individual’s personal representative. This clause provides that a deduction is allowable if the relevant costs are met by the employer on behalf of the individual or the individual’s personal representatives as appropriate.

At Budget 2016, the government announced that it would align the employer NICs treatment of termination payments with income tax and that it would tighten the scope of the £30,000 exemption to prevent that manipulation.

Clause 9 is intended to bring fairness and clarity to the taxation of termination payments by making it clear that all payments in lieu of notice, not just contractual payments in lieu of notice, are taxable earnings. All employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual payment in lieu of notice. This means the tax and NICs consequences are the same for everyone and it is no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.

1.10 Simplification of PAYE Settlement Agreements (PSAs) Clause 10 PSAs are arrangements under which employers can, in a single payment, settle their employees’ income tax liabilities for certain benefits and expenses. The government aims to reduce the administrative burden on employers of operating PSAs in their current form. This clause aligns with the principles of HMRC’s wider digital transformation strategy.


The proposed simplification is the removal the requirement for an employer to submit a request, and obtain agreement of terms, in advance of their end of year reporting obligations. The proposed process will allow for employers to submit their PSA request at the year end, and to make ad hoc requests during the year.

Currently, the process relies on the submission of paper returns. HM Revenue and Customs (HMRC) will develop a digital solution, in line with its digital strategy. It will be a largely automated process, although HMRC will be able to intervene manually to mitigate compliance risk. This clause paves the way for automated agreements with HMRC.

1.11 Overseas Pensions Clause 11 and Sch 3 A number of changes are being made to the UK taxation of foreign pensions

HMRC will:

Extend from five to 10 years the period in which UK tax charges can apply to payments out of funds in overseas pension schemes that contain pension funds or rights that have benefitted from UK tax relief

Ensure that funds in a registered pension scheme based outside the UK are subject to UK taxation consistent with the tax treatment of a UK-based registered pension scheme

Tax the full foreign pension of UK residents, instead of 90%

Tax foreign pension lump sums paid to UK residents that are not already liable to UK tax

Close specialist “section 615 schemes” to new pension saving if individuals wish to continue to be able to receive relief from tax in respect of annuity payments from those schemes.

Have new powers to make Regulations specifying how information and evidence should be provided and that a pension transferred from a relevant non-UK scheme out of funds that have benefitted from UK tax relief to another relevant non-UK scheme or a registered pension scheme will be treated as the original pension.

1.12 More interest to be paid gross Clause 12 and Sch 4

From 6 April 2017 the requirement for tax to be deducted at source from interest distributions of open-ended investment companies, authorised unit trusts and investment trust companies, and from interest on peer-to-peer loans is to be removed.

1.13 Changes to Partial Surrenders of Life Insurance Policies Clause13

Finance Bill 2017 will include legislation to allow individuals who, in certain unusual circumstances, have part surrendered or part assigned their life insurance policies and inadvertently generated a wholly disproportionate tax charge, to apply to HMRC to have the charge recalculated on a just and reasonable basis. This will lead to fairer outcomes for these policyholders. The changes will take effect from 6 April 2017.

1.14 EIS and SEIS – no pre arranged exits Clause 15 Sections 177 and 257CD ITA 2007 act to deny tax relief if certain arrangements exist, in connection with the issue of the shares, that provide for the disposal of shares or securities in the company. Where a company converts or exchanges one class of shares into, or for, another within the qualifying period of the EIS and SEIS, this would be considered Clauses 29 - 31


to be a disposal of the shares. Therefore, where such future rights or other such arrangements exist at the time of the share issue, sections 177 and 257CD would apply, preventing the company from accessing either the EIS or SEIS.

HM Revenue and Customs has been discussing the issue of share conversion rights with industry members and advisers for over a year to understand the implications of allowing companies to include share conversion rights in their articles of association and elsewhere.

Companies often issue shares with these rights for commercial reasons to enable them to simplify their share structures at some future date, for example before listing on a stock exchange or private refinancing. These amendments are intended to allow companies to issue shares with these rights without limiting their access to the EIS or SEIS. However, the amendments do not change the treatment that would apply if shares are converted or exchanged in this manner within the qualifying period. Neither do the amendments exclude any other aspects of the issuing arrangements from the application of Sections 177 or 257CD.

1.15 Employee Shareholder Share Scheme Ends

As announced at Autumn Statement 2016, the government will legislate in Finance Bill 2017 to withdraw the Capital Gains Tax exemption and the Income Tax reliefs in respect of shares received as consideration for entering into most Employee Shareholder Status agreements. Agreements entered into before 1 December 2016, or before 2 December 2016 where independent advice was received before 1:30pm on 23 November 2016, will retain their tax benefits.

1.16 New Tax Free Allowances Clause19

As announced at Budget 2016, legislation will be introduced in Finance Bill 2017 to create 2 new allowances for individuals of £1,000 each, 1 for trading and 1 for property income. Where the allowances cover all of an individual’s trading or property income (before expenses) then they will no longer have to declare or pay tax on this income. Those with higher amounts of income will have the choice to deduct the allowance instead of deducting their actual allowable expenses. These allowances will take effect from 6 April 2017.

1.17 Disguised Remuneration Schemes – Anti-avoidance Clauses 32 to 35 and Schedules 10 and 11

These changes are part of a package of proposals announced at Budget 2016 to tackle existing and prevent future use of disguised remuneration avoidance schemes. The first part of the package was legislated in the Finance Act 2016 and this clause introduces the next part of the package.

The future use of schemes will be prevented by strengthening the current rules. The existing use of schemes will be tackled by the introduction of a new charge on disguised remuneration loans that were made after 5 April 1999 and remain outstanding on 5 April 2019. Comprehensive provisions to ensure there is no double taxation are also being introduced. All of these changes were subject to a technical consultation that ran from 10 August 2016 to 5 October 2016.

These changes will help to meet the government’s objective of tackling tax


avoidance and will ensure that users of disguised remuneration avoidance schemes pay their fair share of tax and National Insurance contributions.

Further changes have been introduced to tackle avoidance by the self-employed and those trading through a partnership where their taxable income has been replaced by loans and other non-taxable amounts to avoid tax. The objective is to ensure that the full earnings of the self-employment remain part of the individual’s taxable income subject to income tax and National Insurance Contributions and that attempts to circumvent this position and still reward the individual are ignored.

Section 38 of ITTOIA 2005 sets out the conditions under which income tax relief may be allowed for an employee benefit contribution. Section 38(2) of ITTOIA 2005 currently allows a deduction to be claimed for employee benefit contributions when a qualifying benefit is paid out of those contributions.

The measures in clause 34 add further conditions – it will deny deductions in computing an employer’s taxable profits for contributions to an employee benefit scheme unless any associated charge to PAYE and NICs is paid within 12 months of the end of the relevant period. The relevant period is that for which the employer seeks a deduction in computing their taxable profits. The restrictions will also apply where a payment of remuneration is or becomes an employee benefit contribution.

The measure will also impose an overarching time limit such that if the employer does not claim a deduction within 5 years of the end of the period in which the contribution is made, that amount cannot be deducted when computing taxable profits. Section 1290 of CTA 2009 sets out the conditions under which corporation tax relief may be allowed for an employee benefit contribution. Section 1290(2) of CTA 2009 currently allows a deduction to be claimed for employee benefit contributions when a qualifying benefit is paid out of those contributions.

The measures in Clause 35 add further conditions – it will deny deductions in computing an employer’s taxable profits for contributions to an employee benefit scheme unless any associated charge to PAYE and NICs is paid within 12 months of the end of the relevant accounting period. The relevant accounting period is that for which the employer seeks a deduction in computing their taxable profits. The restrictions will also apply where a payment of remuneration is or becomes an employee benefit contribution.

The measure will also impose an overarching time limit such that if the employer does not claim a deduction within 5 years of the end of the accounting period in which the contribution is made, that amount cannot be deducted when computing taxable profits.

1.18 New Deemed Domicile Rules for Income Tax, CGT and IHT Clauses 40, 41 and

Sch 12

As announced at Summer Budget 2015, and following consultation, the government will legislate in Finance Bill 2017 so that those individuals who are not domiciled in the UK will be deemed to be UK domiciled for tax purposes if they are either (a) resident in the UK for


15 of the past 20 tax years, or (b) if they are born in the UK with a UK domicile of origin. These changes will bring an end to permanent non-dom status for tax purposes. This follows a consultation which set out the detail of the proposals to deem certain non-doms to be UK-domiciled for tax purposes. The changes will take effect from 6 April 2017.

1.18.1 Protection for overseas trusts

Paragraph 18 of the Schedule amends Schedule 5 to TGCA (provisions supplementing section 86 of TGCA 1992) by inserting new paragraph 5A.

New paragraph 5A (1) provides that section 86 TGCA does not apply in relation to a tax year – referred to as 'the particular year' – where certain conditions are met. These are that:

the tax year is 2017/18 or later;

the settlor is not domiciled in the UK at the time when the settlement was created;

where a settlement is created on or after 6 April 2017, that settlement was created when the settlor was not deemed domiciled in the UK under section 835BA ITA for the purposes of section 86(1)(c);

there is no time in the particular year when the settlor is either domiciled in the UK or treated as domiciled in the UK by virtue of 835BA ITA because they were born in the UK with a UK domicile of origin throughout that tax year;

no property or income has been provided directly or indirectly for the purposes of the settlement by the settlor, or any trust of which the settlor is a beneficiary or settlor, since 6 April 2017 (or the date of creation of the settlement if later) whilst the settlor is treated as domiciled in the UK by virtue of s 835BA ITA as a result of being UK resident for at least 15 of the previous 20 tax years.

New paragraph 5A(2) provides that, when considering property or income provided for the purposes of the settlor, the following should be disregarded:

any property or income which is provided on arms' length terms;

any property or income provided in pursuance of a liability which was incurred by any person before 6 April 2017; and

any property or income which is provided to meet any excess of the settlement's administration and taxation expenses for the year over its income.

1.18.2 CGT - Rebasing to 5 April 2017 value

Paragraph 21 provides that a person who was a non- UK domiciled remittance basis user prior to 2017/18 and becomes treated as UK domiciled under the 15 out of 20 rule from 6 April 2017 may, in computing the gain or loss accruing on the disposal of an asset on or after then, treat the acquisition cost of the asset as its value at 5 April 2017 (“rebasing”) provided that during the person’s ownership the asset was not situated in the UK in the period 16 March 2016 to 5 April 2017 (the “relevant period”), and the person remains deemed domiciled under the 15 out of 20 rule at all times until disposal. Paragraph 22 provides that assets brought to, or received or used in the UK are treated as not situated in the UK under certain circumstances. Paragraph 23 provides that a person may elect for rebasing not to apply to a disposal. An election must be made and once done will be irrevocable.


1.18.3 Mixed Funds

Paragraph 24 (1) introduces Part 4 of the Schedule which enables individuals who have previously been taxed on the remittance to rearrange their overseas funds so that they will be able to bring money as “clean capital” to the UK without being subject to the rules which normally apply for remittance basis purposes.

Paragraph 24(2) will disapply section 809R(4) ITA to any transfer of funds made between two overseas accounts, one of is a mixed fund, provided certain conditions are met. A mixed fund is defined in section 809Q(6) of that Act as money or other property containing or deriving from a mixture of income, gains and capital or income, gains and capital from different tax years.

These conditions are provided in subsections (a) to (f) of paragraph 28(2) of the Schedule. These are that:

the transfer is a transfer of money which made at any time during the 2017/18 tax year or the 2018/19 tax year;

the transfer is made from an account which is a mixed fund

the transfer is made into a different receiving account;

the transfer is nominated as a transfer for the purposes of this paragraph 26(2);

at the time when the transfer is made, no other transfer has been so nominated from that mixed fund into the receiving account; and

the transfer is made by a qualifying individual.

1.19 Non Doms with UK Property Owned Offshore Clause 42 and Sch 13

A further measure in Finance Bill 2017 will extend Inheritance Tax (IHT) to UK residential properties which are held by non-domiciled individuals through overseas vehicles. This will bring the treatment of such properties for IHT purposes into line with the existing treatment where they are held by individuals who are domiciled in the UK. The changes will take effect from 6 April 2017.

Paragraph 1 of new Schedule A1 provides that property is not excluded property where it falls within any of three categories set out in paragraphs 2 to 4 of the Schedule. This applies both where :

o the beneficial owner of the property is an individual domiciled outside the UK; and

o the property is held in a settlement where the settlor was domiciled outside the UK when the settlement was made.

1.19.1 Any right or interest in a close company

Subparagraph 2(1) provides that paragraph 2 applies to any rights or interests of a participator in a close company where its value is directly or indirectly attributable to a UK residential property interest. The term ' UK residential property interest' is defined in paragraph 8 of the new Schedule.

1.19.2 Interest in a partnership.

Subparagraph 3(1) provides that paragraph 3 applies to an interest in a partnership to the extent that its value is directly or indirectly attributable to a UK residential property interest.


Subparagraph 3(2) provides that the value of an interest in a partnership in subparagraph 3(1) is directly or indirectly attributable to a UK residential property interest where it is attributable as a result of one or more qualifying interests. It is not necessary for the qualifying interest to be owned directly by the partnership in subparagraph 3(1).

Subparagraph 3(3) provides that a qualifying interest for the purposes of subparagraph 3(2) has the same meaning as it does in subparagraph 2(3). Further, it provides that subparagraph 2(4) which disregards minor qualifying interests applies for the purposes of subparagraph 3(2).

1.19.3 Loans

Subparagraph 4(1) provides that paragraph 4 applies to any rights of a creditor in a relevant loan. It also applies to money or money's worth which is used or made available as collateral or security for a relevant loan. The term 'relevant loan' is defined in subparagraph 4(4).

Subparagraph 4(2) provides that paragraph 4 also applies to a participator's right or interest in a close company and to an interest in a partnership to the extent that its value is attributable to any rights of a creditor or to any collateral or security for a relevant loan.

1.20 Business Investment Relief Clause 18 At Autumn Statement 2015 the government announced it would consult on ways the BIR rules can be amended to increase take-up. The changes set out in the clause expand the types of businesses in which an investment can be made and ensure that the anti-avoidance rules do not discourage genuine investment. They also clarify parts of the rules which were previously unclear.

Finally there will be further clarification that a company which is a partner in a partnership is not to be regarded as carrying on the trade of the partnership, meaning that unless the target company is carrying on a commercial trade in its own right, it will not qualify for BIR.

1.21 New Corporate Loss Relief rules from April 2017

Clause 20 and Sch 6

Following consultation over the summer, Finance Bill 2017 will include to reform the rules governing corporate losses carried forward from earlier periods. The reform will:

o give all companies more flexibility by relaxing the way in which they can use losses arising on or after 1 April 2017 when they are carried forward - these losses will be useable against profits from different types of income and other group companies

o restrict companies’ use of losses carried forward so that they can’t reduce their profits arising on or after 1 April 2017 by more than 50% - this restriction will apply to a company or group’s profits above £5 million, carried forward losses arising at any time will be subject to the restriction

The rules will apply to losses arising in the form of trading losses, expenses of management, non-trading loan relationship deficits, UK property business losses and non-trading losses on intangible fixed assets. No changes are made to relief for in-year losses or in-year group relief, and to losses carried-back to an earlier period: they can still be set off against all available profits of the same period. There is also no change to the treatment of allowable losses under the chargeable gains legislation.

1.21.1 Anti-avoidance on change in ownership

Paragraph 50 to the new Schedule is one of the more controversial changes as it amends section 673 of CTA 2010, which applies to trading losses. It changes the timeframe within which a major change in the nature or conduct of a trade can occur in order to deny the carry


forward of losses. That timeframe is extended from a period within 3 years of a change in a company’s ownership to 5 years.

This extended timeframe applies only where both the change in ownership and the major change in the nature and conduct of the trade occur on or after 1 April 2017.

Where either of those events takes place before 1 April 2017 the current 3 year timeframe continues to apply.

1.22 Relief for Contributions to Grassroots Sports Clause 23

The government will legislate in Finance Bill 2017 to provide a Corporation Tax deduction for contributions to grassroots sports. This will encourage participation in grassroots sports and reduce administrative burdens for some organisations which currently make contributions to grassroots sports. The new rules allow companies to deduct all contributions to grassroots sports through recognised sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions.

1.23 Amendments to Patent Box Rules Clause 24

Finance Bill 2017 will include legislation adding specific provisions to the revised Patent Box rules introduced in Finance Act 2016, covering the case where R&D is undertaken collaboratively by 2 or more companies under a ‘cost sharing arrangement’ (CSA). The provisions will ensure that companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way.

1.24 100% FYA for Electric Vehicle Charging Points Clause 36

Finance Bill 2017 will include new measures to incentivise investment in Ultra Low Emissions Vehicles (ULEVs). The 100% first-year allowance (FYA) will allow businesses to deduct investments in electric charge-point equipment from their pre-tax profits in the year of purchase. The relief is designed to encourage the use of electric vehicles by increasing charge-point availability. This took effect from 23 November 2016 to avoid delays to planned investments.

1.25 Substantial Shareholdings Exemption (SSE) Relaxed Clauses 27 and 28

Following consultation over the summer, the government will legislate in Finance Bill 2017 to simplify the rules. It will remove the investing requirement within the SSE and will also provide for the SSE to apply to companies owned by qualifying institutional investors, without regard to the nature of the activities carried on by the companies they are invested in. Both changes will apply from 1 April 2017. These changes will ensure that the UK remains a competitive environment for global investors, whilst reducing some complexity in the Corporation Tax system for UK groups.


1.26 Tax Relief for Museums and Galleries Clause 22 and Sch 8

The government will broaden the scope of the museums and galleries tax relief that was announced at Budget 2016 to include permanent exhibitions. This is following a consultation on the policy design which ended on 28 October. Relief is available on the cost of developing new exhibitions including those that are toured. Autumn Statement 2016 announced the rates for the relief as 25% for touring exhibitions and 20% for non-touring exhibitions. The relief will allow museums and galleries to claim a credit worth up to £100,000 on exhibitions that are toured and £80,000 on non-touring exhibitions. The maximum credit allowable is the equivalent of qualifying expenditure of £500,000. The relief will take effect from 1 April 2017 to April 2022 unless renewed. In 2020 the government will review the tax relief and set out plans beyond 2022.

1.27 Insurance Premium Tax (IPT) to increase to 12% Clause 44

As announced at Autumn Statement 2016, the government will legislate in the Finance Bill 2017 to increase the standard rate of IPT from 10% to 12%. The changes will take effect from 1 June 2017 for premiums received on or after that date relating to risks for which the period of cover under the terms of an insurance contract begins on or after that date.

1.28 “Requirement to Correct” Offshore Tax Non-compliance Clause 94 and Sch 22

Following consultation in summer 2016 the government will legislate in Finance Bill 2017 to introduce a new requirement for those who have failed to declare UK tax on offshore interests to correct that situation, with new tougher sanctions for those who fail to do so. This new ‘requirement to correct’ is expected to come into force when the Finance Bill 2017 receives Royal Assent and will apply to all taxpayers with offshore interests who have not complied with their UK tax obligations.

1.29 Enquiries – Partial Closure Notices Clause 90 and Sch 19 This measure allows HMRC to conclude discrete matters in an enquiry into a Self-Assessment (SA) or Corporation Tax Self-Assessment (CTSA) tax return where more than one issue is open. This will be done by the issuing of a Partial Closure Notice (PCN) ahead of the final closure of an enquiry.

As summarised in the responses to the Consultation on this change, taxpayers requested a reciprocal power on the basis of fairness. The government has agreed and, accordingly, taxpayers will be able to apply to the tribunal for a direction requiring HMRC to issue a Partial Closure Notice in relation to a matter.

HMRC will issue PCNs only in enquiries where a customer's tax affairs are complex or where there is avoidance or large amounts of tax at risk.

1.30 Tax Avoidance - Errors in Taxpayers Documents Clause 91 The aim of the clause is to act as a disincentive to entering into tax avoidance. It ensure that those who submit documents that contain inaccuracies in relation to their use of avoidance schemes cannot sidestep a penalty by claiming they took reasonable care based on advice which is supplied by those not qualified to give it or who are themselves connected to the avoidance in question. The clause will come into effect when the Act is passed and will apply


to inaccuracies in documents relating to tax periods which begin on or after 6 April 2017 and end on or after the day the Act is passed.

1.31 Penalties for Enablers of Defeated Tax Avoidance Schemes Clause 92 This clause supports the government's objective to influence and promote behavioural change in the minority of tax agents, intermediaries and others who design, market or facilitate the use of abusive tax arrangements. It will ensure that enablers of abusive arrangements can be held accountable for their activities, while ensuring that the vast majority of professionals who provide clients with advice on genuine commercial arrangements will not be impacted.

The penalty will apply to any person who, after the clause comes into effect, enables another person to enter into abusive tax arrangements which have later been defeated. Defeat and enabling are defined in the legislation and do not include the provision of second-opinion advice on arrangements or a proposal for arrangements designed or made available by others provided no modifications are suggested to the arrangements or, if modifications are suggested, there is a recommendation that the modified arrangements are not implemented.

The penalty will apply where the defeated arrangements are abusive. Arrangements will be treated as abusive if they meet a ‘double reasonableness test’. This will ensure that the clause does not inhibit genuine commercial transactions. External scrutiny will be provided by the GAAR Advisory Panel, and any penalty HMRC decides to charge having considered the Panel opinion in relation to the arrangements in question or substantially similar arrangements will be appealable.

1.32 Customs Powers to Search Vehicles and Containers Clauses 96 and 97

The government will legislate in Finance Bill 2017 to clarify the powers that allow customs officers to use force to gain access to a locked vehicle, when stopping and searching it, which they suspect contains goods liable to forfeiture. This will amend section 163 of the Customs and Excise Management Act 1979. The changes will take effect upon Royal Assent.

Finance Bill 2017 will also extend the powers officers currently have under section 24 of the Finance Act 1994 so they can examine goods away from ports, airports and other approved places, under customs control, inland after clearance. This will enable an officer to move, open or unpack goods or containers, or require them to be opened or unpacked, and search the containers and anything in them, as well as mark them as necessary. The changes will take effect upon Royal Assent.

1.33 Pensions – Money Purchase Annual Allowance reduced to £4,000

As announced at Autumn Statement 2016 the government will legislate in Finance Bill 2017 to reduce to £4,000 the money purchase annual allowance which restricts the amount of tax relieved contributions an individual can make in a year into a defined contribution pension if they have flexibly accessed their pension savings.

1.34 New 16.5% VAT Flat Rate for “Limited Cost” Traders

As announced at Autumn Statement 2016, the government will introduce a new 16.5% flat rate, with effect from 1 April 2017, for all FRS businesses with limited costs, such as many labour-only businesses. This measure creates a more level playing field for all small businesses, while keeping VAT accounting simple for the small businesses who use the scheme as intended. Businesses using the scheme, and new businesses joining the


scheme, will need to complete a simple test, using information they already hold, to work out whether they must use the new 16.5% rate. To support businesses, the government will introduce an easy to use online tool that will help them determine whether the new rate applies to them. This rate will be introduced through secondary legislation.

1.35 New ATED Rates from 2017/18

With the exception of the lowest band the Annual Tax on Enveloped Dwellings (ATED) annual charges will rise in line with the September 2016 CPI. The new charges will apply for the chargeable period 1 April 2017 to 31 March 2018.

Chargeable amounts for 1 April 2017 to 31 March 2018:

Property value Annual charge

More than £500,000 but not more than £1 million £3,500 (no change)

More than £1 million but not more than £2 million £7,050




More than £20 million £220,350

1.36 Spring 2017 Budget

The Chancellor has announced that the Government will publish its final Spring Budget on Wednesday, 8 March 2017.

As announced at Autumn Statement 2016, following the Spring 2017 Budget, Budgets will instead be delivered in the Autumn.

2. MAKING TAX DIGITAL (MTD) UPDATE:

On the 31 January HMRC announced a policy statement summarising over 3,000 responses it had received on the 6 consultation documents. HMRC also announced that MTD legislation will be included in the Finance Bill 2017.

2.1 Bringing Business Tax Into The Digital Age

HMRC remarked that “Respondents overwhelmingly support the move to a digital tax system. However, the main concerns raised focused on:

the pace of change

the capability of the smallest businesses and those who struggle with digital technology to adapt

burdens on businesses

agents’ ability to access digital services to support their clients

data security when using third party software” An important relaxation that was announced is that businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business - this is likely to involve combining the spreadsheet with software (The importance of retaining the ability to keep records in this way was requested by a wide range of stakeholders, particularly small businesses);


Businesses eligible for three line accounts will now be able to submit a quarterly update with only three lines of data (income, expenses and profit); Free software will be available to businesses with the most straightforward affairs; The requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally; As recommended by the accounting profession there will be a trial of the new system before it goes live in 2018.

End of year activity The deadline for finalising taxable profit for a period will be the earlier of:

10 months after the last day of the period of account, or

31 January following the year of assessment in which the profits for that period of account are chargeable to income tax (the existing self assessment deadline).

For many businesses, this will involve checking and agreeing the total for that year, based on the information which they have provided in the relevant four quarters.

Businesses with more complex affairs will be able to add and apply annualised reliefs and allowances for the period as these would not have been reflected in the quarterly reporting updates.

Start date and roll out The MTDfB obligations will start with effect from the first accounting period beginning after 5 April 2018. The government is still considering the possibility of phasing in the obligations for some businesses.The key dates are:

April 2018 if profits chargeable to income tax and pay Class 4 national insurance contributions (NICs);

April 2019 if registered for and pay VAT; and

April 2020 for corporation tax payers.

Individuals in employment and pensioners will be exempt from digital tax reporting unless they have secondary incomes of more than £10,000 per year from self-employment or property.

Charities (but not their trading subsidiaries) will not need to keep digital records; For partnerships with a turnover above £10 million, MTD for Business is deferred until 2020.

2.2 Tax Administration/ Penalties

The consultation covered proposals for compliance powers and for late submission and late payment penalties. It proposed that current interest rules for Income Tax and Class 4 National Insurance Contributions should continue to apply and asked for views on the possible alignment of interest rules across tax regimes. On the matter of late submission penalties HMRC state that more work is required in this area. HMRC state: “Having considered the responses to the proposals for late submission penalties, we recognise that more work needs to be done and will look again at this. We can confirm that in order to support customers during the transition to Making Tax Digital for Business, customers will be given a period of at least 12 months before they are charged any late submission penalties. Most respondents considered penalty interest to be the most attractive proposal for a late payment sanction. Current interest rules for Income Tax and Class 4 National Insurance Contributions will continue to apply. We will now consult further on specific proposals for late payment penalty interest and the alignment of interest rules in 2017”.


2.3 Simplifying Tax For Unincorporated Businesses

As far as simplifying tax for unincorporated businesses, HMRC conclude that: “The vast majority of respondents supported the objective of simplifying the tax system. Some were concerned about the timing of the reform in this consultation and whether businesses have the capacity to understand multiple changes at once. The government has chosen to proceed with two of the measures published in the consultation. The measures being taken forward are increasing the entry threshold for the cash basis to £150,000 and simplifying the rules on capital and revenue expenditure within the cash basis to make it easier for businesses to work out whether their expenditure is deductible for tax.” Further consultation is being given to the reform to the basis period rules and measures to simplify period end reporting requirements.

2.4 Unincorporated Property Businesses

On the cash basis accounting for unincorporated property businesses, HMRC comment: “Although a majority of respondents supported having no entry threshold for using cash basis, others felt that the cash basis is not suitable for the largest unincorporated property businesses and that we needed a threshold. The government has therefore decided to include a maximum rental income threshold of £150,000 per property business. This excludes only 0.5% of businesses, leaving approximately 2.36 million eligible businesses with up to 1.8 million expected to benefit from the administrative savings of using cash basis.”

2.5 Voluntary Pay As You Go

This consultation looked at options for those businesses, self-employed people and landlords required to use digital record keeping to make and manage voluntary payments of their tax throughout the year. It considered how voluntary payments will be allocated across different tax bills, explored the best way of dealing with the repayment of voluntary payments and the opportunity regular updating provides to make earlier repayments. The majority of respondents wanted voluntary payments to be easily and speedily repayable. HMRC have decided that a repayment will not be repayable shortly before a liability becomes due only if the customer failed to pay on time in the previous 12 months. HMRC agrees that early repayments are better left until Making Tax Digital for Business is fully embedded. HMRC will allocate voluntary payments against tax liabilities as they arise, instead of the customer and decided to proceed with their proposal on payment allocation despite reservations from respondents. “We believe this will reduce the need for customers to have to access their digital tax account to tell HMRC where payments should go. We will ensure that robust allocation rules are in place and publicly available.”

2.6 Transforming The Tax System Through The Better Use Of Information

This consultation focused on how HMRC will make better use of the information they currently receive from third parties to save customers providing information they already hold and to provide a more transparent service. In 2017 HMRC will start to use PAYE information during the tax year to calculate whether the right tax is being paid. “In the short-term, customers will still receive letters directing them to their digital account to check this, but in future, customers will be prompted digitally to check their tax account.” HMRC have been working with third party information providers and individual customers on co-designing a process for resolving queries when a customer believes the information provided by a


third party is incorrect. They will continue to use customer feedback and engage with stakeholders to ensure that this process is clear and easy to use. HMRC will adopt a gradual phased approach to using further sources of third party information and will seek to make better use of information they already hold.


3. HMRC ANNOUNCEMENTS AND OTHER RECENT TAX DEVELOPMENTS

3.1 HMRC Guidance on Public Sector Off-payroll working changes

On 3 February 2017 HMRC issued guidance on the operation of the new rules that will apply to “off payroll” workers in the public sector that will start to apply from 6 April 2017:

Many people use their own limited companies also known as a personal service companies (PSCs) to provide their services to clients.

Depending on the nature of the contracts and services you provide through your company, your work can be deemed to be an employment for tax purposes. Existing rules, the intermediaries legislation (often known as IR35) tell you how you should treat payments received from contracts like that. The way in which those rules are applied for contracts in the public sector is changing, following the introduction of new provisions for off-payroll working.

From 6 April 2017, where you provide your services to a public authority client, new rules apply, the client, agency or other third party who pays you (the fee-payer) will deduct Income Tax and primary Class 1 National Insurance contributions (NICs) from your fees.

The fee-payer calculates a deemed direct payment and pays Income Tax and Class 1 primary NICs arising on it over to HM Revenue and Customs (HMRC) on your behalf. Those payments are reflected on your tax records and contribute to your state benefit entitlement. They will also pay secondary Class 1 NICs on the deemed earnings.

3.1.1 Deciding if the rules apply

When you are considering a contract for providing your services to a public authority client, they will decide whether the off-payroll working legislation should apply. That decision is informed by a variety of factors based on the nature of the contract and the services you will provide to the client.

The Employment Status Service, an online tool expected to be made available by the end of February 2017, can help them make that decision. The online tool will be for use if you use either an employment agency, or other third-party to get work.

Where it has been determined that the rules should apply, how your company gets paid for your work will change.

3.1.2 Payments received from the fee-payer

The fee-payer is the organisation who is paying your company for the services you provide. The person paying your company will pay VAT (if you are VAT registered) and then deduct Income Tax and primary Class 1 NICs from your fee.

As an example (figs are illustrative):

your company invoices the fee-payer for £7,200 for services provided (£6,000 fees and £1,200 VAT)

the fee-payer deducts £1,871 (£1,458 tax and £413 primary Class 1 NICs) which it pays to HMRC

your company receives £4,129 for your services plus £1,200 VAT

https://www.gov.uk/guidance/ir35-find-out-if-it-applies

https://www.gov.uk/guidance/off-payroll-working-in-the-public-sector-reform-of-intermediaries-legislation

https://www.gov.uk/guidance/off-payroll-working-in-the-public-sector-reform-of-intermediaries-legislation


the fee-payer also pays secondary NICs on the deemed direct payment

3.1.3 Paying yourself through your company

The off-payroll working legislation will allow for your company to receive a deduction up to the full amount of the deemed direct payment so you won’t be taxed twice. There are a number of ways your company can pay you for your services. These include either or both of:

paying you a salary through your company’s payroll paying you a dividend from the company profits

Salary You can pay yourself for the work provided to public sector clients through your company’s payroll. There are changes to the way you operate your payroll for new or existing public sector contracts, which are subject to the new provisions.

Your company will receive a deduction up to the total of the net fee, exclusive of VAT received from the fee-payer. In the example given, that would be a non-taxable payment up to the total of £4,129 that does not require further deduction of Income Tax or NICs. You can pay yourself that amount through your payroll without Income Tax and NICs.

You should report to HMRC non-taxable payments your company pays you on the Full Payment Submission (FPS) that your payroll software produces.

If you also work in the private sector, you will need to determine if the existing intermediaries legislation rules apply to that work. Where they do, you will need to calculate a deemed employment payment for those contracts.

You must report the pay, Income Tax and NICs to HMRC each time your company pays you, using your payroll software. The deductions must be paid over to HMRC by the 19th or 22nd calendar day of the following month, depending on your payment method.

Secondary Class 1 NICs will be payable on earnings paid through your company’s payroll on which you deduct primary Class 1 NICs.

Dividends If you are a director of your own company, you might choose to pay yourself a dividend from the company’s profits, where you have chosen to leave the money in the company. You can pay yourself a tax-free dividend up to the total of the net fee received from contracts in the public sector, where Income Tax and NICs have been deducted at source. You do not need to declare that dividend on your self-assessment return. Corporation Tax calculations When you are calculating your company’s income, you should deduct the total amount of the invoice, less the amount of Income Tax and NICs that were deducted at source. In the example given, that would be £4,129 (£6,000 minus £1,871). Your company accounts should reflect this deduction to ensure the amount is not taxed twice. VAT If you are VAT registered, you should continue to include VAT in your invoices. You will need to file your VAT returns and pay over to HMRC any VAT payments that are due.



https://www.gov.uk/vat-returns


3.2 HMRC Guidance on Transactions in UK Land

On 13 December 2016 HMRC issued guidance to clarify the scope of the new transactions in UK land rules introduced by Finance Act 2016 sections 72 to 82 that apply from 5 July 2016.

This guidance states that the new rules do not apply to businesses which acquire and repair properties in order to generate rental income, even if those businesses also enjoy capital appreciation from those properties. So most buy-to-let landlords should not be subject to income tax on the gains he makes when he sells properties which were acquired for letting.

The HMRC guidance also makes clear that the new transactions in UK land rules are directed at businesses which conduct a trade consisting of property development or property dealing. The guidance lists the factors which would indicate the activities amount to a trade as opposed to an investment business. This point was entirely missing from FA 2016.

Although the new guidance is extensive at 64 pages it does not cover every situation. It states that taxpayers should engage with their HMRC customer relationship manager (CRM) to discuss whether their transactions are caught. Taxpayers who do not have a CRM can use HMRC’s non-statutory clearance service to clarify if the new transactions in UK land rules apply to them.

When the anti-avoidance legislation was introduced there were concerns that it was very widely drawn and could potentially catch a large population of taxpayers, however the HMRC guidance seeks to “clarify” the scope to narrow the effect to the intended targets. Note however that HMRC guidance has no legal standing and the courts will look initially at the wording of the legislation and in particular the intention of the parties.

BIM60520: Profits from a trade of dealing in or developing UK land: Overview All profits from a trade of dealing in or developing UK land are now specifically subject to tax in the UK. The new rules have been brought in through amendments to Section 5 CTA 2009 and Section 6 ITTOIA 2005, repeal of Part 18 CTA 2010 and Chapter 3 Part 13 ITA 2007, and the introduction of Part 8ZB CTA 2010 and Part 9A ITA 2007. The amendments to Section 5 CTA 2009 and Section 6 ITTOIA 2005 expand the scope of the UK legislation, to include dealing in and developing UK land regardless of the residence of the company or individual, or whether that company or individual is trading in the UK through a permanent establishment. Section 5B CTA 2009 and Section 6B ITTOIA 2005 set out what is meant by a trade of dealing in or developing UK land. Part 8ZB CTA 2010 and Part 9A ITA 2007 prescribe the treatment of certain transactions or arrangements that will form part of profits of a trade of dealing in or developing UK land. The commencement and transitional provisions set out the treatment of transactions in the period between Budget day (16 March 2016) and the introduction of the legislation on 5 July 2016; and of transactions that straddle 5 July 2016. BIM60525: Profits from a trade of dealing in or developing UK land: Expansion of territorial scope of Corporation Tax and Income tax: Overview


The UK’s territorial scope of charge to corporation tax and income tax is set out in Section 5 CTA 2009 and Section 6 ITTOIA 2005. Prior to the changes in the Finance Act 2016 a non-resident company was chargeable to UK Corporation Tax, only to the extent that the profits were attributable to a UK Permanent Establishment. In circumstances where its arrangements met the specific conditions in Part 3 Finance Act 2015 it may have been charged to Diverted Profits Tax. The territorial restriction has been removed for UK land transactions. Section 5 CTA 2009 and Section 6 ITTOIA 2005 have been amended to the effect that non-resident companies, and non-resident non corporates are now within the charge to corporation tax or income tax (as appropriate) on the full profit, from carrying on a trade of dealing in or developing UK land. It is not necessary for them to be trading through a permanent establishment in the UK or for them to be resident in the UK. The expansion of the territorial scope does not impact the treatment of rental income to non-resident landlords. Where a non-resident company which does not carry on a trade in the United Kingdom through a permanent establishment in the United Kingdom is within the new CT charge and holds investment properties or derives rental income from properties in the UK such rental income remains subject to income tax and is not taxed as part of the new trade. Where a non-resident company is within the new CT charge and it derives rental income from properties it holds as part of its trade, the rental income will be subject to corporation tax if it is derived from a permanent establishment in the United Kingdom. If the non-resident company has no permanent establishment in the UK the rental income will be subject to income tax. Where a non-resident company within the new CT charge, holds properties on trading account and also derives rental income from those properties, the rental income will be within the CT charge if it is derived from a permanent establishment in the United Kingdom - otherwise, the rental income will be charged to IT. Example Company X is not resident in the UK. It purchases a block of flats in the UK to develop and sell as part of a trading business. As Company X carries on a trade of developing UK land it is within the charge to UK corporation tax. All of the profits from the trade of developing UK land will be subject to corporation tax regardless of the place of residence of the company, or the amount of profit that would be attributed to a UK PE of Company X. BIM60530: Profits from a trade of dealing in or developing UK land: Expansion of scope of Corporation Tax and Income tax: Trade of dealing in or developing UK land The meaning of trade of dealing in or developing UK land is set out in Section 5B CTA 2010 and Section 6B ITTOIA 2005. A non-UK resident’s trade of dealing in or developing UK Land consists of:

dealing in UK land or developing UK land for the purpose of disposing of it, this includes redeveloping, or

any activities which are treated as profits of a trade of dealing in or developing UK land by virtue of Part 8ZB CTA 2010 or Part 9A ITA 2007.


A trade of dealing in land exists where land and/or property is acquired or developed with a view to profit on disposal. This is in contrast to the situation where property is acquired for investment, usually rental income, but over time that property may increase in value and a profit may therefore be realised from its eventual disposal. This increase in value may arise as a result of movement in the property market or from action taken by an owner to enhance the value of the property for investment purposes. To establish if an individual or company is trading, the facts of each case are key. The list below gives some factors which could have an impact when considering if the business is carrying on a trade or investment in respect of land. This list is not definitive and each case will depend on its individual facts and circumstances.

- Length of time the land is owned.

- Intention at purchase date.

- Any change of intention.

- How the acquisition is funded.

- The usage of the property by the owner.

- Whether it is developed or improved (rather than repaired) before disposal.

- Whether there is a connection with an existing trade – for example a builder buying a property to renovate and sell.

The anti-fragmentation rule needs to be taken into account when considering whether a person is trading (BIM60600); slice of the action contracts and similar arrangements (BIM60645) are also to be considered as trading. BIM60540: Profits from a trade of dealing in or developing UK land: Expansion of scope of Corporation Tax and Income tax: Permanent Establishment exemption Section 18A (2A) CTA 2009 sets out how the Permanent Establishment exemption applies to a foreign Permanent Establishment carrying out a trade of dealing in or developing UK land. Where a company makes an election for foreign Permanent Establishment exemption, profits from a company’s trade of dealing in or developing UK land will not benefit from exemption. This means the full amount of the profits or losses relating to the UK property trade should be taxed or allowed. Example UK resident Company X has a non UK Permanent Establishment (PE) which is developing a property in the UK. The PE has a total profit of 100 and 40 relates to the UK property trade. For the purposes of PE exemption the 40 relating to the UK property trade should not be left out of account and should be taxed in the UK. BIM60645: Profits from a trade of dealing in or developing UK land: 'Slice of the action' contracts and overage arrangements The transactions in UK land rules can be applied to ‘slice of the action’ contracts. ‘Slice of the action’ contracts are so called because they confer upon a landowner (who holds the land as an investment), the right to share in the proceeds of any subsequent development by the purchaser. In these cases, the contract for sale of the land to a builder or developer provides for consideration that is, in whole or in part, contingent upon the successful development of the land.


A common arrangement is for the landowner to receive a fixed sum at the time of the disposal, plus a percentage of the sale proceeds of each building subsequently constructed by the purchaser on the land. Such ‘slice of the action’ contracts, and other overage arrangements where the landowner is entitled to receive consideration, if a specified condition is satisfied often fall within the transactions in UK land rules for the following reasons:

- The landowner is included under the definitions of ‘person’ as the ‘slice of the action’ contract or other specified contractual condition is an arrangement with the person holding the land.

- The land has been developed with the main purpose of realising a profit or gain from disposing of the land when developed (condition D in Section 356OB(4) CTA2010).

Example 1 A landowner sells land to a developer for £10m. At the date of sale the land is valued at the same amount. The contract of sale specifies that if the developer makes profits in excess of £5m from developing the land the landowner will receive 10% of subsequent profits. The developer makes £8m profit and pays the landowner £300k. In this instance the landowner is concerned in an arrangement to develop the land and condition D is met. The £300k will be taxed as trading income. Example 2 A landowner sells land to a developer for £6m. The developer’s intention is to build a block of flats. The contract stipulates that £3m will be paid to the landowner immediately, and £3m will be paid to landowner at the earlier of 4 years after the date of sale or when 20 of the flats have been sold. Here the landowner is not concerned in an arrangement to develop the land. The £3m is deferred consideration receivable regardless of whether the land will be developed or not. BIM60650: Profits from a trade of dealing in or developing UK land 'Slice of the action' contracts: Portion of gain relating to period before relevant activities commenced may be exempt In a ‘slice of the action’ contract the following legislation may be relevant: ● Section 356OL CTA 2010 (for corporation tax)

● Section 517L ITA 2007 (for income tax) Where either of these sections is in point the portion of the gain attributable to the period prior to the intention being formed may be exempted from the transactions in UK land rules. Any gain which has accrued whilst the land functioned as a capital asset will not therefore be charged to income tax or corporation tax as income under the transactions in UK land rules. Only the gain arising after the intention to develop has been formed will be taxed as income under those rules. The ‘first intention date’ is a question of fact, which should, if possible, be agreed at an early stage in any enquiry. It is expected to be the date at which it was first intended that the land would be developed or sold, for the purpose of subsequent development. When the ‘first intention date’ has been established you should obtain a valuation of the land from the District Valuer at that date. BIM60655: Profits from a trade of dealing in or developing UK land: 'Slice of the action' contracts: Portion of charge may be exempt: Example


In a ‘slice of the action’ contract the effect of the exemption from the transactions in UK land rules can be significant. Normally, it removes an amount equal to the value of the land at the first intention date from the calculation of income chargeable to tax under those rules. Example A landowner agrees to sell some fields to a land developer for a fixed payment of £1m and a further payment of £0.5m which is contingent on the properties being built on the site being sold.

- The initial fixed payment of £1m is made on 5/8/2016 ,

- Further payments of £0.5m contingent on the development are agreed , and

- The value when the contract is signed on 5/8/2016 (the first intention date) is £1.2m. The amount excluded from the calculation of the chargeable income is £1.2m. The amount of income subject to income tax or corporation tax is £0.3m: the total payments received (£1.5m) less the value of the land at the first intention date (£1.2m). The balance of the gain is taxed as a chargeable gain. If, exceptionally, the first intention date value is less than the fixed initial payment, the amount of the gain taxed as income is the entirety of the contingent payments. The fixed initial payment is not within the calculation of the income since it is not contingent upon the development. Example A landowner sells land held for investment purposes to a developer for £5.2m. The developer intends to build 10 houses on the land. At the date of sale the land is valued at £5m and in this case this is the first intention date. The contract of sale specifies that £1m will be paid to the landowner when the first house is sold. At the date of sale £5.2m is recognised for capital gains tax purposes. Three years later the first house is sold. At this point condition D is met and the £1m will be taxed as trading income.

3.3 HMRC List Top Ten “Dodgy” Expense claims

On a lighter note just before the 31 January self assessment deadline HMRC published a list of its top ten spurious claims for a deduction as allowable expenses. They say that they want to make sure other taxpayers do not make similar claims to those it rejected on 2014/15 self assessment returns. The top ten were:

1. Holiday flights to the Caribbean 2. Luxury watches as Christmas gifts for staff – even though it had no employees. 3. The cost of regular Friday night ‘bonding sessions’ - running into thousands of

pounds 4. International flights for dental treatment ahead of business meetings, 5. Pet food for a Shih Tzu ‘guard dog’. 6. Betting slips 7. Armani jeans as protective clothing for a painter and decorator 8. Underwear (for personal use) 9. The costs of a garden shed for private use, plus the costs of the space it takes up in

the garden, 10. Expenses for a caravan rental for the Easter weekend.


4. RECENT TAX CASES AND TRIBUNAL DECISIONS

4.1 Directors Not liable for unpaid PAYE and NICs West v HMRC

[2016] UKFTT 536

For a number of years Mr West, who was the sole director and shareholder of a limited company (“A”), regularly drew money from A which were recorded in the director's loan account as loans.

At the end of the year a small amount of remuneration and a much larger amount of dividend were approved and credited to the loan account, thereby extinguishing the loan. Corporation tax was paid on A's profits and income tax was paid by Mr West through self-assessment.

However, for the years ending 30 April 2007 to 2010 the loans remained outstanding and increased in amount. Towards the middle of 2011, Mr West became concerned about the state of A's business and was advised to put A into liquidation. He also instructed his accountant to prepare accounts showing an amount of director's remuneration which, after deducting pay as you earn (“PAYE”) liabilities and national insurance contributions (“NICs”), would be sufficient to offset the drawings on the loan account. That “net” remuneration, which was equivalent to the outstanding director's loans of £129,150, would be “grossed up” by a calculated PAYE and NICs liability to arrive at the figure for director's remuneration in the profit and loss account of £202,967.

The company's loan to Mr West was repaid in full by the “net” remuneration. The PAYE and NICs were shown on the balance sheet as current liabilities. In September 2011, at a creditors' meeting, a resolution was passed for the voluntary winding up of A. At that time PAYE and NICs totalling £99,886 were still owing to HMRC.

HMRC subsequently issued directions under the Income Tax (Pay As You Earn) Regulations 2003 (regulation 72) and the Social Security (Contributions) Regulations 2001, (reg 86) in respect the outstanding PAYE and NICs liabilities. Mr West appealed to FTT.

It was held that PAYE had been properly deducted and thus the first precondition to the operation of reg 72 was not fulfilled. As all three conditions had to be fulfilled, there was no basis for transferring A's liability to account for income tax under PAYE to Mr West. In addition, as A deducted tax from the payment to the appellant which was used to discharge the money's due from him to his director's loan account, there was no wilful failure within the terms of reg 72(4); The court distinguished this case from R v IRC, ex parte McVeigh (1996).

The question to be considered under the Social Security (Contributions) Regulations 2001, reg 86 was whether there had been a wilful failure to pay, rather than a wilful failure to deduct. The issues to be considered were, first, whether the employer had wilfully failed to pay the employee's contributions on the latter's behalf, and secondly, if so, whether the employee knew that the employer had wilfully failed to pay those primary NICs.

On the evidence it was clear A had not paid those contributions and so the initial question was whether A's failure to pay was wilful. A's position, at the time when the draft management accounts were in preparation and the remuneration was allocated to discharge the outstanding balance on Mr West’s director's loan account, was such that it would not have been open to it to pay the resulting NICs to HMRC. Therefore, A's failure to pay the NICs was not wilful or deliberate and so the precondition in reg 86(1) (a) was not fulfilled, and that therefore A's liability to pay the NICs could not be transferred to Mr West under reg 86(1). The appeal was therefore allowed.