Tax Update 13 March

Tax update A round-up of recent issues 13 March 2018 1. General 2 1.1 HMRC’s refusal of LDF benefits to EBT applicants not an abuse of power 2 1.2 EC publishes report on ‘aggressive tax planning’ indicators 2 1.3 Proposals on intermediaries who promote aggressive cross-border tax schemes 3 1.4 First two unexplained wealth orders issued 3 2. Private client 3 2.1 HMRC publishes warning to owners of offshore assets 3 2.2 FTT finds reasonable excuse for late filed return 3 2.3 HMRC discovery assessment vacated following a COP9 investigation 4 2.4 FTT finds trading losses allowable deduction against general income 4 3. Trust, estates and IHT 5 3.1 Trust registration service (TRS) penalties announced 5 4. PAYE and employment 5 4.1 SAYE savings holiday 5 5. Business tax 6 5.1 Consultation into first time buyer relief for Land & Buildings Transaction Tax (LBTT) 6 5.2 New guidance on treatment of leases for LBTT made available 6 5.3 HMRC succeeds over contrived restrictive covenants payments in a DOTAS scheme 6 5.4 ATED valuation – a reminder 7 6. VAT 7 6.1 Further judgment on ‘white goods’ input tax claims 7 6.2 AG opines that sale of credits to participate in online penny auctions is taxable 7 6.3 MTD for VAT regulations 8 6.4 MTD for VAT – Smith & Williamson briefing note 8 6.5 FTT rules on partial exemption special method 9 7. And finally 9 13/03/2018 1 1. General 1.1 HMRC’s refusal of LDF benefits to EBT applicants not an abuse of power The CA has held that HMRC’s refusal to grant the full benefit of the Liechtenstein disclosure facility (LDF) to the taxpayers, who had all operated EBTs, was not an abuse of power. The taxpayers had all operated employee benefit trusts (EBTs) and had applied for registration under the LDF. At the time of their applications, HMRC was in the process of reviewing the use of the LDF for EBT purposes, and this potential policy change was notified to the relevant tax advisers before the applications were made. On receipt of the applications, HMRC put them on hold and did not register them for the LDF. Some months later, HMRC confirmed that, while taxpayers registered to use the LDF could continue to settle under the favourable terms of the LDF, those who had applied but had not yet been registered could no longer access the full favourable terms it offered. The taxpayers claimed that this was such conspicuous unfairness as to amount to an abuse of HMRC’s powers, as it had already accepted applications from taxpayers in similar tax positions. The HC dismissed the claim for judicial review as covered in our 1 February 2016 Update. The CA has now rejected the taxpayer’s appeal of that decision, and agreed with the HC that there was no conspicuous unfairness. It did however note that: ‘it is regrettable that HMRC took no steps to explain to BDO that the claimants' applications for registration would not be processed in the usual way while the review of the LDF was still in progress. It would also have been better if there had been a formal public announcement of the commencement of the review on 31 July 2013, rather than the relatively informal notification given to BDO and other agents.’ City Shoes (Wholesale) Limited v HMRC [2018] EWCA Civ 315 www.bailii.org/ew/cases/EWCA/Civ/2018/315.html 1.2 EC publishes report on ‘aggressive tax planning’ indicators The report notes that the aim of the study is to provide economic evidence of the relevance of so- called aggressive tax planning (ATP) structures for all EU Member States, relying on various indicators. While there is some data limitation, the study provides a broad picture of which Member States appear to be exposed to ATP structures, and how this impacts on their tax base (erosion or increase). Findings included: • profitability of the corporate sector is found to be particularly low in France, Croatia, Slovenia and the United Kingdom. This was noted as a potential indicator of an erosion of the tax base owing to ATP; • both inward and outward foreign direct investment stocks are several times higher than GDP in Cyprus, Ireland, Luxembourg, Malta and the Netherlands. It was noted that extraordinarily high values could indicate that substantial ATP activities take place; • large market shares of large corporations suggest that some Member States like Germany or the UK are more vulnerable to ATP because of high concentration among the corporate tax payers; • the extraordinarily high share of foreign-controlled firms in Estonia and Luxembourg might possibly reflect some tax-driven behaviour; • the high share of gross operating surplus in foreign controlled firms in Ireland, Hungary, Luxembourg and Romania can also be consistent with a high profitability of the corporate sector in these countries, which could in turn indicate ATP; • Ireland stands out as the Member State with the highest net royalty payments as a percentage of GDP, which is consistent with a potential ATP channel using royalty payment; • strategic transfer pricing strategies could affect the tax base in: Germany, France, Spain, UK, the Netherlands and Italy. 13/03/2018 2 https://ec.europa.eu/taxation_customs/sites/taxation/files/taxation_papers_71_atp_.pdf 1.3 Proposals on intermediaries who promote aggressive cross-border tax schemes MEPs have voted by 541 to 33 votes to back a proposal that would mean service providers who design or promote such plans, would have to provide details of their schemes in a central directory. The disclosed information would then be made automatically available to national tax authorities in all member states. www.europarl.europa.eu/news/en/press-room/20180226IPR98618/meps-back-crackdown-on-aggressive- cross-border-tax-schemes 1.4 First two unexplained wealth orders issued The National Crime Agency (NCA) has secured two unexplained wealth orders, to investigate assets totalling £22 million. As covered in our Update of 6 February 2018, the unexplained wealth order (UWO) provisions came into effect from 31 January 2018. These provisions can require persons who are suspected of being involved in serious crime to explain the source of their wealth to HMRC or other UK enforcement agencies. The orders relate to two properties, one in London and one in the South East of England. www.nationalcrimeagency.gov.uk/news/1297-nca-secures-first-unexplained-wealth-orders 2. Private client 2.1 HMRC publishes warning to owners of offshore assets HMRC has issued a press release titled: ‘HMRC warns offshore tax dodgers.’ It is essentially a reminder to taxpayers to disclose undeclared tax liabilities relating to offshore assets by 30 September 2018. The note appears somewhat misleading as it just refers to offshore assets, rather than the income, capital gains and inheritance tax liabilities arising from such assets. Further, it refers to those ‘that seek to evade paying tax’. While the new Requirement To Correct (RTC) legislation does indeed cover evasion, it also covers other behaviours including wholly innocent error. Finance (No.2) Act 2017 introduced the RTC legislation. It requires those with undeclared UK tax liabilities that involve offshore matters or transfers, relating to IT, CGT or IHT for the relevant periods, to disclose those to HMRC on or before 30 September 2018. www.gov.uk/government/news/hmrc-warns-offshore-tax-dodgers 2.2 FTT finds reasonable excuse for late filed return The FTT has cancelled penalties issued to a taxpayer for the late filing of his tax return on the basis that he had a reasonable excuse. He had behaved in an exemplary manner in his dealings with HMRC and there was nothing to indicate that he had received the notice to file the return. The taxpayer left the UK in February 2010 and submitted a P85 to HMRC advising he would be leaving for 18 months. Later in 2010, the taxpayer and his wife let out their UK home for a short period. The taxpayer notified HMRC of the change before receiving any rent and completed an application to register as a non- resident landlord. His share of the income for 2010/11 was £1,901, within his personal allowance and no tax was due. HMRC stated that it issued a notice to file a 2010/11 tax return on 6 April 2011, although the taxpayer maintained he did not receive this. He subsequently filed the return in May 2013, once he had returned to the UK and had become aware that it was due. HMRC issued late filing penalties totalling £1,600, a number not far short of the total income arising. The 2011/12 tax return was submitted on time, reporting the rental income for the year. 13/03/2018 3 HMRC had separately accepted in identical circumstances that his wife had a reasonable excuse for late filing. The FTT stated that ‘the web-site guidance is at best unclear in places and caused puzzlement to the Tribunal with its conflicting, vague, and inconsistent advice’ and ‘the tribunal considers that HMRC have wasted everyone’s time in bringing a case which has very little merit on their side and where the taxpayer seems to have acted in an exemplary manner. Nothing would have been gained by the issue and completion of the return, no tax was at stake, and another HMRC department had already realised that the appellant’s wife, who was in very similar circumstances, should not be penalised.’ http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10315/TC06357.pdf 2.3 HMRC discovery assessment vacated following a COP9 investigation HMRC carried out a Code of Practice 9 (suspicion of fraud) (COP 9) investigation and assessed a taxpayer on a substantial shortfall of taxed income.

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