UK Swiss Confederation Taxation Cooperation Agreement – Update

UPDATE: Please see Eaves and Co’s Swiss Treaty Brochure for full details of the treaty

As the timeframe moves closer for the UK Swiss Treaty to come into operation (1 January 2013) there have been some further changes to its terms.

On 18 April 2012 the UK and Switzerland exchanged letters with the outcome being that the minimum rate payable on capital through the treaty has been raised to 21%.  The upper rate also being raised and to 41%.

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Switzerland (Photo credit: siette)

Clearly this makes the UK Swiss Treaty even less palatable, with some commentators saying that only people wishing to remain anonymous should suffer the levy.  However, an initial professional consultation for anybody considering the matter remains a necessity in considering the alternative routes to redress of their tax position.

Orsman v HMRC – Consideration for SDLT

The case of Orsman v HM Revenue and Customs (TC01921) highlights that care should be taken when attributing sale proceeds between land and ‘chattels’ such as fixtures and fittings.

In this case the taxpayer sold a property for £258,000 of which £8,000 was attributed to chattels and was not therefore included in the sale price for SDLT purposes.

The sale agreement contained a list of fixtures and fittings to which the £8,000 consideration related and this included (amongst other items) fitted units in the garage.

For SDLT purposes the value of fixtures and fittings that are ‘part of the land’ should be included in the sale proceeds for SDLT.

The rate of SDLT is 1% where the sale proceeds are between £125,000 and £250,000, rising to 3% where the proceeds are in excess of £250,000 but less than £500,000.

Therefore if some of the proceeds attributed to chattels were in fact attributable to the land then the rate of SDLT would increase from 1% to 3%.

In determining whether a chattel is part of the land the following two tests should be considered:

1. the degree of annexation of an item to the land (ie is furniture fixed to the wall, what damage would be caused by removing the item?)

2. what is the purpose of the annexation (for example, was the item put in place in order to better enjoy the land or the item?)

In this case the tribunal found that the fitted garage units were provided in order to increase enjoyment of the garage by creating a work space.  Thus the value of the units (agreed to be £800) should have been included in the sale proceeds for SDLT purposes.

Losing a Domicile of Choice

In the High Court case of Perdoni & Anor v Curati, Mr and Ms Perdoni claimed that their Uncle’s English will (they were sole beneficiaries) was not fully revoked by his subsequent Italian will.

It was agreed that the key point was whether Mr Curati was UK domiciled in 1994, when his Italian will was drawnup.

Flag of Italy

(Photo credit: Wikipedia)

If he was, his English will would be partly effective and Mr and Ms Perdoni would be entitled to the deceased’s English estate.

The deceased, Pierlugi Curati, resided in Italy until he was 28, at which point he moved to London, with his wife (a British citizen) where he owned a restaurant and later purchased a portfolio of properties in England and in Italy. However the centre of his business activities always remained in the UK along with the marital home.

It was contended that the deceased always had an intention to move back to Italy before his death and therefore had not acquired England as a domicile of choice.

The key point was whether he had established an intention to return to Italy “upon clearly foreseen and reasonably anticipated contingency” in 1994.

This flag is the Union Flag in the 3:5 ratio e...

(Photo credit: Wikipedia)

In 1992 Mrs Curati was diagnosed with cancer and she was cared for by the NHS in England. As the deceased was inseparable from his wife, from that time on there was no prospect that he would change his established pattern of life and decide to return to Italy until his wife had either recovered or died.

Mrs Curati never fully recovered from her cancer which meant that there could not have been a clear intention to return to Italy in 1994.

Therefore Mr Curati was held to have being UK domiciled at the time the Italian will was drawn and therefore the English will was partially effective.

Deferred Payments – CGT on Sale of Shares – Tax Advice

A fairly common feature on a sale of shares in a private company is an element of consideration which is delayed, either for a set period of time or based on certain conditions being met.

The tax impact of these innocuous looking payments can often be surprising and can lead to unwanted tax liabilities arising before any funds have been received.  In most cases, the tax will be payable in the year following disposal, regardless of when the deferred proceeds are received.

In a recent case which Eaves and Co have been involved with following an HMRC enquiry, a sale was agreed with an element of the sale price becoming payable only when dividends were paid by the company in the future.  No tax advice was sought at the time the sale was agreed.

HMRC had stated that the contract was unconditional and that the proceeds were simply deferred.

Our analysis was that the payments are contingent, as something has to happen (the payment of dividends) before the amounts are due.  However, having established that the payments are contingent, we then have to determine whether the proceeds are ascertainable or not.

If the proceeds are ascertainable, they will be taxed in full as part of the proceeds of the disposal, despite the fact that they may not become payable until some time into the future.  The position is more complex if the proceeds are unascertainable, as the value of the right to receive the funds in the future is taxed on the original disposal.

In this case, the chances of dividends being declared are thought to be low, and as such the right could potentially be valued at a substantial discount and therefore bring down the initial tax cost.

The distinction between ascertainable and unascertainable can be quite subtle, but the key is whether or not all the events that can affect the amount occur before the disposal.  For example, where the proceeds are based on a percentage of future profits, this would be unascertainable as the future profits are not known at the date of the sale.

We successfully argued that the payments in this case are unascertainable, because whilst there is a limit on the maximum that can be received, there is no way to determine what dividends will be declared in the future.

HMRC confirmed that they accept our position, despite having previously argued that the payments were not even contingent.  We have begun negotiations with HMRC as to the value of the potential right to future consideration and have begun with a low valuation due to the facts of the case and the likelihood that any funds will be received in the future.  The downside to this is that any further receipts would be taxable without Entrepreneurs’ relief being available, however the cashflow benefits are thought to outweigh this drawback.

The key point is that taking tax advice at the time of the disposal would have prevented this unexpected tax treatment, and the contract could have been worded in order to provide a more clear outcome without the expense of negotiating with HMRC.

Disclosures – Act Now!

HM Revenue and Customs recently announced that a plumber who failed to disclose income tax of £91,000 has been jailed for tax fraud for 12 months.

This case highlights that HM Revenue and Customs are cracking down on tax evasion; clients and their advisers should carefully consider making voluntary disclosures now.

There are a number of disclosure schemes available which may offer benefits such as; reduced penalties, the ability to limit the number of years that HM Revenue and Customs may go back to assess tax, payment of tax by instalments and protection against criminal prosecution.

Current disclosure facilities include:

  • The Liechtenstein Disclosure Facility (LDF) – where taxpayers do not currently have assets in Liechtenstein it may be possible to transfer assets now so as to qualify for the terms of the LDF
  • E-Markets Disclosure Facility – this facility is aimed at people who sell goods or services on online websites (such as eBay or Amazon) and whose activities are treated as a trade for tax purposes
  • Electrician’s Tax Safe Plan (ETSP) – please note that the deadline to notify intention to disclose under this facility is 15 May 2012
  • The UK-Swiss Tax Treaty – whilst not strictly a disclosure facility the impact of the UK-Switzerland Tax Treaty should be considered carefully by those with undisclosed Swiss income.

At Eaves & Co we have experience of preparing voluntary disclosures and have successfully submitted disclosures under the LDF for a number of clients.  For further advice regarding the disclosure of unpaid tax please contact Eaves & Co Specialist Tax Advisors’ Leeds office on 0113 244 3502.

Mr A Omar v HMRC – What qualifies as a Disclosure on a tax return?

HMRC raised discovery assessments on Mr Omar in relation to the transfer of properties in 2005 and 2006 to a FURBS (Unapproved Pensions Scheme).

Mr Omar said HMRC had enough information from the relative tax returns to understand what had happened in 2005 and 2006.  Therefore he claimed that “discovery” assessments could not be raised by them.

Mr Omar had written some narrative about transactions in the relevant tax returns but the Tribunal held:-

  • His entries did not disclose who were members of the FURBS
  • The entries contained no detail about the potential tax treatment of the transfers
  • They did not disclose who the properties were allocated in within the FURBS

Mr Omar lost the case because his disclosures were not detailed enough.