What happens when laws collide?

Here is a case which emphasises points about pre-planning for tax purposes.  It may also be one for legal philosophers!

In the recent case of G4S Cash Solutions (UK) Ltd v CIR, the Courts followed the old case of CIR v Alexander von Glehn and held that payments of fines should not be allowed as tax deductible.

So far, so good.  It even sounds sensible as public policy: but –isn’t there a ‘but’ in tax matters – the fine in Alexander von Glehn was for ‘collaborating with the enemy in time of war’; maybe many business owners may distinguish this from parking fines incurred by getting armoured cash delivery vans close to shops/banks to protect employees and the public from extra risk of armed robbery, but by doing so infringing parking regulations.  The statutory fines in the G4S case were for parking infringements.

The Courts accepted:-

  1. It made sense (and was accepted by the police) to minimise the time/distance that the person delivering the cash had to spend outside the van.
  1. G4S owed a duty of care to their staff, customers and the general public, so parking close by, even in crowded shopping centres made sense.  Thus, health and safety law was to a degree in conflict.
  1. Parking infringements were not on a par of severity with ‘collaborating with the enemy’.

Nevertheless, the Courts decided that it was inappropriate to grant a tax allowance for the payment of statutory fines, so G4S lost out on a substantial tax relief to what they had generally seen as an occupational hazard.  Interestingly, G4S did ‘advance deals’ with some Councils whereby in exchange for a lump sum in advance, they got an agreement that the parking wardens would not issues tickets for certain G4S parking infringements.  These were agreed to be tax deductible, showing that a different structure can lead to the same commercial end, but in a more tax efficient manner.

In the G4S case the First Tier Tribunal quoted the judge in McKnight v Shepherd as an illustration of how the tax picture may be altered by minor distinctions.  Mr Justin Lightman said, “The authorities reveal what a fine line may need to be drawn between what is within and what is outside the trader’s profit earning activities and there are to be found subtle distinctions not immediately obvious to minds of mere ordinary intelligence”.

Lessons to be drawn:

  1. This case could be a rich earner for HMRC with tax, interest and penalties falling on the multitude of delivery firms set up to provide services in these days of internet shopping.  No doubt a number of them will face similar traffic fines and treat them as an incidental cost of doing business.
  1. Forewarned is forearmed, so checking future accounts for fines etc., and then adding them back, would seem prudent.  This is unlikely to be the outcome desired by the business, but HMRC are getting stricter with imposing penalties on even ‘technical’ mistakes.
  1. Advance thought and planning can help the same commercial ends be achieved – with a better tax outcome.

Trading Losses and Succession – Leekes Ltd v HMRC

A recent case on trading losses could have implications going forward as it was found that, in the specific circumstances, losses from an acquired trade could be used against profits from the existing trade.

The case in question, Leekes Ltd v HMRC (TC4298), was heard by the First-Tier Tribunal.

Leekes Ltd previously owned four department stores and purchased Coles, a company with three furniture stores as well as warehousing facilities.  Coles had been loss making for a number of years. The Coles trade was hived up to Leekes Ltd and the stores were all rebranded as Leekes stores; however the former Coles stores continue to sell furniture predominantly.

Leekes claimed the brought forward losses incurred by the Coles business against the profits of the combined business for the year to 31 March 2010, which was the first following the acquisition.

HMRC argued that the losses incurred in the Coles business could be used only against future profits from that business, and could not be used against the previous Leekes business.

It was common ground between the company and HMRC that Leekes Ltd succeeded to the trade of Coles Ltd and that the trade consisted of the running of out of town department stores.

The issue at stake was therefore whether Leekes could relieve trading losses incurred by Coles before the succession against the profits of the combined trade after the succession by virtue of the provisions of ICTA 1988, s. 343(3).  Interestingly, HMRC agreed that ICTA 1988, s. 343(8) did not apply in this case.  Section 343(8) deals with situations in which there has been a succession to something different than the trade of the successor company, but in that case specifically requires that losses are kept separate.

Section 343(3) stated that ‘the successor shall be entitled to relief under s. 393(1) as for a loss sustained by the successor in carrying on the trade, for any amount which the predecessor would have been entitled to relief had it continued to carry on the trade.’

The legislation did not make it clear whether it was necessary to stream the losses as it was not clear whether the “trade” referred to was the post or pre-acquisition trade.

The First-tier tribunal found in favour of the taxpayer company, concluding that the Colesʼ trade losses were relievable against future profits of the combined post-acquisition trade for three main reasons:

1. There was no explicit reference to a requirement to stream losses in s. 343(1) and (3), unlike those of s. 343(8) where there is such a specific.

2. That requiring the company to stream losses would involve extensive practical difficulties in application.

3. That such an approach to the legislation is more closely aligned to commercial reality.

This ruling may help to give greater clarity to taxpayers on the treatment of such losses.  As was admitted in the case, the legislation itself is fairly vague and therefore the decision should be useful. It is possible that HMRC may seek to appeal or look to rewrite the legislation to achieve HMRCʼs preferred interpretation.

It should also be noted that ICTA 1988, s. 343(3) is re-written at CTA 2010, s. 944 but the substance of the rules appears to be unchanged in the process.

McLaren’s FIA Fine Not Wholly and Exclusively for Trade

We wrote previously regarding the First-Tier Tribunal case of McLaren Racing Ltd v HM Revenue & Customs, where the Tribunal found that the fine relating to spying on Ferrari (which amounted to around £34m) was deductible because the act in question was wholly and exclusively for the purposes of trade and no laws were broken.

HMRC appealed the case to the Upper Tribunal who found that the fine had been incurred because McLaren engaged in conduct not in the course of its trade.  The penalty was found therefore to be a disbursement or expense, but not paid wholly and exclusively for the purposes of the company’s trade. It was therefore not an allowable deduction against their profits for corporation tax.

The outcome of the original Tribunal case was somewhat surprising, and this decision therefore appears to be more in line with previous case law.  This is a shame as the First-Tier Tribunal case had suggested that the scope of the “wholly and exclusively” rules might have been wider than previously thought.  Bearing in mind the amount of tax at stake, it is possible however, that McLaren could seek to appeal the decision.

Employer-Financed Retirement Benefit Schemes (EFRBS) Settlement Opportunity

HMRC Offer EFRBS Settlement Opportunity

HMRC are giving employers the chance to settle open enquiries into the use of employer-financed retirement benefit schemes (EFRBS).

The settlement opportunity applies to contributions made by employers on or after 6 April 2006 and before 6 April 2011.

HMRC are of the belief that such arrangements do not work and therefore the settlements will avoid the need to take part in potentially costly litigation, thus benefiting both sides.

Firms will have until 31 December 2013 to enter into an agreement with HMRC.

Two Options Available

They will then be required to choose one of the following two options offered by HMRC:

i) No Corporation Tax deduction can be claimed on contributions to an EFRBS until the relevant benefits are paid out by the scheme, HMRC also expect PAYE and NICs will be due when they are paid out or

ii) A Corporation Tax deduction can be claimed when contributions are made to the EFRBS.  However, when those contributions are made they will be subject to PAYE and National Insurance contributions.

If an employer chooses to settle with HMRC by choosing one of these options they will have until 30 June 2014 to finalise the arrangement.

Interest & Penalties

Under option 1 interest will run from 9 months and 1 day from the end of the accounting period for which the additional amounts are due.

Under option 2 interest will run from 19 April following the end of the tax year in which allocations were made to the date the PAYE Income Tax and NIC is paid to HMRC.

HMRC have said that they will only seek penalties regarding any tax due in exceptional circumstances. However this is caveated by saying that every case will turn on its own facts.

The importance of the motive behind the transaction

In the recent case of Land Securities PLC v HMRC, the appellant Land Securities PLC appealed against the decision of the First Tier Tribunal, who had agreed with HMRC’s arguments to disallow claims made to deduct a capital loss from profits subject to corporation tax on the basis that the creation of the loss, and therefore the avoidance of tax, was the underlying motive behind the transaction.

The series of transactions involved Land Securities PLC selling shares in a subsidiary called LM Property Investments Limited (LMPI) to a subsidiary of Morgan Stanley in the Caymen Islands (C) with a put option being set up whereby C could sell the shares back to Land Securities PLC at any time after 29 February 2004. On 1 August 2003 C injected funds of around £200m into LMPI. On the same day C also agreed to sell back the shares in LMPI to Land Securities PLC for over £200m more than they had originally been purchased for.

The Upper Tier Tribunal denied relief, finding against the appellant on the basis that the transaction did not exist to create a commercial profit but that the materiality of the transaction was to create a loss for Land Securities PLC to offset against its profits and as such pay a lower amount of tax.

A further recent case (PA Holdings),involved a company constructing a complex arrangement in order to divert employee bonuses to be taxed as dividends rather than employment income, therefore saving tax and NICs. The Court of Appeal found that the payments were remuneration for employment and subject to Income tax and NICs accordingly.

PA Holdings’ appeal to the Supreme Court following this ruling has now been withdrawn and the decision at the Court of Appeal is therefore final. Further details of the case can be found at:

 http://eavesandco.co.uk/blog/2012/01/18/a-payment-cannot-be-both-dividend-and-employment-income/.

Highlights from the Autumn Statement 2012 & Draft Finance Bill 2013

A summary of the key changes affecting businesses, individuals and estates from the Autumn Statement 2012 and the Draft Finance Bill 2013

Businesses

Annual Investment Allowance

The Annual Investment Allowance (AIA) for capital allowances will increase from £25,000 per annum to £250,000 per annum.

The increase will take effect from 1 January 2013 and will last for 2 years.

The increased relief should be of benefit to those businesses that intend to invest in capital assets/expansion during the next few years.

Businesses whose accounting periods do not end on 31 December 2012 will need to take care when apportioning the amount of the AIA available to them in accounting periods that straddle the change.  This is an area that has caused confusion following numerous changes to the amount of the AIA in recent years.

Cash Basis for Small Businesses—Income Tax

A new simpler scheme is to be introduced so that ‘eligible sole    traders and partnerships’ will be able to calculate their taxable profits on a cash basis if they wish.

Eligible sole traders and partnerships will include those whose receipts for the year are below the VAT registration limit (currently £77,000) or twice the VAT registration limit (currently £154,000) for recipients of the Universal Credit.  Businesses must leave the scheme where their receipts exceed twice the VAT registration limit.

There are particular rules for determining the ‘receipts’ and ‘allowable payments’ of the business and any losses may only be carried forward against future profits.

The scheme is likely to be of use to smaller traders; however care will need to be taken to ensure that the intricacies of the scheme are adhered to.

Corporation Tax Rates

The main rate of corporation tax for FY 2014 has been reduced by an additional 1% from the rates previously announced.

The rates will therefore be:

FY 2013

Small Companies Rate      20%

Main Rate                              23%

FY 2014

Small Companies Rate      20%

Main Rate                              21%

The latest reduction means that the gap between the small company’s rate and the main rate of corporation tax is becoming ever smaller, thus reducing the potential impact of having associated/group company structures.

 

Individuals & Estates

Personal Allowance

The personal allowance will be increased to £9,440 in 2013/14.  This will save basic-rate taxpayers up to £267, although changes to the basic rate band mean that higher-rate taxpayers are unlikely to benefit

Income Tax Rates

The additional rate of tax is set to be reduced from 50% to 45% with effect from 6 April 2013.

Pension Annual Allowance

The annual allowance for tax relieved pension savings is to be reduced to £40,000 with effect from the tax year 2014/15.

Where a taxpayer’s gross pension contributions (including employer contributions) exceed the annual allowance a tax charge will apply.  The amount of the charge is calculated so as to eliminate tax relief on the excess contribution.

Inheritance Tax—Nil Rate Band

The nil rate band will be increased to £329,000 with effect from 2015/16.

Don’t forget—the unused portion of the nil rate band may be transferred to the estate of the surviving spouse.

 

Finance Bill 2013

The Finance Bill 2013 has been released in draft and includes legislation in respect of:

  •  Income tax reliefs that will be limited to the higher of £50,000 and 25% of adjusted net income.  This does not apply to gift aid on charitable giving.
  •  Entrepreneurs Relief and Shares Acquired under EMI Share Options—subject to the trading/employment conditions being met, entrepreneur’s relief will be available where the EMI options were granted at least 1 year prior to the disposal of the shares.  It is not necessary for the EMI options to have been exercised 1 year prior to the disposal nor for the employee to hold at least 5% of the share capital.
  •  Statutory Residence Test—the draft rules set out a legislative test to determine whether a person is UK resident in a given tax year.  This should give more certainty to taxpayers, however given that the rules are more prescriptive than the current case law based guidance taxpayers should consider their position before the new rules come into force on 6 April 2013.

Please note that our offices will be closed for the Christmas period from Saturday 22 December 2012, reopening on Wednesday 2 January 2013.

 

Wishing you a Merry Christmas & a Happy New Year from all the team at Eaves & Co.

 

Wholly and Exclusively for the purposes of trade

In recent cases there has been a wide ranging application of the definition of “wholly and exclusively for the purposes of trade”, which is the general test for deductibility of expenses.

Two recent examples of this are Mclaren Racing Ltd v HM Revenue & Customs and Interfish v HM Revenue & Customs.

In the case of Mclaren Racing Ltd, the fine relating to the spying of Ferrari amounting to £34m was deemed to be deductible by a first tier tribunal. This was because the act (which was fined) was wholly and exclusively for the purposes of trade and no laws were broken.

Whereas in the case of Interfish Ltd v HM Revenue & Customs the first tier tribunal deemed that sponsorship to a local rugby club was not incurred wholly and exclusively for the purpose of trade. This was because one of the reasons why the company sponsored Plymouth rugby club was to help the club to buy players, and therefore the sponsorship had a dual purpose.

These two cases could suggest to general taxpayers that there is a disparity between how the wholly and exclusively is applied on a case by case basis, although it should be noted that the points at question were quite different to each other.

 

HMRC Trialling Email Correspondence

HMRC have put in place a new scheme in order to test whether emails can be used more effectively for communicating with taxpayers.

 A pilot scheme has begun covering Corporation tax, VAT and employer-compliance issues.

 There is currently no intention to make email communications compulsory, but it may enable quicker responses in some circumstances.

Corporation Tax and Associated Companies

HM Revenue & Customs have produced a toolkit for identifying associated companies and proving whether small company rates or marginal small company relief (MSCR) is due.

Much commentary has suggested that the toolkit should be used every time the small company rate/MSCR is claimed with the checklist incorporated into the procedures of all accountancy firms so that the issues brought up are discussed annually with the directors of companies.

HMRC have stated that penalties could be applied where such rates are applied incorrectly and it is therefore important to ensure that the correct procedures are followed.  Having the completed checklist on file would be an advantage, but it must also be clear that someone has appropriately considered the circumstances.

There are proposals to change the rules on associated companies which are currently in consultation.  The proposed new rules look at commercial interdependence rather than the current basis looking strictly at control.

The toolkit can be found at www.hmrc.gov.uk/agents/toolkits/mscr.pdf