Littlewoods Case – Compound Interest due on VAT Refunds?

HMRC paid Littlewoods £205m in relation to a VAT claim by them, stretching back over a period of up to 30 years.

Interest under the normal simple basis was calculated at £268m, as being due to Littlewoods.

However the owners of Littlewoods were not satisfied that this was sufficient recourse for them not having the money for so long and challenged in the Courts that interest should be calculated on a compound basis.  If successful they stand to gain additional interest of around £1bn.

As the case rumbles on, its outcome could have a significant effect on everyday taxpayers.  If HMRC lose will underpayments of tax also be charged with compound interest?  Also, are the rates of interest payable fair, in terms of the rate payable on refunds being lower than that on tax due.

Termination Payments – Contractual PILON or Damages?

In the recent case of Goldman (TC 01999) the tribunal found that a payment made to an employee for termination of their contract was taxable as earnings under ITEPA s.62 and did not therefore qualify for the £30,000 statutory exemption.

The taxpayer had contended that the amount agreed under the terms of a compromise agreement was received not as earnings but as damages because the employer failed to make the payment in lieu of notice (PILON) within 14 days of termination, thus making them in breach of contract.

However, the tribunal found that where a payment is made in respect of a contractual provision it should be regarded as an emolument and not damages.

In reaching this conclusion the tribunal said that if the taxpayer was correct it would be possible for anyone entitled to a payment in lieu of notice to ensure the availability of the £30,000 exemption by accepting an amount in settlement of the claim to enforce the contractual contract.  This was considered to be inconsistent with a purposive interpretation of the legislation.

On the other hand, in the case of Rubio (TC 02047) the tribunal decided that a termination payment was not earnings under s.62 but a payment of damages.  This was particularly relevant because the taxpayer spent a lot of time abroad therefore the foreign service exemption was available.

In this case, the taxpayer had been seconded from Spain to the UK.  The UK company issued a new contract which stated that he was on leave from the Spanish company.  HMRC therefore stated that the original Spanish contract was automatically reinstated when he ceased employment with the UK company (and under the terms of which he would have been contractually entitled to a PILON).  However, the tribunal did not agree with this interpretation.

These cases demonstrate that where an employer is making a termination payment, the facts should be looked at carefully in order to determine whether or not the payment is contractual or a non contractual payment of damages.

Eaves & Co on Tax Avoidance

Highly aggressive tax-avoidance scheme, Sign, ...

Highly aggressive tax-avoidance scheme sign. Pearson Airport, Toronto, Canada (Photo credit: gruntzooki)

With the recent furore regarding complex tax avoidance schemes, as tax specialists we thought we could share our reasons for not generally getting involved in such schemes.

For users of aggressive schemes, before the introduction of DOTAS, it was a question of hoping the scheme went under the radar, but now this is almost impossible (as shown by the rise in the number of media oustings).  It is now a question of waiting for an enquiry to begin, and hoping that when it does, the scheme is water tight.  More often than not the age old adage applies, that if something seems too good to be true, it is.

The majority of such schemes fail and the client is forced to pay the tax, interest and possibly penalties in addition to the high planning fee.  This can leave a sour taste in the mouth for the client, with them unlikely to come back for repeat business.

With the introduction of the general anti-abuse rule announced in the latest budget, the scope for such schemes is to be narrowed even further; a point which appears to have been conveniently forgotten by the country’s media.

At Eaves & Co we pride ourselves in providing bespoke tax planning which works; this is simply not possible to achieve using one-size fits all tax avoidance schemes.  Therefore with client satisfaction and value for money as our main aims we steer well clear of providing or recommending such schemes.

We find that genuine tax planning provides a robust position for the client and gives them more comfort that the planning works and will not be counteracted at some point in the future.  There is less chance (although obviously the risk is still present) of costly and time-consuming correspondence and litigation involving HMRC.  This is because the planning is specific to the actual facts relating to the client, taking into account their needs and commercial aims.  The client has more peace of mind.

We are keen to maintain a good reputation and build on-going relationships with the tax authorities and working within the spirit of the law is an important aspect of this.

Employment Status – Umbrella Contracts and Illegal Performance – Quashie v Stringfellows Restaurants Ltd

Contracts

Contracts (Photo credit: NoMouse)

A recent Employment Appeal Tribunal case was of interest for tax purposes as it considered whether an individual was employed or self-employed in fairly unusual circumstances, as well as a related legal point on whether illegality in reporting the income from the engagement could prevent a claim being made in relation to the contract.

 The case concerned Ms Quashie, who had worked as a dancer at Stringfellows from June 2007.  An interesting element of the case concerns the fact that the dancers were not paid by the the club, but actually paid the club to be able to work there.

 The tribunal considered whether the elements of control and mutual obligation still created an overarching “umbrella” contract of employment despite this.

 The key factors appeared to be the requirement for dancers to turn up if they were rostered to appear, and a requirement to attend team meetings every Thursday morning.  Fines were levied for failures to attend in these circumstances.

 Based on these factors, the tribunal found that there was an employment contract which covered the full period of her engagement.

 A further interesting aspect of the case related to illegality.  Ms Quashie had completed tax returns on the basis that she was self-employed and had claimed a number of expenses which the tribunal believed had been misrepresented.  These included £20 per week for the use of her home, motor expenses and “depreciation and loss of profit”.

 The judge pointed out that false returns to HMRC can make the performance of a contract illegal and therefore prevent a claim being made by the taxpayer for a breach of the contract.

 The case was referred to a full employment tribunal to consider Ms Quashie’s claim for breach of contract on the basis that she was employed but direction was given for the tribunal to consider the illegal performance aspect further.

Research & Development (R&D) Project – The R&D Claim Process

A recent Eaves and Co project involved helping a client prepare a claim for their Research and Development (R&D) Expenditure. Small and medium companies are able to benefit from a deduction of 200% (2011/12) and 225% (2012/13) of the qualifying expenditure.

The initial stage in the process was determining whether the research and development undertaken qualifies for a claim for a deduction from their taxable profits. In order for the expenditure to qualify, the research and development undertaken must aim to solve a scientific or technological uncertainty and not just find evidence to support previous conclusions. We interviewed the individual who is responsible for R&D and formed a ‘product matrix’ of all the products worked on and why the work qualified as R&D.

Once it had been decided that the client’s research and development qualified for the deduction, Eaves and Co gathered the information required, for example expenditure on gas, water and electricity as well as staff costs and materials specifically relating to the research and development undertaken.

The next step involved determining whether the client would be classed as a large or small/medium company and calculating the tax reduction/saving that they would benefit from. This entailed applying the company in question to the legislation on R&D in areas such as the criteria for small and medium companies and the criteria surrounding the number of employees, and the annual turnover and balance sheet figures.

The final part of the project involved the preparation of the R&D calculations and the supporting paperwork to the claim. This also involved liaising with the company’s accounts department and auditors to ensure that the claim was reported in the correct manner.

On this occasion, Eaves & Co were able to help the client save nearly £60,000 in their R&D claim.

Inheritance Tax, Lifetime Planning

Inheritance Tax is a thorny subject for families and can affect couples with more than £650,000 of net wealth between them (2012/13 rates).

 For such couples planning to avoid inheritance tax is never easy because there is a balance to be achieved between maintaining a standard of living through the later years and giving assets to younger generations.

 It is never too early to start planning for IHT mitigation; but typically it would be sensible for the process to begin in the late 50s or 60s.

 It is important to understand that capital gains tax can often hamper planning for IHT and so succession planning in relation to property, shares and businesses is important if this is to be accounted for.

 The first stage of planning is to estimate a family’s current exposure to IHT and if this is material some initial ideas can be suggested. It will become clear to the family which ideas are practical and which are not, and then we can focus on the ones which have a chance of practical success.

For an initial consultation please call Eaves & Co on 0113 2443502 to arrange an appointment. We have much experience in this area of tax planning and testimonials are available on our website.

Miss Mead Ali v HMRC – Tribunal Case TC01977 – Bank Transfers Were Not Income

HMRC had raised assessments in relation to the tax years 2002/03 – 2006/07, alleging that Miss Ali had underdeclared income.  This arose as a result of deposits made into her bank accounts for the years in question which HMRC asserted were income.

Income tax

(Photo credit: Alan Cleaver)

The appelent explained that the reason for the transactions was that money had been lent to members of her family who had then returned the funds to her.

The tribunal found that the burden of proof was on Miss Ali to show that the payments did not amount to income.  They found that she was a truthful and careful witness, and in particular noted that it was normal in the community of which Miss Ali is part for there to be communal use of bank accounts by family members, even to extended family.

The tribunal therefore allowed Miss Ali’s appeal as on the balance of probabilities they were satisfied that the deposits did not represent taxable income.

HMRC Argue for Self-Employment – T Coffey T/A Coffey Builders and Dr M Selvarajan (TC1888)

A recent First-tier Tribunal case was unusual in that HMRC were arguing for self-employment, whereas they would normally take cases to Tribunal arguing against self-employment, due to the extra National Insurance costs and less relief for expenses.

Yellow hard hat. Studio photography.

(Photo credit: Wikipedia)

Mr Coffey had been in partnership with his wife as a builder, but had retired through poor health. He claimed that he had been employed by Dr Selvarajan to supervise the refurbishment of the Doctor’s clinic.

Mr Coffey was paid a set weekly amount, regardless of hours worked. There was no written contract, no invoices were raised and there was no right of substitution.

The tribunal found that Mr Coffey had control over the building project. In the absence of a written contract, two documents were considered. The first was a document which Mr Coffey had signed which referred to him as, “principal contractor” and “planning supervisor”. The second was a note in his diary setting out the payments to contractors, which was held as evidence that Mr Coffey was in charge of these payments. Dr Selvarajan was still responsible for actually making these payments.

The tribunal also noted that there was a lack of financial risk, but that this was not “necessarily determinative”.

The Tribunal determined that Mr Coffey was self-employed, with one key indicator apparently being the fact that Mr Coffey had previously been a builder for a number of years and that he had not checked with his accountant how his new engagement would be taxable.

Whilst the outcome of this case, and the approach taken by HMRC, might be surprising, there may be some elements that could be used to build a case in favour of self-employment.

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%.

switzerland

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.

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.