D J Cooper and Partners was formed as a partnership to provide services to one customer.  The customer was a limited company which traded as a builders merchants.  The partners were also shareholders / directors of the limited company.
HMRC challenged the tax treatment of cars which were owned by the partnership and used by the partners (who were also directors of the limited company).  HMRC said that the directors of the limited company should have declared a benefit in kind for usage of the cars which they said were provided because of their office.
The tribunal case hinged on the commerciality of the arrangements and the court held that the partnership was wholly dependent on the company.  This structure would not have existed without the connection and the partnership was seen as an attempt to avoid paying tax on what was primarily a personal benefit.

Under the current concession taxpayers that have outstanding tax are able to apply to use ESC A19. This concession writes off the amount owed if the taxpayer can show that HM Revenue & Customs failed to use information at their disposal in a timely manner.

Under the proposed changes taxpayers would be deemed to have a basic level of knowledge and understanding of their own tax affairs. Also, if the taxpayer believes there is an error relating to their tax affairs they would be expected to contact HM Revenue & Customs without delay.

This also brings into question whether there should be a time limit on using the concession as taxpayers have to take ‘personal responsibility’ in making sure their tax affairs are correct.

The proposals are currently under consultation and Eaves & Co are to provide a response as we have successfully assisted clients in claiming under ESC A19 on a number of occasions.

In practice these proposed changes would appear to make it more difficult for taxpayers to make a claim under concession ESC A19 as there is more onus on the taxpayer to make sure their affairs are correct.

English: George Osborne MP, pictured speaking ...
English: George Osborne MP,  (Photo credit: Wikipedia)

The government has made a number of high profile U-turns in recent weeks.

The chancellor has decided to modify plans to impose VAT charges on takeaway food and static holiday caravans, as well as deciding not to introduce a limit on the amount of tax relief that can be claimed on charitable donations.

All three changes appear to have come about directly as a result of considerable public pressure, with the ‘pasty tax’ in particular capturing the public’s imagination. However these U-turns are expected to cost the treasury in the region of £120m in lost revenue.

Pasty Tax

The pasty tax, as it has now become known, was proposed in order to bring clarity to the VAT position on the supply of baked goods.

However, the proposed changes in the budget appeared to cause more confusion and place a greater administrative burden on taxpayers. The amendments should reduce the burden on those affected, but the recent furore has merely highlighted the discrepancies and complications involved in the current VAT system.

Static Caravans

The VAT amendment will mean a rate of 5%, rather than the full rate of 20% being applied to static holiday caravans to ‘reflect their position between permanent residences that are not liable for VAT and other caravans that are liable for the standard rate’.

Cap on Charitable Donations Relief

The above amendments on VAT can be seen to have clear tax and administrative reasons for the U-turns. However the removal of the cap limiting income tax relief on donations to charities to £50,000 appears, on the basis of donation figures, to be as a result of the public outcry rather than based on substantiated facts.

In order to exceed the previously proposed cap an individual would have to make donations exceeding £100,000 in one tax year (assuming they were a 50% rate taxpayer).  That is a substantial donation and it is unlikely that the vast majority of individuals could afford such giving in one tax year.

This was confirmed by BBC Radio 4 who conducted a study of the largest charities and found that only around 1% of their income came from donations over £50,000, suggesting that the cap would have had nowhere near the impact on charities’ funding as heralded by the media and various charity lobby groups.  It would be interesting to see how many donations charities receive in excess of £100,000, as this was the effective ceiling for donations that was initially proposed.

Whatever your views on the U-turns, it will be interesting to see how the chancellor proposes to fill the £120m ‘gap’.

IR35 TestsFollowing a review of the effectiveness of the IR35 rules, there is to be new guidance from HMRC including what is described as 12 business entity tests.

Points are allocated to each test and if a contractor scores less than 10 points there is a high chance of them being caught by IR35; if they score more than 20 points there is low risk.

 The headings for the tests are set out below:-

  • Business Premises Test
  • PII Test
  • Efficiency Test
  • Assistance Test
  • Advertising Test
  • Previous PAYE Test
  • Business Plan Test
  • Repair at Own Expense Test
  • Client Risk Test
  • Billing Test
  • Right of substitution test
  • Actual substitution Test

 For further advice regarding IR35 contact Eaves & Co on 0113 2443502

Do you know anybody who would be interested in the opportunity to qualify as a tax advisor?  If so, then this role as a tax apprentice with our firm in the centre of Leeds could be just the start needed.

Eaves and Co are looking for a bright hard-working individual to join their growing team as a tax apprentice.  We are keen to attract candidates who would like a career in finance.  The role will start in an administrative capacity, but the right candidate may have the opportunity to be fully trained and sit both their ATT and CTA exams, leading to membership of CIOT.

What’s more if we do well, you do well – Eaves and Co like to reward their staff for the work they do, with trips, events and social evenings as a part of their culture.  We even have a five a side football team in the Leeds Law League.

After 12-24 months in an administrative capacity, the intention would be for the candidate to progress on to tax exams with full training (paid by Eaves and Co) support and encouragement given.

If you are interested in the role please email Diane Middleton.

partnership agreement
(Photo credit: o5com)

The case of Mrs Pauline Valantine v HMRC (TC 01644) demonstrates that in certain cases it may be useful to engage in discussions/meetings with HM Revenue and Customs as this could prevent cases being taken to Tribunal unnecessarily.
The key issue in the case concerned whether Mrs Valantine was in partnership with her husband.  If Mr & Mrs Valantine were in partnership then Mrs Valantine would become liable for unpaid income tax/NICs on her share of the partnership profits and unpaid VAT for which she would be joint and severally liable.
The question of liability was particularly relevant because Mr Valantine was expected to declare bankruptcy, therefore if a partnership did not exist then Mrs Valantine would not be liable for the unpaid tax and HM Revenue and Customs could not expect to receive payment.
Based on the evidence before them the Tribunal found in favour of the taxpayer on the basis that the relationship between the taxpayers made it unthinkable that they would have entered a business partnership.
Interestingly however, the Tribunal concluded that HM Revenue and Customs should not be criticised for their handling of the case or for bringing the case to Tribunal.  They went on to say that had the taxpayers been willing to meet HM Revenue and Customs to discuss the case then the case may never had been brought to appeal.
Taxpayers involved with investigations/enquiries from HM Revenue and Customs may find professional advice useful to ensure that matters are concluded both quickly and robustly.
For information regarding our tax investigation/enquiry services please contact Paul Davison on 0113 244 3502 or visit our website www.eavesandco.co.uk

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.

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

The UK and Swiss governments have now signed the long awaited UK-Swiss Confederation Taxation Cooperation Agreement. The new treaty still has to be ratified before coming into effect, but is expected to be fully effective from 1 January 2013.

The treaty will generally apply to UK taxpayers who held a Swiss account as of 31 December 2010 and where the account remains open as of 31 May 2013. Non-UK domiciliaries will have to prove, by way of a certification by a lawyer or tax agent that they have claimed the remittance basis of taxation for the year in question, and give notice to opt-out of the agreement. Under the terms of the agreement, UK taxpayers may either:

1) Retain anonymity and suffer an initial one off deduction of between 21-41%, or

 2) Make a voluntary disclosure to HMRC regarding their Swiss assets and income.

Option 1

There will be an initial one-off deduction, in order to settle past tax liabilities, of between 21% and 41% applied to the balance of a UK resident’s existing Swiss accounts as of 31 December 2010.

The rate charged depends upon the number of years of investment and the account movement. It is estimated that the applicable rate will be 22-28% for most taxpayers.

 In addition to this from 2013 there will be a withholding tax of 48% on interest income, 27% on Capital Gains, and 40% on dividends.

Taxpayers who pay the levy and withholding tax will be able to retain anonymity (subject to EU approval).

Option 2

Alternatively the taxpayer can make a full disclosure of untaxed Swiss income and gains to HMRC. HMRC will then seek unpaid taxes, interest and penalties from this disclosure.

If a disclosure is made, the taxpayer’s accounts will not be subject to the one off charge and future withholding tax. However the taxpayer must inform their banks that they have chosen to disclose otherwise the one-off levy will be automatically applied.

 What to do now

 It is likely that UK persons with undisclosed Swiss income will need to contemplate whether to make a disclosure or pay the one off levy and suffer the withholding tax moving forwards.

Disclose

There is no specific disclosure facility contained within the Treaty, so HMRC will levy penalties at normal rates on any liabilities disclosed. HMRC can assess such tax liabilities for up to twenty years so the total cost of tax, interest and penalties could be very high.

A more generous disclosure opportunity is available using the Liechtenstein Disclosure Facility (LDF). The LDF provides certainty of settling past worldwide tax issues, with liabilities being limited to those arising after April 1999, and with a set 10% penalty rate for years up to 5 April 2009. More importantly, the LDF provides immunity from prosecution.

Pay the Levy and Withholding Tax

The one off charge is levied on the value of Swiss funds as of 31 December 2010 and therefore only clears tax liabilities associated with those funds and therefore does not guarantee that all past Swiss liabilities will be settled.

 As a result it does not offer immunity from prosecution but does however ensure that anonymity is retained.

Move Assets to another Jurisdiction

It is possible to move assets to another jurisdiction before the 31 May 2013 to avoid the regime; however Swiss banks will be providing information to HMRC on the top ten destinations where funds are being moved. If the taxpayer is subsequently caught they will be liable for tax due going back to 20 years, penalties of up to 200%, public ‘naming and shaming’ and the risk of prosecution.

How Eaves & Co Can Help

Based on the LDF’s that Eaves & Co have already made for clients, the average cost is around 17% of the account value at the time of the disclosure. This is less than the 21%-41% levied under the Swiss Tax Treaty; however each case will need to be judged on its own merits.

In order to establish the best option for the individual involved it would be useful to undertake a technical review to compare the net costs of both options. Eaves & Co would be happy to have a no names discussion (so as not to contravene the money laundering rules) to discuss the options available in more detail to anyone feels they may be affected.

 HM Revenue & Customs (HMRC) raised assessments to PAYE and NIC’s for the years 1998/99 to 2006/07 totalling £3.6m on the basis that the consultants were employees of the taxpayer.

The taxpayer supplied individuals for counter and promotional work to major cosmetic companies at duty free shops at airports. It had a database of 100 individuals (consultants) upon which to call upon. The taxpayer was under no obligation to offer the consultants work and the consultants were under no obligation to accept work offered. In addition there were no formal contracts between the taxpayer and the cosmetic company or consultants.

Talentcore Ltd successfully appealed HMRC’s assessment to the First Tier Tribunal (FTT). HMRC then appealed to the Upper Tier Tribunal (UTT) challenging the FTT’s application of ITEPA 2003 s.44.

The rules state that the consultants would not be deemed to be employed by the taxpayer for Income Tax and NIC’s, if the individual was not:

 (a) Providing, or under an obligation to provide personal services; or

 (b) Subject to (or to the right of) supervision, direction or control.

The Tribunal found the consultants had complete freedom to arrange for substitutes if they wished. This amounted to an unfettered right to substitution. Therefore condition (a) was met as the consultant was not obliged to perform the services personally.

 The Judge dismissed HMRC’s appeal saying “Since the First Tier Triubunal held, correctly in my judgment, that the terms of the contract did not oblige the consultant to provide the services personally, it is not an ‘agency contract’”.

The case shows if it is possible to structure contracts so that either or both of the conditions (personal service and supervision) are not met, then PAYE and NIC obligations can be avoided when providing temporary workers.

UPDATE: Please see Eaves and Co’s Swiss Treaty Brochure for full details of the treaty
After much anticipation, details of the treaty between Swiss Federal Department of Finance and the UK Treasury aimed at tackling offshore tax evasion were announced on 24 August 2011.
Broadly speaking there will be two routes to go on under the agreement:
1) Retain anonymity via making an initial one off payment and paying withholding tax from 2013 or;
2) A voluntary disclosure to HMRC regarding Swiss assets and associated income
Option 1
If option one is chosen there will be an initial one-off deduction of between 19% and 34%, on a UK resident’s existing Swiss accounts which were open on 31 December 2010 and remain so on 31 May 2013. This deduction is in order to settle past tax liabilities.
The rate charged equation accounts for the number of years of investment and the account movement. It is estimated by the Swiss Banking Association that the applicable rate will be 20-25% for most taxpayers.
In addition to this from 2013 there will be a withholding tax of 48% on interest income and 27% on Capital Gains, with the level of withholding tax for dividends to be announced later.
Option 2
Alternatively the UK resident can make a full disclosure of untaxed Swiss income and gains to HMRC.  HMRC will then seek unpaid taxes, interest and penalties from this disclosure.
If a disclosure is made, the accounts of UK taxpayer will not be subject to the one off charge and future withholding tax.
A disclosure under this option could be made under the Liechtenstein Disclosure Facility (LDF) which may offer reduced penalties.
Conclusion
It is clear then that this deal will have a big impact on UK residents with a Swiss account. Possibly affected taxpayers should consider which option might be most beneficial.   This will require calculating the effect of both options on their funds.  This initial assessment exercise will be very important and may not be straightforward.
If you would like to discuss the impact of the treaty further or would like help deciding which option to choose please feel free to contact us in our Leeds office.