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Home » Business News

Baker Tilly’s Weekly Tax Brief – 29 January 2013…

Submitted by on January 29, 2013 – 9:37 pm |


Baker tillyIn this edition of Baker Tilly’s weekly round-up of the most important tax news, we cover the latest developments…

1. Tax avoidance – now business pushes back

George Bull

Businesses are now beginning to push back against those who criticise their tax planning. We consider how the UK government and HMRC may react. While stability and certainty are two important foundation stones of the UK tax system, 2013 brings with it the prospect of tax earthquakes which may shake those foundations.

2. Tying the knot in 2013? HMRC wants to add to your special day…

Ian Carpenter

From this month, couples getting married could see the price of their wedding soar as HMRC plans to add VAT to the cost of hiring rooms. Will this lead to more tears on the big day?

3. Taxman targets local sports clubs

David Heaton

Local cricket clubs are falling under the scrutiny of the tax man, but with many clubs operating on no more than a shoestring, could committee members be caught by googlies and be forced to ‘stump’ up the cash themselves?

4. Offshore trusts – no consultation, no explanation and now retrospective taxation…

Gary Heynes

HMRC has suddenly – and very quietly – announced changes to offshore trusts. But these changes will mean that many people will suddenly find themselves in a taxable position with no consultation, no explanation for the change, and no opportunity to make any changes to their arrangements.

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1. Tax avoidance – now business pushes back

Last week I mentioned the prospect of a head-to-head between the UK and the Netherlands over international corporate tax avoidance.

Whereas the UK Prime Minister, David Cameron, had announced his intention to tackle aggressive tax avoidance as one of the main priorities for the UK presidency of the G8 Group of the world’s largest economies, the Dutch seem to be taking a different course. While the Netherlands is not a member of the G8, the Dutch Finance Minister had sent an open letter to the Dutch Parliament, explicitly recognising that setting up or shifting real economic activities to low-tax jurisdictions is a legitimate way of reducing taxes.

Both the Netherlands and the UK have spent years, decades even, creating tax systems to encourage inbound investment. In a democracy, one might reasonably expect that the collective will of a population, expressed through its elected representatives, would produce a system of laws – and specifically a tax system – which more or less met with public approval. Autumn 2012 marked a turning point in the UK. Faced with public outcry over what was seen as unfair tax avoidance, MPs began to suspect that – in the eyes of the public at any rate – Parliament had reached exactly the wrong place in encouraging multinational business, but for all the right reasons.

Of course, there are two sides to every argument. Recent statements by high-profile business figures, to the effect that morality has no place in taxation, mark a visible turning of the tide. There is a sense of justice in that: companies feel that, in an era when their behaviour is prescribed in so many areas by legal and regulatory requirements, it is simply not tenable for a government to argue that ethics impose a greater obligation than statute. Notwithstanding the growing recognition that good ethics make good business, business are beginning to argue that by organising their tax affairs in ways specifically encouraged by tax legislation, it is not then open to the government to argue that there is an ethical obligation to pay the maximum amount of tax in respect of legitimate commercial transactions. As some businesses now point out, if the government doesn’t like the legislation it made, then it should change it.

Beyond all the rhetoric the real debate centres on the distinction between legitimate tax mitigation and wholly artificial, abusive tax avoidance. The noise in the system doesn’t help; while reasoned debate is fostered by judicial attempts to draw a distinction between the two, politicians and some in high office have an unhelpful tendency to blur the distinction and to tar legitimate tax mitigation, artificial and abusive avoidance and tax evasion with the same brush.

So what might happen next? It would be tempting to suggest that, if Parliament feels that the tax code needs to be changed, then it should review priority areas to enact a consistent and cohesive code which achieves the intended effect. That is easier said than done for many reasons. First, the UK tax system is interlocked, through corresponding legislation and through international tax treaties, with many other tax systems around the whole. Changing the UK tax system in isolation could well create more loopholes, along with other unintended consequences. Second, at a time when the government should be concentrating on economic recovery, rewriting parts of the tax code hardly seems to be the best use of limited time and resources.

There is of course an alternative which is not entirely welcome, namely unilateral action by HMRC. Through the new General Anti-abuse Rule, HMRC will soon have a powerful tool to tackle arrangements which, it may reasonably be concluded, were undertaken for abusive tax purposes. The key to the operation of the GAAR will be to determine what is reasonable and so these powers are subject to the checks and balances imposed by an independent GAAR panel (the first members of the interim GAAR panel were announced last week). As an alternative to a rewriting of the tax code or using the GAAR, HMRC might choose to go it alone by changing its position on established tax legislation and leaving those affected to challenge it through the courts. My colleague Gary Heynes looks at two current examples of this below, in the context of overseas trusts.

Stability and certainty are two important foundation stones of the UK tax system. 2013 brings with it the prospect of tax earthquakes which may shake those foundations.

 

2. Tying the knot in 2013? HMRC wants to add to your special day…

From 22 January 2013 when couples decide to tie the knot and celebrate their wedding in a fabulous country house hotel, they may find that HMRC has been at work and added VAT to room hire cost. As a result there may be tears and possibly fewer flowers or catering so that couples can meet their budget for the big day. This is because last week, HMRC issued a brief reaffirming its position on the VAT treatment of rooms provided in hotels and similar establishments.

Certain supplies of land, including room hire, are normally exempt from VAT. However, the VAT exemption does not apply to the provision of accommodation in hotels, inns, boarding houses and similar establishments, including accommodation in rooms provided for the purpose of supplies of catering, such as rooms provided by hotels or country houses for wedding receptions. Often hotels and similar establishments provide both the venue and the catering, charging VAT on the total price. However, some venues require or allow guests to have the catering supplied by someone else. In these cases, unless the hotel had elected to charge VAT, the room hire was supplied VAT free to the customer.

Where both the room and the catering were supplied by the hotel, the whole supply has always been subject to VAT. However, where the catering was supplied by a different person, HMRC’s historic position was that the supply of the ‘room only’, by the hotel, would be VAT exempt. However, in November 2011, HMRC changed its view on this point, and, although it updated the Public Notice, it never issued any briefing or press notice to reflect this change in policy…….making it very difficult for businesses to know whether they should, or should not charge VAT. A recent case specifically relating to the VAT treatment of wedding venues has brought the lack of clarity from HMRC into sharp focus.

In recognising its previous shortcomings, HMRC has now stated that where businesses have treated supplies as exempt from VAT in the past, no assessments will be issued, or action taken to correct the treatment of such supplies. All supplies should however be treated consistently with HMRC’s revised interpretation, and subject to VAT at the standard rate from the date of the Revenue and Customs Brief.

Now if ever there were grounds to bring back married couples allowance….

3. Taxman targets local sports clubs

News has emerged of HMRC again starting a project to collect what must be small amounts of tax from local cricket clubs.  With many clubs operating on no more than a shoestring, committee members are in danger of having to stump up the cash.

Any club that employs staff or pays an ‘honorarium’ to committee members or players should have a PAYE scheme.  Many clubs who pay foreign players or local groundsmen or bar staff take the view either that they are paying self-employed suppliers or that the amounts involved are so small that they won’t trouble the taxman, but as every cricketer knows, if you’re in line when a straight ball hits the pad, you’re out (assuming the umpire’s eyesight is OK).

It is perfectly in order for a club to hire the services of a self-employed groundsman or coach, but, like every good batsman, you have to watch the delivery carefully – are the terms genuinely for services that don’t amount to part-time employment?  Cricket clubs are small businesses: if you have a part-time employee who already has a job elsewhere, you’ll usually be liable for at least basic rate tax on anything you pay him, although NI is usually less of a problem because of the earnings threshold.  If you disregard the basics, it’s easy to be caught out.

Community Amateur Sport Clubs benefit from some exemptions, but they don’t extend to PAYE.

Committee members who wouldn’t dream of disregarding the rules of the game can be liable to pay up personally if the club is found liable and has no funds.  They won’t appreciate being hit for six by HMRC.

4. Offshore trusts – no consultation, no explanation and now retrospective taxation…

Offshore trusts are often seen as being at the forefront of tax avoidance, and so have been disliked and scrutinised by HMRC for decades.  But there is a clear set of tax rules in place, and despite these becoming increasingly complex over the years, tax advisers can broadly follow their intention.

So it was with some surprise that HMRC announced a sudden change in their understanding on a matter of general law which has an impact for offshore trustees (as well as in other general circumstances). This change took place without consultation or clear guidance as to why they reached a different conclusion from centuries of accepted legal practice and case law.  After recent years of helpful consultation prior to major changes, hopefully this is not the new way HMRC intends to make changes in the future.

The specific issue revolves around loans and – for trustees specifically – loans they make to UK resident beneficiaries.  Where trustees make a simple loan to a UK beneficiary, they will be regarded as having a UK asset equal to the value of the loan.  In most circumstances, this will mean that under Inheritance Tax rules, trustees have a charge to tax on the value of the loan every 10 years.

Many overseas trusts rightly pay tax in this country only on assets in the UK and not foreign assets.  For centuries, it has been clear that a debt written under deed, also known as a Specialty Debt, was located for general legal purposes in the jurisdiction where the deed itself was held.

However on 24 January, HMRC announced they had received a different view and would now regard these debts as located where the debtor resides, often meaning that they are now regarded as being in the UK, with tax implications for overseas trustees and other lenders.

This will have a major impact for those working within accepted general legal principles and HMRC practice, who suddenly find themselves in a taxable position with no consultation, no explanation for the change, and no opportunity to make any changes to their arrangements (assuming HMRC’s revised position is to be accepted).

While overseas trustees may seem a small group of taxpayers to be affected, this could impact many more taxpayers if HMRC now start changing their view in other areas of accepted practice, without consultation or opportunity to change arrangements.


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