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RSM’s Weekly Tax Brief – 26 January 2016…

Submitted by on February 3, 2016 – 6:20 am |


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

  1. The right amount of tax?  Who decides?

Rebecca Reading

It’s been an interesting week for tax and the multinationals, with much made in the press about Google’s £130 million tax deal with HMRC, and further announcements on anti-tax avoidance measures expected. The strong views expressed show that there are still some tough questions when it comes to the taxation of large corporates……

  1. Tax return deadline – get it done but get it right

Mike Down

Sunday’s self-assessment deadline is fast approaching, and taxpayers need to get a move on if they haven’t already filed their return. But be warned, if you’re rushing to meet the deadline then you’re more likely to make mistakes – and that could prove to be very costly…

  1. HMRC’s digital myth-understanding…

Andrew Hubbard

When HMRC announced last year that businesses would be required to update them on a quarterly basis via their digital tax account, there was uproar. Many assumed this would mean businesses would have to complete four tax returns a year and, as a result, the taxman came in for some serious stick. But now HMRC’s newly-published ‘myth-buster’ has straightened out the situation once and for all…or has it?

  1. Part payment of college fees is ‘business’

David Wilson

A recent Upper Tribunal has ruled that part-payment of fees paid by students has to be treated as VAT exempt ‘business income’. This will come as a blow to further education establishments – especially to the dozens of colleges that have already submitted VAT reclaims totalling in excess of £121 million for VAT zero-rated construction works.

  1. Higher education can be ‘taxing’

David Wilson

The Court of Appeal has confirmed that although university tuition fees for higher education are exempt from VAT, fees payable to commercial providers of higher education are subject to VAT. Bad news for ‘unaffiliated’ suppliers of ‘paid for’ services to the higher education sector…

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  1. The right amount of tax?  Who decides?

Few will have missed the furore last weekend over the news that Google and HMRC have come to an agreement over ten years disputed corporate tax returns.

Initial commentary from the government suggested that the additional £130 million tax bill was considered a good result, and perhaps they did not anticipate the backlash they received. The UK has been a vocal supporter of the OECD project to fix the international tax system (the BEPS project) and has already begun to make law changes that will tackle avoidance by multinationals. The agreement with Google is for historic liabilities, although their comments suggest that they have been influenced by the BEPS project and the need to align tax revenues with value creation.

We would be surprised if this is found to be some sort of special ‘sweetheart’ deal by HMRC. Unlike some of our European neighbours, the UK tax system is less prone to negotiation and focusses on the application of the law. There are, of course, still grey areas and such debates between the taxpayer and HMRC can often be protracted, so this in itself is not unusual.

If there is something too generous here, then is there a possibility that it could be undone by Europe – in the same way as the deals done by Luxembourg for Fiat, and the Netherlands for Starbucks have been found to be illegal state aid? There is no sign of any let-up from the EU Commission on tax issues, with indications that further announcements on new anti-tax avoidance measures thought to be imminent, but again these are expected to be in line with the BEPS project recommendations.

The BEPS project has a lot riding on it. Scanning through the Actions 1-15, it is clear that  the UK is an early adopter, whatever might be said about the Google situation.  A remaining challenge, and one acknowledged by the OECD, concerns how disputes should be resolved.   The EU Commission approach is an imaginative one, to address direct tax deals using state aid rules. This does, however, leave the taxpayer outside the normal rules for dispute resolution. Or in a situation like Google, if a multinational pays more tax in the UK, it should pay less somewhere else.

How much less and when should that refund be made are difficult questions for any tax authority to address.

  1. Tax return deadline – get it done but get it right

With less than a week to go before the self-assessment deadline, taxpayers who haven’t yet filed will need to get a move on. But in the rush to complete their returns, taxpayers should not overlook the importance of accuracy.

HMRC may charge a penalty when a tax return or other document contains an inaccuracy, and the inaccuracy results in tax being understated or over-claimed.

The rate of a penalty charged by HMRC is based on the percentage of Potential Lost Revenue and is dependent on the behaviour of the taxpayer.

While the vast majority of penalties (more than 80%) imposed for inaccurate tax returns fall into the ‘failure to take reasonable care’ category (which in certain circumstances, can result in a penalty being suspended), the numbers of penalties for ‘deliberate’ behaviour are on the rise.

An FOI request submitted by RSM last year found that the number of individual penalties imposed for ‘deliberate’ as opposed to ‘careless’ inaccuracies in tax returns almost trebled, rising from 5,162 in 2012-13 to 14,401 in 2013-14.

Crucially, these ‘deliberate’ penalties also grew as a proportion of the total number of penalties, suggesting HMRC is taking a much tougher line – with significant implications for those affected.

The ‘deliberate’ behaviour categories carry significantly higher financial penalties and do not allow any opportunity for a suspension of the penalty. They also increase the possibility that individuals will be ‘named and shamed’.

You have been warned!

  1. HMRC’s digital myth-understanding…

I don’t remember much from my O level physics (sorry Mr Jones) but I do remember being told that ‘nature abhors a vacuum’. That principle came back to me when I was considering the latest developments in the government’s digital strategy.

You will recall that before Christmas, HMRC issued a document in which they stated that businesses will have to ‘update HMRC at least quarterly via their digital tax account’. No details were given about what this would actually mean, but in the absence of specific information, the vacuum was very quickly filled with speculation. Many people, not surprisingly, interpreted this as meaning that business would have to complete four tax returns each year. Business owners got up in arms, and a petition urging the government to abandon plans for quarterly returns attracted over 100,000 signatures. This triggered two things – a debate in parliament, and the publication by HMRC of a document with the extraordinary title ‘making tax digital: myth-buster’. The debate and the publication both make the same point: quarterly reporting does not mean quarterly tax returns. It means sending information to HMRC directly from accounting records which will be kept electronically. What that information is, and how it is to be sent to HMRC is still completely unknown.

There are important lessons here for the way in which HMRC communicates with taxpayers. In a world of instant electronic communication it is very easy to lose control of the agenda and set hares running, which is exactly what has happened here. HMRC should have been much more explicit upfront in the way that this change was explained so that the ‘myths’ didn’t develop in the first place.

I have some sympathy for HMRC because they want to take a collaborative approach to all of this, to roll things out gradually and to consult at all stages in the process. This must be right in principle, but it does run the real risk that a lack of detail leaves people in the dark and allows rumours to flourish.

In an environment where the internet allows ideas to go viral in a matter of minutes, the calm civilised timetable of HMRC consultations may not be realistic.

  1. Part payment of college fees is ‘business’

In a somewhat disappointing VAT decision of particular relevance to the amount of VAT relief available on the construction of new college buildings throughout the further education sector, the Upper Tribunal has ruled that part-payment of fees paid by students has to be treated as VAT exempt ‘business income’ of the College.

Further education colleges providing education for predominately no charge can benefit from the VAT zero-rated construction of new buildings and campuses. Following the favourable decision of a lower tax tribunal that part-payment of fees was ‘non-business’ income, some 50 colleges submitted VAT reclaims totalling in excess of £121 million for VAT zero-rated construction works.

Now the Upper Tribunal has set aside that decision and stated that part-payment of fees paid by students over the age of nineteen (and presumably over eighteen in Scotland) are to be treated as ‘business income’ of the college where such fees are partly remitted because of income support grants or are otherwise reduced because they are grant supported.

The tribunal considered that, albeit the part-payment of fees represented less than the cost of the supply of education (primarily because that cost was in part defrayed by grant funding) that didn’t mean the fees did not amount to consideration for the supply of education. In its view there was a direct link to, and reciprocity of obligation between, the part-payment of fees and a supply being made by the College.

Such part-payments must therefore, on the basis of this decision, be included within calculations of the level of business use, and will mean that many colleges may not, after all, fall within the five per cent ‘business’ test, and so can’t benefit from newly constructed buildings being VAT free.

One crumb of comfort is in a postscript to the decision where the Upper Tribunal has called on the Government to reconsider VAT legislation. In noting that public funding doesn’t cover all a college’s costs, then depending on from where other sources of income are received, it can either escape from, or suffer, the tax burden on the construction of a building intended for its charitable purpose. The tribunal therefore made the bold statement that ‘it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse’.

Perhaps the Chancellor will revisit this issue in the forthcoming Budget?

And while we’re on the subject of education….

  1. Higher education can be ‘taxing’

The Court of Appeal has confirmed that, while tuition fees payable to universities for higher education are exempt from VAT, fees payable to commercial providers of higher education are subject to VAT at the standard rate.

Finance and Business Training Limited (FBT) is a ‘commercial’ provider of education with some (but by no means all) of its courses and students qualifying for degrees from the University of Wales. They attempted to argue before the court that the UK had failed to correctly implement the education exemption afforded under the European VAT Directive.

This European VAT legislation requires member states to exempt university education from VAT but, the education has to be provided either by bodies governed by public law ‘or by other organisations recognised by the member state concerned as having similar objects’. In the UK, VAT exemption applies to education provided by universities and ‘any college, institution, school or hall of such a university.’

In this case, the Court determined that, even though FBT was supplying educational services, it failed to meet the EU law-compliant ‘supplier condition’ as it was not an ‘eligible body’. Its supplies therefore could not qualify for VAT exemption.

The disparity in the VAT treatment in the provision of higher education is not new and, following proposals within Budget 2012, there was some anticipation within the commercial sector that HMRC’s formal consultation on higher education would bring these and other such institutions within the realm of VAT exemption. However by treating higher education as a VAT exempt supply, commercial providers, like universities, would no longer be able to recover VAT incurred in underlying costs with the effect that, any potential reduction in ‘commercial’ fees being passed on to students would be significantly reduced.

HMRC subsequently withdrew its proposals explaining that, because of the issues relating to non-recoverable VAT costs it was unable to find a solution acceptable to the majority of the ‘for-profit’ sector which would also meet government objectives of accessible ‘VAT-free’ education by commercial providers.


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