Tax News Roundup: February 2015

After the publication of our regular Square Circular, which gives an overview of the tax landscape and some helpful tax advice, we thought we’d update you on some recent tax cases and tax news from February.

From footballers feeling the squeeze of Accelerated Payment Notices to a bit of leniency from HMRC regarding PAYE fines, we look at the ongoing after-effects of tax avoidance schemes and planned reforms to HMRC’s system.

Tax News – February 2015

Affluence unit

The HMRC division dedicated to investigating the affairs of affluent taxpayers collected £137.2m in additional tax in 2013/14, up from £85.7m in 2012/13, an increase of 62%.   Around 500,000 individuals are potential targets of this team which focuses on UK residents with an annual income in excess of £150,000 or wealth of more than £1m. They are people not deemed rich enough to be the concern of the tax department’s high net-worth unit, but are increasingly getting HMRC attention.

Footballers in financial difficulty. Yes, we’re serious! 

Over 100 footballers, including recently retired Premier League players, are said to be facing serious financial difficulties following the first round of accelerated payment notices (APNs) from HMRC for repayment of substantial tax reliefs claimed via investment schemes which are now in dispute.  This is a situation facing a number of taxpayers who entered into tax avoidance arrangements, spent the funds and are now facing hefty bills for upfront tax payments.

Positive changes to PAYE fines 

Employers will not incur penalties for delays of up to three days in filing PAYE information.  There will be no changes to the submission deadlines, and employers with fewer than 50 employees will still be subject to late-filing fines from 6 March, however, late-payment sanctions will be reviewed on a risk-assessed basis, rather than issued automatically.  HMRC intends to next month close about 15,000 PAYE schemes that have not made a report since April 2013 and appear to have ceased, in an effort to prevent unnecessary penalties being issued.  They will write to the affected schemes to tell them about the planned closure and what to do if they are, or should be, operating PAYE.  Employers that have received in-year late-filing fines for the period from 6 October 2014 to 5 January 2015 and were three days late should appeal online by completing the “other” box and add “return filed within three days”. Find out more about our tax services in Manchester and Salford here.

Reduction in beneficial loans interest rate 

The official rate of interest used to calculate the income tax charge on beneficial loans will be 3% for 2015/16. The rate for the current year is 3.25%.

Benefits of capped draw down for over 55s

People who are over 55 before the 6 April 2015 may wish to consider moving some of their pension into capped draw down (which is a means of taking a pension without buying an annuity) prior to the introduction of the new pension on 6 April 2015.  At present, an individual can pay up to £40,000 a year into a pension fund and obtain tax relief until 75 subject to having sufficient relevant earnings against which to set the contributions.  After 5 April 2015, this will reduce to £10,000 a year in respect of money purchase pension contributions once the member has dipped into the pot and taken a flexible income payment.  If no income has been taken before that date, the £40,000 limit will apply until income is taken from the fund, after which it will reduce to £10,000.  The exception is for those who are over the age of 55 before 6 April 2015 and have previously placed funds into capped draw down, even if they have taken no income or only a very small amount before that date.  For these individuals, the limit will remain at £40,000 after 5 April 2015 as long as income withdrawals remain within the capped draw down limit.  Please note that anyone taking a secure income such as an annuity or solely taking tax free cash will not be subject to the £10,000 limit.

Tax Cases – February 2015

VAT on card transaction fees – National Exhibition Centre Ltd v CRC – Upper Tribunal

The taxpayer company owned and operated exhibition venues. It treated the facility, booking and transaction fees as consideration for standard-rated supplies.  The business later decided that booking fees charged on credit card and debit card payments on tickets were consideration for a supply of payment processing services, making them exempt from VAT.  HMRC refused claims for repayment of overpaid output tax.  The First-tier Tribunal (FTT) allowed the taxpayer’s appeal.  The matter moved on to the Upper Tribunal.  The judge said the FTT had asked the correct question, namely what service the taxpayer had supplied in return for the booking fee. It noted the customer was liable to the charge if he or she paid by card remotely or in person at the box office. The FTT concluded the fee was a charge on card transactions.  This was not an unreasonable or perverse conclusion, according to the Upper Tribunal.  The Revenue’s appeal on the supply issue was dismissed. The tribunal decided to refer to the Court of Justice of the European Union for a preliminary ruling on the exemption issue.

VAT fraud – Fonecomp Ltd v CRC – Court of Appeal

The taxpayer company bought mobile phones in July 2006 and claimed a refund of input tax. HMRC refused on the basis the purchases were connected with missing trader intra-community (MTIC) fraud and the taxpayer knew or should have known.  The First-tier Tribunal and the Upper Tribunal both accepted that the business may not have known it was part of a MTIC scheme, but ruled it should have known its purchases were connected with fraud. The taxpayer appealed.  The Court of Appeal said it was not necessary to show knowledge of the details of the fraud or the connection between its purchases and the fraudulent evasion of VAT. The trader had just to know – or have the means of knowing – that fraud had occurred or would occur at some point in some transaction to which his transaction was connected. He did not have to know how the fraud was carried out to have that knowledge.  The taxpayer’s appeal was dismissed.

Film scheme – Eclipse Film Partners No 35 LLP v CRC – Court of Appeal

The taxpayer partnership obtained a 20-year licence from Disney in April 2007 to distribute two movies.  The business was financed by 289 partners, who contributed £840m in total. They borrowed £790m and claimed relief on the interest, on the basis the partnership was carrying out a trade and the loan constituted capital used wholly for the purposes of such.  HMRC refused the claim on the basis the taxpayer was not carrying on a trade.  The taxpayer lost at both the First Tier and Upper Tribunals and the matter escalated to the Court of Appeal, which said the “proper characterisation” of the taxpayer’s business depended upon the totality of its activity and enterprise. The payment of the licence fee had the character of an investment and the possibility that the partnership would obtain a share in the contingent receipts was not sufficient to characterise its business as a trade.  It was established law that the production and exploitation of a film was a trading activity, but the taxpayer in this instance had not paid for the production of the films, nor had it made a significant contribution towards the movies’ exploitation.  The taxpayer’s appeal was dismissed.

Validity of accelerated payment notices legally challenged

Film scheme investors who have been served with the penalty notices, which demand payment of the tax in dispute upfront, have been granted permission to challenge the notices by way of judicial review.  The investors are understood to be arguing various points including a breach of their rights to a fair trial, a breach of their Article 1, Protocol 1 rights to property and various common law allegations.  Under APN rules, a taxpayer has 90 days to pay the tax once an APN has been issued unless they successfully make representations to HMRC that the notice should not have been issued.  Representations can only be made on the grounds that the conditions for the notice were not fulfilled – for example that the scheme was not a DOTAS scheme or that the amount of the accelerated payment claimed is incorrect. There is no right of appeal against an APN.  The law firm taking the case said that there were several grounds for arguing that the APNs in these cases were unlawful, including the fact that taxpayers that are issued with one have no right to appeal, which is not compatible with human rights legislation and that the legislation is retrospective because it applies to DOTAS schemes which were entered into before the APN rules came into force.