#ukunct @ 09.24 Monday 6th Dec 2010

Posted by: Stephen Relf - Contact Stephen

Tax avoidance is in the news again. First came reports that Cadbury is to "turn" Swiss, the insertion of a Swiss holding company being part of a restructuring programme expected to cost the UK millions of pounds in lost taxes. Then came news footage of demonstrations organised by the group UK Uncut (using the twitter hashtag #ukunct) at stores belonging to the Arcadia Group which, although managed by Sir Philip Green, UK-resident and an adviser to the government, is owned by his wife who is resident in Monaco. And all this in the week that the Government published its blueprint for the reform of the corporation tax system, a document which clearly has done little to deliver on the Liberal Democrats’ key election pledge to tackle avoidance.

Although I believe that individuals and business have a right to arrange their affairs in a manner which reduces their tax bill, so long as its legal, its hard not to sympathise with the protestors especially given the current financial climate. If tax avoidance is here to stay, and let’s face it it is, then perhaps the answer is for groups like UK Uncut to bring it to the public’s attention when businesses enter into arrangements which aren’t commercially justified and which exist purely to reduce exposure to UK tax. A kind of Big Society perhaps?

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Roll on Thursday @ 09.46 Tuesday 2nd Nov 2010

Posted by: Stephen Relf - Contact Stephen

This is a first for me as I can honestly say that I have never looked forward to a meeting of the Treasury Committee before. However, Thursday’s meeting is no ordinary meeting as George Osborne will be called on to defend his child benefit masterplan which, based on reports in the press, appears to be for HMRC to write to all higher rate tax-payers asking them to confirm if they or their partner received child benefit. For those who answer yes, the benefit will be clawed back either through self-assessment or through the much-loved PAYE system. There’ll also be a civil fine for those who don’t play by the rules.

Has there ever been such a recipe for disaster? Giving that we are dealing with an unfair and unpopular policy, can taxpayers really be expected to self-assess? Not only that but the claw back will take place after the benefit has been paid and spent and, in many cases, it will be recovered from a person who didn’t receive it in the first place. And what about couples who separate during the year?

Although not quite Haye versus Harrison, Thursday’s encounter between George Osborne and the Treasury Committee may well prove just as bloody.

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Worrying times ahead @ 09.38 Wednesday 6th Oct 2010

Posted by: Stephen Relf - Contact Stephen

Day two of the child benefit fiasco and the Government’s plans are throwing up some awful anomalies, not least that a two-income family earning as much as £86,000 will keep the benefit but a single-earner family with earnings of more than £44,000 will lose it. Apparently, the Government are unwilling to fix the problems as to do so would risk simplicity.

Is simplicity also to be prized ahead of fairness when the corporate tax rules are reformed? If so, many companies may see their tax bills grow despite the planned reduction in rates as complex but valuable reliefs are scrapped. Let’s hope the Government keeps its promise to consult on changes to tax law and that it is willing to act on the responses it receives.

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Helena Housing Ltd @ 15.40 Friday 10th Sept 2010

Posted by: Stephen Relf - Contact Stephen

If ever a reminder is needed that all taxes need to be considered when structuring a transaction, the case of Helena Housing Ltd is it.

Helena Housing entered into an agreement with a Council to acquire a significant number of properties most of which were in the need of repair. For VAT purposes, the price paid by Helena Housing represented the refurbished value of the properties (£104m above the actual value). To compensate Helena Housing for this, the Council agreed to pay it £104m for refurbishing the properties. This allowed input VAT of £18m to be recovered.

Although the scheme worked for VAT purposes, it caused problems with regard to corporation tax. Helena Housing had deducted the refurbishment expenses from its property business income. HMRC rejected this, arguing that by providing services to the council Helena Housing was carrying on a trade. Consequently, the refurbishment expenditure related to that trade and not its property business. The First-tier Tribunal agreed with HMRC, finding that the legal structure of the transactions could not be ignored.

Incidentally, the scheme was publicised by the Office of the Deputy Prime Minister in 2002 as giving rise to a VAT saving which could be used to improve the services provided to tenants. Not only is tax taxing, it can also be unfair.

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If it isn't broke...don't fix it @ 09.13 Friday 3rd Sept 2010

Posted by: Stephen Relf - Contact Stephen

I find myself in the unlikely position of arguing against an exemption regime for foreign branches! Although I have no problems with exempting profits from tax, I do take issue with the proposed replacement of a regime which is familiar and which works well in most cases with a regime which, based on the recent HM Treasury Discussion Document , will be complex, unwieldy and potentially disadvantageous to some.

Under the proposed exemption system, profits and losses of the foreign branch would be removed from UK tax. Clearly, this would benefit profitable enterprises trading in countries with a low tax rate, all be it at an increased compliance cost given the complex anti-avoidance provisions likely to be introduced, but it would leave loss-making branches worse-off. If loss relief is retained, it will be in a restricted manner.

In truth, no area of the proposed exemption regime is without difficulty and complex legislation is likely to be required with regard to the quantification of profits, chargeable gains, relief for losses and anti-avoidance. It is also proposed that separate rules apply to small companies.

Thankfully, the word "elective" features in the document and it is to be hoped that the exemption regime is made voluntary. The best result would be for the exemption regime to be available to those that would benefit from it (largely banks and insurance companies) leaving everyone else to get on with business as usual.

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An academic exercise @ 15.15 Sunday 1st August 2010

Posted by: Stephen Relf - Contact Stephen

A response document setting out the latest attempt at simplifying the attribution rules as they apply for associated companies purposes was published last week. Briefly, it is proposed that, from 1 April 2011, rights of associates will only be taken into account where there is substantial commercial interdependence (as defined in legislation and illustrated by HMRC guidance) between the companies in question.

Given that the gap between the small profits and main tax rates are expected to close to 4% by 2014, and that the Office of Tax Simplification is promising a bonfire of reliefs and allowances (at least according to the popular press), could it be that this is all academic anyway and that, from a date yet to be announced, there will be one rate of corporation tax and no associated companies rules to contend with? Let’s hope so.

The response document can be viewed on the HM Treasury website

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The Office of Tax Simplification @ 11.40 Wednesday 21st July 2010

Posted by: Stephen Relf - Contact Stephen

Well, we knew it was coming. First mentioned in the Conservative’s manifesto, then referred to in the Emergency Budget, it was a matter of when, and not if, the Office of Tax Simplification (‘OTS’) would be launched. And now its here and all over the news. Its not often tax makes the headlines but today is an exception. So far, I’ve found only one refuge – Cbeebies, although I’m half expecting George Osborne to turn up in Jackanory Junior later.

Is it good news or bad? Surely everyone must agree that the UK’s tax code is ridiculously complex in parts and in need of an overhaul. 11,000 pages of tax law, as the newsreaders keep telling us (every good story needs a number), is far too much for most of us to cope with. Its also encouraging that John Whiting, the CIOT’s Tax Policy Director, has been appointed as Tax Director of the OTS.

But, as we all know, there’s no such thing as a free lunch and simplification will surely come at a cost. We are told that the first task of the OTS will be to review, and so reduce, the many tax reliefs which are available. Although reductions in tax rates will compensate for this in most cases, it seems likely that some taxpayers who find themselves worse off. A price worth paying for simpler tax law - time will tell!

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Take the CCH Tax Challenge @ 11.12 Monday 12th July 2010

Posted by: CCH

All through July and September CCH are teaming up with Accounting Web to set the CCH Tax Challenge – with the chance to win a £100 John Lewis gift voucher. Every two weeks during these months CCH will be setting a question designed to provoke debate on a topical area of tax. The first is now live: Capital Gains Tax!

Visit Accounting Web to see the challenge and see what other experts suggest doing to deal with the issue.

Grappling with the law @ 11.00 Monday 12th July 2010

Posted by: Stephen Relf - Contact Stephen

When it comes to R&D relief, attention to detail is everything. A number of detailed conditions, many of which have changed over the years, must be satisfied for relief to be available and each represents a pitfall for the unwary. For proof, look no further than the case of Gripple v R & C Commrs.

Gripple Ltd was a wholly-owned subsidiary of Loadhog Limited and the two companies had a common director, Mr Facey. The two companies had entered into an agreement under which Loadhog Limited paid Mr Facey’s salary and then recharged part of this cost to Gripple Limited. Gripple Limited then included these amounts in its R&D claims on the basis that they represented staffing costs.

However, there was a problem. Under what is now CTA 2010, s. 1123(2), emoluments only count as staffing costs if they are paid by the company to the director. In Gripple’s case, the payments had been made indirectly. HMRC therefore rejected the claims and Gripple Limited appealed, unsuccessfully, to the general commissioners. On 30 June, the High Court upheld the judgement of the general commissioners.

There are two lessons to be learnt from Gripple, as follows:

• Planning is key. Additional R&D relief would have been due had Gripple and Loadhog arranged their affairs differently. Worse still, this could have been achieved quite easily by having Loadhog act as a salary agent for Grindle (a point accepted by counsel for HMRC).
• There is no margin for error. Counsel for Gripple had argued that the R&D rules envince “a general intention to provide enhanced relief for expenditure on R&D, and that a generous construction should where possible be adopted in order to further that general aim.” This was rejected by Henderson J who found that “a detailed and prescriptive code of this nature leaves little room for a purposive construction”.

All advisers dealing with R&D claims would be well advised the bear in mind the following words from Henderson J:

“There is no substitute for going through the detailed conditions, one by one, to see if, on a fair reading, they are satisfied.”

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Deferred tax problems @ 10.15 Friday 2nd July 2010

Posted by: Stephen Relf - Contact Stephen

One of the few bits of good news in last week’s Emergency Budget was the announcement that the main rate of corporation tax would fall to 24% by 2014. However, I suspect not everyone looked on this favourably. For those amongst us who have the misfortune to deal with deferred tax, it can only mean one thing – extra work.

Both FRS 19 and IAS 12 require deferred tax assets and liabilities to be measured at the tax rate or rates expected to apply in the period or periods when the asset will be realised or the liability settled. This can be a pain where an asset or liability is expected to unravel over a number of years and different rates of tax apply in each of those years.

For example, a company makes up its accounts to 31 March each year. At 31 March 2011, it has trading losses carried forward of £1m which are expected to be realised over the next four years. Different rates of tax will apply in each of those four years. To establish the tax value of the losses, it is necessary to (1) establish the accounting periods in which the losses will be utilised and (2) apply the tax rate for each period to the appropriate proportion of the losses. So, if the losses are expected to be utilised as follows:

• £100,000 in the year to 31 March 2012 (when the tax rate will be 27%)
• £400,000 in the year to 31 March 2013 (26%)
• £200,000 in the year to 31 March 2014 (25%)
• £300,000 in the year to 31 March 2015 (24%)

The deferred tax asset at 31 March 2011 would be £253,000. For companies with accounting periods which straddle 1 April, it’s even worse!

However, account can only be taken of changes in tax rates where those changes have been enacted, or substantively enacted (3rd reading in the Commons), by the Balance Sheet date. Therefore, the staged reduction should only be taken into account to the extent that it has been enacted or substantively enacted.

Although it looked like the staged reduction would be legislated for in the 2nd Finance Bill of 2010, this no longer seems to be the case as clause 1 of the Bill sets the main rate for FY 2011 only. Assuming that the reductions applying from 1 April 2012 don’t find their way into the 3rd Finance Bill of 2010, a draft of which is expected to be published later this month, life will be a lot easier than expected.

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