Monthly Tax Update

Private Markets

This monthly briefing note summarises some tax and other news items of interest to UK-focused private companies and their management teams and shareholders.

United Kingdom  | Deloitte Private | 11/05/2021

UK Spring Budget 2021

Finance (No. 2) Bill: progress; reprinted Bill; written evidence

The Public Bill Committee held its third and fourth sittings to consider the Finance (No. 2) Bill on 27 April 2021. The government amendment to Clause 116 and Schedule 28 in relation to VAT late payment interest and repayment interest was passed in the fourth sitting. The debate on the third sitting is here. The debate on the fourth sitting is here. The Committee has completed its scrutiny of the Bill which will now move on to its Report stage in the House of Commons. No date has yet been set for the Report stage. The Bill, as amended by the Committee of the Whole House and the Public Bill Committee, is available here. Written evidence submitted to the Public Bill Committee has been published.

COVID-19 measures and announcements 

COVID-19: help and information

A reminder that we are running a series of webinars chaired by Ian Stewart, our Chief Economist, with contributions from experts across the firm. We will be sharing our insight on the global economic impact of COVID-19, the challenges organisations are facing, how they are responding and recommendations on the actions they can take. You can register for the webinars here. You can access more information  at our Deloitte global COVID-19 webpage

Coronavirus Job Retention Scheme: updated guidance

HMRC have updated their guidance on the Coronavirus Job Retention Scheme (CJRS):

 Self-Employment Income Support Scheme: Treasury Direction, updated guidance

Treasury Direction has been made under Sections 71 and 76 of the Coronavirus Act 2020 in relation to the Self-Employment Income Support Scheme (SEISS). The Direction sets out the rules for the fourth SEISS grant. The fourth grant covers the period from 1 February 2021 to 30 April 2021 and must be claimed on or before 1 June 2021. Unlike the previous grants, the fourth grant takes into account the 2019/20 profits, both in the eligibility criteria and the average profit calculations (i.e. it is now normally a four-year average rather than three, taking 2019/20 into account along with the original three). Another difference between the fourth grant and the previous three grants is that the fourth grant can be wholly or partly clawed back if there is an amendment to a tax return that would lower the grant amount, or make the claimant ineligible, subject to an exception where the clawback would be £100 or less.

HMRC have updated their guidance on the SEISS with information about the fourth grant:

The House of Commons Library has updated its research briefing on the SEISS.

UK direct tax developments 

Upper Tribunal: HMRC win follower notice penalty appeal

The Upper Tribunal has allowed HMRC’s appeal in HMRC v Comtek Network Systems (UK) Limited which relates to follower notices. Finance Act 2014 permits HMRC to issue a follower notice where they consider that there is a final judicial ruling in another case that is determinative of a dispute between HMRC and the taxpayer. If the taxpayer then fails to take the ‘necessary corrective action’ (e.g. by telling HMRC that they have given up their claim to the tax advantage) the taxpayer can be charged a penalty of up to 50% of the tax in dispute. In this case, HMRC issued a notice in relation to a stamp duty land tax decision and followed it up with a penalty. The penalty was overturned by the First-tier Tribunal, which held that it was reasonable in all the circumstances not to take corrective action. However, the Upper Tribunal found the First-tier Tribunal had misapplied the concept of ‘reasonable in all the circumstances’ in particular when considering actions occurring after the statutory deadline had passed. It reinstated the penalty, although in a reduced amount. 

Khan: share buy back: taxable distribution: HMRC win in Court of Appeal

The Court of Appeal has dismissed the appeal of Mr Bostan Khan against the decision of the Upper Tribunal on a transaction in relation to a company, Computer Aided Design Limited (the company). Mr Khan, who had acted as the company's accountant, arranged to purchase shares in the company with the intention being to wind-up the company over 2-3 years, with Mr Khan receiving the company’s trading profits over its remaining life. Mr Khan purchased all of the shares in issue from the company’s existing shareholders and the company then repurchased 98 of its 99 shares in issue. Mr Khan used the money received for the repurchase to pay the original shareholders. HMRC assessed Mr Khan as having received a taxable distribution of £1.95million, being the amount he received for the 98 shares.

The First-tier Tribunal rejected Mr Khan's contention that the disposal was one of trading stock. Before the Upper Tribunal, Mr Khan maintained that the purchase and subsequent resale of the shares should be viewed as a single composite transaction, with the result that Mr Khan had purchased a single share for £18,771 and should not be taxed on the distribution from the purchase of own shares. The Upper Tribunal held that the real question before it was who was liable for the tax associated with the distribution arising on buy back of the shares. Mr Khan argued that he was never in receipt of the sale proceeds because they were directly deposited into an account and then were immediately withdrawn. However, the Upper Tribunal held that Mr Khan had received the distribution and was entitled to receive it, so the tax charge rested with him.

The Court of Appeal has concluded that the Upper Tribunal reached the right conclusions for the right reasons. Lady Justice Andrews said: “However one views these transactions, they cannot be re-characterised as a buyback arrangement made directly between the vendor shareholders and the company, ignoring the genuine role played by Mr Khan and disregarding his legal rights and obligations.” 

Residential Property Developer Tax: consultation

The government has announced a consultation on the proposed design of a new tax on the largest residential property developers set to raise at least £2 billion to help contribute to the cost of cladding remediation work. The tax was first announced in February as part of £5 billion cladding remediation package. Its proposed design would mean:

  • it would apply to a measure of developers’ profit from UK residential development;
  • it would only apply to in-scope profits over £25 million;
  • it would apply to conversion of existing buildings as well as new construction.

Ministers intend to set out the rate of the tax at a future fiscal event. The time-limited tax is due to apply from 2022, and it intended to be UK-wide.

The consultation closes at 11pm on 22 July 2021. The necessary measures will be included in the 2021-22 Finance Bill. 

UK indirect tax developments

European Commission: Guide to the VAT One Stop Shop

The European Commission has published a Guide to the VAT One Stop Shop (OSS) which provides details concerning VAT registration, returns and payments for the three OSS schemes (union scheme, non-union scheme and import scheme) that will apply in the EU from 1 July 2021. Under these schemes, online sellers will be able to register in one EU Member State to declare and pay VAT on all distance sales of goods and cross-border supplies of services to EU customers. Existing thresholds for distance sales of goods will be abolished and replaced by an EU-wide €10,000 threshold for distance sales of goods and telecoms, broadcasting and electronic services. The introduction of the Import One Stop Shop (IOSS) for distance sales of low value goods imported from non-EU countries will accompany the removal of the low value consignment threshold. The new guide complements other extensive guidance that has been published by the Commission. Some EU Member States, including Belgium, the Netherlands, and Denmark, have launched portals allowing businesses to register under the schemes.

Customs duties: how to treat a teddy bear’s heart: Upper Tribunal

How can you tell if a plastic heart, which gives a cuddly toy a ‘realistic pitter-patter’ heartbeat, is designed for a bear (and therefore subject to duty at 4.7%) or a doll (duty free)? In Build-a-Bear, the Upper Tribunal has considered how to classify both hearts and other accessories (such as shoes, clothing, and wigs) which could be used with either. It decided that where accessories were designed principally for bears or for dolls, then Note 3 to Chapter 95 of the Combined Nomenclature classified them accordingly. Therefore, wigs which had slits and loops to fit over a bear’s ears were principally suitable for teddy bears and were subject to duty. However, bears and dolls both need hearts, and in that case Note 3 did not help. Classification of the hearts depended on the existence of a subheading in the Combined Nomenclature for ‘parts and accessories’ of dolls but the absence of any equivalent for bears, meaning that they should be classified as duty-free.

Common law claim for historical VAT bad debt relief rejected: High Court

Deficiencies in the VAT bad debt relief (BDR) scheme prevented BT from claiming VAT between 1978 and 1989 under the ‘Old BDR Scheme’. In 2014 the Court of Appeal ruled that BT did not have a legitimate expectation arising from the eventual repeal of the Old BDR Scheme in 1997, and that a claim submitted in 2009 under the scheme was time-barred. The High Court has now ruled that BT was not entitled, as an alternative, to relief for mistake of law either. Unlike claims for overpaid VAT, VATA 1994 does not expressly exclude common law remedies for bad debt relief. However, in the High Court’s judgment, the Old BDR Scheme was intended by Parliament to be an exhaustive and exclusive scheme for VAT relief on bad debts. Otherwise, taxpayers could circumvent the rules made by Parliament relating to the format, the calculation, and the time limits for BDR claims by seeking an equivalent relief at common law. The High Court concluded that Parliament intended the Old BDR Scheme to oust any common law remedy, and dismissed most of BT’s claim (even though it accepted that there was an arguable case about whether HMRC had been unjustly enriched by limitations of the Old BDR Scheme). 

Royal County Down Golf Club: time limits apply to catch-up claims – First-tier Tribunal

The First-tier Tribunal’s decision in Royal County Down Golf Club is a reminder of the need to review claims regularly if they are based on litigation that may take several years to resolve. The golf club submitted a claim for VAT on green fees in March 2009, covering 1990-96 and 2006-08. The CJEU ruled that green fees were exempt in December 2013, and early in 2015 the club submitted a catch-up claim for 2009-13. HMRC rejected the first two years of this claim on the basis that they were time-barred. The club argued that it was unreasonable for HMRC to rely on the four-year cap (when it was obvious that the club considered that its green fees were exempt) but the First-tier Tribunal has dismissed its appeal. The claim submitted in 2015 was a new claim, not an amendment to the 2009 claim; the question of whether HMRC should exercise their care and management powers (and ignore the cap) did not fall within the First-tier Tribunal’s jurisdiction; and HMRC’s refusal to accept the 2015 claim did not contravene the club’s right to peaceful enjoyment of its possessions under Article 1 of Protocol 1 of the European Convention on Human Rights. HMRC had correctly treated part of the 2015 claim as time-barred.

International developments 

OECD international tax update to G20 Finance Ministers

OECD Secretary-General Angel Gurría presented an international tax update to a virtual meeting of G20 Finance Ministers and Central Bank Governors held in April. This includes chapters on responding to the COVID-19 pandemic; addressing the tax challenges arising from digitalisation; tax and the environment; progress in tackling tax evasion and tax avoidance; and capacity building - supporting developing countries. Annex A provides an overview of tax and fiscal policy responses to the COVID-19 pandemic based on data from 66 countries. A communiqué issued following the meeting, inter alia, takes note of the update and confirms continued cooperation for a ‘globally fair, sustainable, and modern international tax system.’

OECD report: Taxing Wages 2021

The OECD has published its report Taxing Wages 2021. This annual publication provides details of taxes paid on wages in OECD countries. It covers personal income taxes and social security contributions paid by employees, social security contributions and payroll taxes paid by employers, and cash benefits received by workers. It illustrates how these taxes and benefits are calculated in each member country and examines how they affect household incomes. The individual summary for the UK is here. Taxing Wages 2021 includes a special feature entitled ‘Impact of COVID-19 on the Tax Wedge in OECD Countries’. It shows that declining household incomes coupled with tax reforms linked to the COVID-19 pandemic are driving widespread declines in effective taxes on wages across the OECD.

Other developments

Office of Tax Simplification:  update on guidance review report

The Office of Tax Simplification (OTS) has published an evaluation update paper following its 2018 review of HMRC guidance for taxpayers and its report Guidance for taxpayers: a vision for the future published on 5 October 2018. The OTS concludes that HMRC have made considerable progress in achieving the twelve recommendations outlined in its 2018 report. In particular, HMRC: 

  • have committed significant resource to their guidance team;
  • have made progress in implementing the guidance model put forward in the OTS report;
  • are making extensive use of external feedback to improve guidance; and
  • are consulting with a Guidance Strategy Forum, which has a wide membership.

The evaluation also sets out HMRC’s commitments in working towards better guidance for taxpayers.

HMRC's Guidance Strategy Forum brings together external stakeholders to inform and influence the direction of HMRC’s strategy on guidance, and was introduced following the 2018 recommendation by the OTS.  Its first set of minutes indicates that HMRC are looking at improving their statement on when taxpayers can rely on information or advice provided by HMRC. 

New Investment Council formed

The Department for International Trade (DIT) has announced the creation of an Investment Council to act as an advisory body to the UK government on foreign investment with the aim of improving and enhancing the UK's business environment for foreign investors. The Council will be led by Minister for Investment Gerry Grimstone and include private sector senior leaders from around the world in a variety of industries. It will provide strategic advice to the DIT and wider government, advising inter alia on policy and regulatory changes that could improve the UK’s attractiveness. 

Public Accounts Committee: report on Environmental Tax Measures

The Public Accounts Committee (PAC) has published a report on Environmental Tax Measures. The PAC observes in its summary that, despite the importance of tax as an instrument for pursuing government’s environmental goals, particularly getting to net zero greenhouse gas emissions by 2050, it is concerned that HM Treasury and HMRC have taken a very limited view of the role of tax so far. It says the departments only recognise four environmental taxes, as these are the only ones with specific environmental objectives, and have limited understanding of the environmental impact of these taxes because their management has focused on the revenue raised. In the PAC's view, they have not kept track of the impact of other tax measures with environmental objectives, such as tax reliefs to support energy saving and clean technologies, or the impact of tax measures affecting the consumption of fossil fuels. The PAC is encouraged to hear that they have started to assess the impact of fuel duty freezes on the environment but argues that that environmental assessments should be made for all taxes. 

Dbriefs webcasts

The next Dbriefs webcast is on Wednesday 12 May 2021 at 12:00 BST / 13:00 CEST on the topic of SAP S/4HANA® And Indirect Tax Determination. During the webcast our panel of experts will discuss challenges and solutions when considering the automation of tax determination, add-ons and third party tax engines, SAP native versus other options and understanding how the latest developments are applicable to your organisation. For more information and to view past webcasts on demand visit www2.deloitte.com/uk/en/pages/dbriefs-webcasts