First Senior Accounting
Officer ‘main duty’ decision: greater clarity on ‘reasonable steps’
The First-tier Tribunal has allowed an appeal against a Senior Accounting Office (SAO) main duty penalty for financial years 2012 and 2013 where the SAO was the finance director of a privately owned group. HMRC had imposed the penalties on the previous SAO of the group as a result of an error correction notice filed by its advisors in 2014 in relation to VAT returns estimating an overall net error of £1.36m. The Tribunal found that HMRC had not established that the SAO failed to meet his main duty, although did agree that there were not ‘appropriate tax accounting arrangements’ in place. HMRC had relied on the absence of selective or ‘thematic’ testing to conclude that there had been a main duty failure.
In coming to her decision, Judge Falk cited several activities undertaken by the SAO that in her view were part of taking ‘reasonable steps’. These included:
· A board approved tax policy;
· A tax risk register;
· Documentation of processes (although she noted that formal documentation was desirable rather than always required);
· Appropriately qualified and trained team members;
· Assurance in the form of audits and advice from external advisors;
· Engagement with HMRC’s VAT specialist.
Consideration was given to the size and complexity of the business, and the SAO’s access to and control over resources to undertake such activities. The Tribunal found that, although the SAO may not have undertaken specific tax testing, his approach and the activities that he evidenced were proportionate to the business and that ‘one size does not fit all’ when it comes to approaching ‘reasonable steps’. The judge did note, however, that more would be expected of an FD of a publicly quoted group, so such groups should assume that such testing would be expected to be undertaken in relation to their tax risks.
Finally, the Tribunal expressed some concerns over HMRC’s approach to the case, notably the handling of confidential taxpayer information where one taxpayer (the SAO) would reasonably be expected to have access to another’s (the company’s) information to respond to the penalties imposed. We await to see whether the decision will be appealed to the Upper Tribunal. See http://deloi.tt/2uswgUo
HMRC publish additional guidance on country-by-country reporting to tax authorities
HMRC’s International Exchange of Information Manual was updated on 10 August to include additional guidance on country-by-country report filing and notification obligations in the UK. See http://deloi.tt/2vIFjAu.
Many groups will be particularly interested in the guidance on notification requirements, given the upcoming 1 September deadline. The guidance sets out that, where there are multiple entities within a group which would otherwise need to provide separate notifications, HMRC will accept a notification submitted by one of the entities as long as it is clear it is sent on behalf of all the relevant entities.
HMRC’s manual also sets out that the G20/OECD guidance (the BEPS Action 13 final report published on 5 October 2015 and subsequent additional guidance) should be used in interpreting the UK regulations implementing country-by-country reporting. Questions that are not covered by the existing guidance should be referred to a group’s Customer Relationship Manager, if there is one, or to a dedicated HMRC email address if not.
Oco Ltd: planning using EBTs fails on Ramsay grounds
The First-tier Tribunal has dismissed the taxpayers' appeals in Oco Ltd and Toughglaze (UK) Ltd, lead cases involving arrangements designed to provide benefits to key employees without incurring PAYE or National Insurance Contributions (NICs) liabilities. The scheme involved setting up an employee benefit trust (EBT), and the subsequent creation of sub-funds for the benefit of particular employees and their families. The benefits were provided mainly by the trustees advancing interest free loans to the employees. The appeals were against Regulation 80 determinations in respect of underpaid PAYE and decisions under the relevant NICs legislation, which HMRC argued arose on the payments the EBT made to the sub-trusts. There were also appeals against closure notices and related amendments to corporation tax self-assessment returns denying a deduction in respect of EBT contributions. The Tribunal held that the planning failed on Ramsay grounds. It dismissed HMRC's ‘redirection of income’ argument, holding that whether a redirection has occurred will depend on the facts of the case. The decision pre-dates the Supreme Court's judgment in Murray Group Holdings, in which it was held that there was no statutory requirement that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for his or her work in order for that reward to amount to taxable emoluments (though it does discuss the decision of the Court of Session (Inner House)). There are some several hundred or so other appeals involving the same scheme standing behind these cases. See http://deloi.tt/2uoVbZe
GAAR Advisory Panel Opinions
The GAAR Advisory Panel has published its first redacted opinions. The opinions cover an arrangement which used gold bullion to reward employees. The opinion of the Panel was that the GAAR would apply. See: http://deloi.tt/2fozG3O
Pimlico Plumbers case on employment status: appeal to Supreme Court
Pimlico Plumbers have been granted permission to appeal to the Supreme Court against the decision of the Court of Appeal on employment status in Pimlico Plumbers Ltd & Anor v Smith  EWCA Civ 51. See http://deloi.tt/2wO4Fdd
The case considered many of the tests developed through case law under which an individual might be regarded as either being in business on his or her own account or being an employee. The Supreme Court's eventual decision will be of interest from a tax as well as an employment law perspective. See http://deloi.tt/2vEABDY
VAT: Temple Retail: value of recharges between associated companies: Upper Tribunal
Temple Retail Ltd and Temple Finance Ltd are part of the PerfectHome group, which sells goods on hire purchase to credit-constrained customers. Temple Retail (which is fully taxable) recharged 20% of the group’s advertising and premises costs to Temple Finance (which is a partially exempt finance house). The Upper Tribunal has rejected HMRC’s arguments that a greater share of the expenses should have been recharged to the partially exempt company, which should in turn have applied a less generous partial exemption method. In particular, the UT rejected the argument that a breach of fiscal neutrality occurred simply because PerfectHome had split its business between two companies. Fiscal neutrality is an aid to interpretation, not a tool for HMRC to recharacterise transactions. The taxpayer had structured its operations in a particular way, and (in the absence of any abuse of law) HMRC should respect that choice. The UT also dismissed HMRC's other grounds of appeal, that the FTT had taken an irrational approach to HMRC's arguments, had failed to record its reasons in sufficient detail, and had misdirected itself about VWFS. See http://deloi.tt/2vSBbhS.To discuss the case, please contact Donna Baker on 0113 292 1953.
VAT: Languard New Homes
Ltd: the perils of pub conversions: Upper Tribunal
The sale of a dwelling converted from a non-residential building (or part of a building) qualifies for zero-rating. However, issues arise when the existing building is partly business premises, and partly residential. For example, Languard New Homes Ltd converted the Haberdashers pub into maisonettes, two of which included parts of the old pub and parts of the manager’s accommodation on the first floor. The Upper Tribunal has ruled that zero-rating applies only where the part of the building that has been converted into a new dwelling was exclusively used for non-residential purposes. This means that if the ground floor of the pub had been developed into a flat, then it would have qualified for zero-rating; but by converting both floors vertically into two maisonettes, no zero-rating applied. The decision highlights some of the complexities involved with converting existing properties to residential use. See http://deloi.tt/2uKZQA0
To discuss the decision or its implications, please contact Richard Smith on 0151 242 9149.
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