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Ernst & Young Weekly Tax News

Week ending 27 June 2008

Welcome to the latest issue of Tax News

In this issue Finance Bill News Consultations Tax Case International Press releases Other publications

Finance bill

Committee Stage
The Public Bill Committee debating this year's Finance Bill met twice on 19 June, thus completing its deliberations. It made many amendments to Schedule 7 and added three new Clauses to the Bill (concerning SDLT, oil taxation and R&D relief). It passed, without amendment, Clauses 22 and 23.

News

New HMRC Chair
The Cabinet Office has announced the appointment of Mike Clasper, CBE, formerly Operational Managing Director at Terra Firma Capital Partners Ltd, as the new Chair of HMRC. His role will be "to strengthen HMRC's corporate governance and to provide oversight to the Executive Committee and Departmental Board. In addition, he will play a key role for HMRC by engaging with the Department's many stakeholders." Mr Clasper will take up the post on 1 August 2008 and will be involved in the selection of HMRC's first Chief Executive.

VAT Recovery Rights
HMRC Brief 31/08, issued on 26 June (click here to view), describes a new clause in the Finance Bill which will restrict avoidance of the set-off and unjust enrichment procedures.

Tax shock for protected pensions
First Actuarial has warned that people with enhanced protection on their pension savings could trigger penal tax charges by being auto-enrolled into personal accounts. The firm is calling on the Government to change the rules so that saving in a personal account does not affect enhanced protection, which protects people from a 55 per cent tax charge if they go over their lifetime allowance. Savers who have registered for enhanced protection will see it invalidated by being auto-enrolled, as it will be classed as a new pension contribution. Director Alan Smith says: “In 2012, people with enhanced protection who are still working will be auto-enrolled into personal accounts and unless they act quickly and opt out they will lose this protection and benefits valued over the lifetime allowance will be taxed at 55 per cent. The resulting tax bill could potentially run to tens of thousands of pounds.” Informed Choice director Martin Bamford says: “It is definitely a risk, particularly because a lot of people will have registered for enhanced protection a long time ago and forgotten about it.” Money Marketing 19/06/08

Brown blocks French-led attempt to lower fuel tax
Gordon Brown was today seeking to scupper a bid by French president Nicolas Sarkozy to cap tax on oil as its price soars. Mr Sarkozy urged EU leaders at a summit in Brussels to back a limit on VAT on a barrel of oil to tackle the fuel crisis. Truckers and motorists in Britain are likely to back his populist move, especially as the UK has the most punitive taxes on fuel in the EU. But the Prime Minister “intervened” at a dinner of EU leaders last night to propose an alternative strategy focusing on improving the oil market. London Lite 20/06/08

UK government to spend £155 million on improving data security at HMRC
The Government will spend £155 million on improving data security after a devastating report into the loss last year of personal details of 25 million child benefit claimants said the incident was “entirely avoidable”. The report by PricewaterhouseCoopers chairman Kieran Poynter was also scathing about weaknesses in the management structure of the Her Majesty’s Revenue and Customs (HMRC) – formed after the merger of the Inland Revenue and Customs and Excise. Poynter lambasted HMRC’s “inadequate awareness, communication and training on data security”, and said there was no clear chain of responsibility for sensitive data. The Government admitted last November that two compact discs sent to the National Audit Office with the details of 25 million child benefit claimants had been mislaid, because they were sent via unregistered post by a junior staff member at HMRC [sic]. Chancellor Alistair Darling was forced to come to Parliament and reveal that the missing discs contained names, addresses, dates of birth, child benefit numbers, National Insurance numbers and, “where relevant”, bank details. The information was given to HMRC’s post service provider TNT NV but was not “recorded or registered”. It also emerged at the time that no alarm was raised for three weeks and a second set of discs was sent, registered, by the same junior staff. Acting HMRC Chairman Dave Hartnett today described the loss as “the most serious incident in the department’s history”. AFX UK Focus 25/06/08

Consultations

Relief from SDLT for Commercial Sukuk
A consultation paper was issued on 26 June.

Tax Case

HMRC v Weight Watchers (UK) Ltd
Weight Watchers supplies both printed materials and slimming-related services to its members. The VAT Tribunal ruled that there were separate supplies of zero-rated printed materials and standard-rated slimming-related services, leaving apportionment to the parties.

In the High Court Mr Justice Morgan held that the Tribunal had correctly directed itself as to the law. However, since the question whether there is a single supply or separate supplies is a question of law, the Court could overrule the Tribunal's decision. The Court should do so with circumspection, recognising that the Tribunal has heard all the evidence and formed its own impression based on the entire hearing, whereas the Court has only a written decision to go on. However, the Court was not limited to overruling the Tribunal on an Edwards v Bairstow basis as with decisions on the facts.

The Judge held that the Tribunal had been reasonably able to decide that at the member's first meeting there were separate supplies of printed materials and slimming-related services. However, the High Court decided to overrule the Tribunal in relation to regular meetings thereafter, which were single supplies of slimming-related services.

The Court of Appeal has now allowed HMRC's appeal and dismissed Weight Watchers' appeal. The Court held that Weight Watchers made only standard-rated slimming-related supplies. It disagreed with the High Court on the basis that it was illogical to treat the first meeting differently from subsequent meetings. Members joined to take part in the ongoing activities and what they received was a single supply.

The Executors of Mr DWC Piercy (deceased) v HMRC SpC 687
The question for the Special Commissioner was whether the business of the company in issue had consisted wholly or mainly in holding investments. If so, no business property relief would be available. On the facts the Special Commissioner held that the land owned by the company had all been held throughout as trading stock (the trade being residential property development). Although rent was received in respect of some of the land, that did not inevitably require that the land was held as an investment, nor did the fact that some land would not be developed for many years. That the land was trading stock precluded the company’s business from consisting wholly or mainly in holding investments. The appeal was therefore allowed.

Bailhache Labesse Trustees Ltd and others v HMRC SpC 688
Some years before his death the deceased, Mr Kirk, made a settlement in which he had a life interest. Following Mr Kirk’s death the trustees divided the trust property into four, with two shares going to charities. Section 23(1), Inheritance Tax Act 1984 provides that transfers of value are exempt to the extent that they are attributable to property which is given to charities. HMRC was held by the Special Commissioner to be correct in stating that an appointment to the charities after Mr Kirk’s death is not a transfer of value by Mr Kirk that can be exempted from inheritance tax by section 23(1). The taxpayers argued that because the appointments were made within 12 months of Mr Kirk’s death they were turned into transfers of value by section 23(2)(b). However, that provision will prevent section 23(1) from exempting a transfer if a condition is not satisfied within 12 months but it cannot turn something that is not a transfer of value by the deceased into a transfer of value by the deceased merely because it happens within 12 months of the death. The taxpayers also argued that section 144, Inheritance Tax Act 1984 should act to treat the appointments to the charities as transfers of value on Mr Kirk’s death. However, this line of reasoning suffered from the fatal flaw that section 144 applies only “where property comprised in a person's estate immediately before his death is settled by his will”. The property in question was not comprised in Mr Kirk’s estate because he had settled it some years previously. Appeal dismissed.

International

France
A new comprehensive double taxation convention between the UK and France (see ) was signed in London on 19 June 2008 by the Chancellor of the Exchequer and the French Minister for the Economy, Industry and Employment. The convention will enter into force once both countries have completed their Parliamentary procedures and it will replace the existing convention, which dates from 1968. The new convention with France that was signed on 28 January 2004 will not now be presented to Parliament and will therefore not enter into force.

Global
ITS Global Dispatch, June 2008

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US
New mark-to-market expatriation tax signed into law

IRS issues final regulations for testing the substantiality of an allocation

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Italy
The Italian tax authorities have announced the repeal of the favourable tax regime for stock options

Italian Government announces additional controls on the actual residency status of Italian citizens living abroad

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Sweden
Swedish tax authority proposes limitations on interest deductions on inter-company loans

Press releases

HMRC
Double Taxation Convention: France (click here to view)
Fifth man jailed in "Casino" money laundering plot (click here to view)

Other publications

HM Treasury
Statement by the Chancellor on the Poynter Review (lost child benefit claimant disks) (click here to view)

HMRC
Tax Law Rewrite Project draft clauses on loan relationships, derivative contracts and intangible fixed assets: provisions affected by the European Mergers Directive (click here to view)
Minutes of meeting of Joint Forum on Expatriates Tax and NICs on 8 May 2008 (click here to view)
VAT Information Sheet 04/08: "Supplies of government grant funded research" (click here to view)
Customs Information Paper 38/08: "Merchandise in baggage" (click here to view)
Working Together, Issue 31 (click here to view)
Figures for calculating indexation in respect of corporation tax on chargeable gains; disposals in May 2008 (click here to view)
Guidance note on the SDLT (Open-ended Investment Companies) Regulations 2008 (SI 2008/710) (click here to view)
Guidance, produced jointly with the Charity Commission and the Housing Corporation, on the tax implications (particularly as they affect charities) of affordable home ownership provision (click here to view)
Minutes of latest Tax Law Rewrite Project Steering Committee meeting (click here to view)