Technical update, pt 2

Taxation

Section 660A
The Inland Revenue has produced further guidance on its view of the way that the settlement legislation in S660A ICTA 1988 applies to businesses. This is published in the February 2004 issue of the Tax Bulletin.
It should be stressed that this is an Inland Revenue view, much of which is not accepted by ACCA or other professional bodies.
The Inland Revenue suggests that income caught by S660A should be returned on the trust pages of Self Assessment Returns and accompanied by any necessary notes in the white space.
The Inland Revenue Trusts Estates and Settlements Manual, which is available at www.ir.gov.uk/manuals/tsemanual/, is to be updated to include this information.
In addition, three consultation documents on trusts and settlements have now been published and could lead to radical changes in the taxation of trusts generally.

Error or mistake claims
The High Court decision in the case of Deutsche Morgan Grenfell (reported previously) effectively removed the six-year time limit for claims for repayment, in cases where tax had been overpaid due to a mistake of law.
As already announced, draft legislation published on 8 September 2003, and to be included in FA 2004, will ensure that the six-year time limit previously in force will continue to apply.
An amendment has now been made to the draft legislation which will prevent claimants who had commenced proceedings before 8 September 2003 from amending their claims to include earlier years.

Cross-border taxation
The EC has published a communication assessing progress on the removal of cross-border tax obstacles for companies.
There are two major issues:
- specific targeted initiatives, and - a single EU tax base.
Matters to be dealt with under the first heading include:
- guidance on ECJ decisions on members dividend systems
- proposals to broaden the scope of the Parent Subsidiary and Merger directives
- a proposed initiation on cross-border loss offset
- a report by the joint forum on transfer pricing, and
- consideration of conflicts between the EC Treaty and bilateral treaties entered into by member states.
In the second area, three initiatives are suggested:
- a pilot scheme to allow small and medium sized enterprises to use the tax rules of their home state to calculate their EU-wide taxable profits
- the establishment of an expert group, to discuss the detailed tax principles that would have to be applied when IFRS is adopted in 2005
- proposed continued research on possible arrangements for sharing the tax generated by a consolidated tax base.
The full text of the communication entitled An Internal Market Without Company Tax Obstacles Achievements, Ongoing Initiatives and Remaining Challenges, is available at europa.eu.int/comm/taxation_customs/whatsnew.htm.

NAO report on Inland Revenue Accounts
Sir John Bourn, head of the National Audit Office, has published his report on the Inland Revenue's Resource Account and Trust Statement for the year ended 5 April 2003.
He has issued an unqualified audit opinion on the Resource Account, which deals with assessment, collection and allocation of tax during the year, but has qualified his report on the Trust Statement which deals with the Working Families and Disabled Persons Tax Credit on the grounds that the probable error rate for 2002-03 remained unacceptably high.

New items on Inland Revenue website
- Tax Deduction Scheme for Interest - information now available in HTML format.
- Dates and venues for the Employer Talks to be held during 2004.
- Information about the Inheritance Tax - Direct Payment Scheme.
- Reminder to employers that they should no longer be using employee tax codes with suffix 'A' or 'H'.
- Announcement that the Child Trust Funds Bill and Explanatory Notes have been published on the UK Parliament website at www.publications.parliament.uk/pa/pabills.htm.
- The Regulatory Impact Assessment for aforementioned Bill.
- Hints and tips on ordering the new SDLT Forms and advice on completing box 31 on Form SDLT 1.
- Various news releases concerning tax, VAT and tax credit fraud.
- Statistics for Scottish property.
- Tax Law Rewrite - Paper CC (03) (19) - containing the latest draft clauses and explanatory notes dealing with gains from contracts for life insurance, etc.

Pensions update
The Inland Revenue Pensions Schemes Office has published update number 145, the last update to be issued in a paper format. New issues will be found only on their website at www.inlandrevenue.gov.uk/pensionschemes/updates.htm. There is no other news of substance in the update.

Statutory instruments
The Finance Act 2003, S195 and Schedule 40 appointed day order 2003 (SI 3077/2003) deals with the taxation position where, as permitted under company law from 1 December 2003, a company holds its own shares.
Effectively, for tax purposes, the shares are treated as cancelled at the time they are acquired by the company and newly issued if they are subsequently sold.
The Income and Corporation Taxes (Electronic Certificates of Deduction of Tax and Tax Credit) Regulations 2003 (SI 3143/2003) authorise the electronic delivery of information about:
- distributions, dividends, interest payments, etc
- tax deduction certificates, and
- information about manufactured dividends.
The sender must have previously notified the recipient that he intended to use electronic communication and the recipient must have consented.
The format used must permit a copy to be printed, or kept electronically, but must be designed to prevent alteration.

Regulations
The Social Security (Contributions) (Amendment No.7) Regulations 2003 (SI 2958/2003). The regulations ensure that sub-postmasters who include their post office salary in the taxable profits of a business run from the sub-post office premises will not have to pay Class 4 NI on their post office salary. The salary will remain liable to Class 1 Contributions.

The provision of various non-cash vouchers for the provision of:
- works buses
- late night transport
- home to work transport for disabled employees
- cycles and cycle safety equipment
- certain other non-cash vouchers are also exempted from Class 4 NI Liability under SI 2958/2003.
The national insurance contributions and statutory payments Bill has been published.
The Bill, which aligns aspects of the administration of NI matters, etc, will not come into form until the bill receives the Royal Assent.

R v General Commissioner of Income Tax for the City of London
In this case, an oversight by the accountant acting for Browallia Cal Ltd (the applicant) meant that the company did not make an in-date claim for loss relief.
The inspector refused a late claim on the grounds that there was no reasonable excuse for delay and the general commissioners refused a late claim on the grounds that their powers were no wider than the inspectors.
On an application for judicial review the Queen's Bench Division held that the commissioners had wider powers than the inspector of taxes and should have taken account of the interest of justice. The late claim was therefore granted.

Walsh v Taylor
In this case, a farming partnership appealed to the special commissioners against the refusal of a claim for loss relief under S381 ICTA 88, for the year ended 31 March 1995.
The special commissioner (John Avery Jones) also refused the claim, on the basis that the partnership had received no trading income in the year and the projected figures showed that there was no reasonable expectation of profit in any of the six years ended 31 March 2000.
He accepted that there was nothing un-commercial about the way in which the trade was carried on. The main reason for the losses seemed to be that the farm was too small to be viable, since it was not owner-managed.

McClymont and Anor v Jarman
In this case, the special commissioners funds, provided to the proprietor of a filling station by Shell (UK) Ltd, were mistakenly included in the accounts as trading receipts.
The accountant realised his error and submitted an error or mistake claim under S33 TMA 70, which the Inland Revenue refused to admit.
The filling station had been purchased for £750,000, of which the vendor had paid £580,000 on completion, leaving £170,000 to be paid in instalments. Shell made various undifferentiated payments to the taxpayer and there was nothing in writing to show that part of the money was for capital expenditure.
In allowing the taxpayer's claim the special commissioner said that Shell was well aware that the purchase could not proceed without its money and the fact that Shell paid the money in advance of completion was consistent only with the intention that the money should be used in part payment of the purchase price and was therefore a capital payment.

Patel v Maidment
In this case, the special commissioner (John Avery Jones) held that, while the letting of property was a business, it was not a trade and, since it was not a furnished holiday letting, it was not deemed to be a trade. Business asset taper relief was not therefore due, nor was a Schedule A deficit available for set off against other sources of income.