News & Insights

The latest tax developments and VAT round-up for the month.

Silverthrone tax digest covers the developments most likely to affect individuals, trusts, estates and businesses. If you would like to discuss anything here in more detail, please get in touch with your usual contact.

1. Private client

1.1 Gifting shares to children before a sale was not tax avoidance

The First-tier Tribunal has accepted that shares passed to three daughters days before a company sale could benefit from share-for-share exchange relief.

Shortly before their company was sold to a buyer for a mix of cash, loan notes and shares, the majority shareholders transferred some of their shares to their daughters. HMRC argued that the anti-avoidance rule for share exchanges applied because the daughters went on to claim entrepreneurs’ relief, saving around £3 million of capital gains tax. The tribunal disagreed, finding that the relevant arrangement was the commercial sale itself and that avoiding tax was not one of its main purposes. The case is encouraging for families planning a sale, but the outcome turned on detailed evidence of motive, so it is important to take advice and keep a clear record of the commercial reasons before shares change hands.

Wilkinson & Ors v HMRC [2023] UKFTT 695 (TC)

1.2 Child benefit charge: telling the Child Benefit Office is not enough

A series of August tribunal decisions confirms that the high income child benefit charge can be collected by discovery assessment, although penalties may be cancelled where the taxpayer acted reasonably.

In one case, an employee’s wife stopped her claim as soon as the couple realised his income was over £50,000, but nobody told HMRC’s self assessment side about the earlier years. The tribunal upheld assessments for three years, relying on the Finance Act 2022 changes that retrospectively confirmed HMRC’s power to assess the charge, but it cancelled the failure to notify penalties because the taxpayer had a reasonable excuse. In a separate August decision, a late payment penalty on the charge was upheld because the taxpayer had already been told what he owed. If either partner’s income exceeds the threshold and child benefit is being received, the person liable must register with HMRC directly, and any tax due must be paid on time.

Simmonite v HMRC [2023] UKFTT 721 (TC); Kalchheim v HMRC [2023] UKFTT 709 (TC)

1.3 Caring for family did not count as exceptional circumstances

The Upper Tribunal has overturned a decision that allowed a taxpayer to ignore extra days spent in the UK to support her sister’s family.

The taxpayer moved to Ireland but spent 50 days in the UK in the following tax year, five more than her limit under the statutory residence test, while helping her unwell twin and her twin’s children. The Upper Tribunal, in a decision released at the end of July, held that a moral duty to family does not by itself amount to exceptional circumstances that prevent someone from leaving the UK, and that the evidence did not show this for each disputed day. She was therefore UK resident for the year, with over £3 million of tax at stake. Anyone close to their day limits should plan visits carefully and keep a daily record of where they were and why.

HMRC v A Taxpayer [2023] UKUT 182 (TCC)

2. PAYE and employment

2.1 Check how pension contributions are reported through payroll

HMRC’s August Employer Bulletin warns that many employers are reporting pension contributions under the wrong method of tax relief.

Under a net pay arrangement, contributions are taken from pay before tax is worked out, whereas under relief at source the pension provider claims basic rate relief from HMRC, so the two must be handled differently in payroll. HMRC has found employers confusing the two, and also reporting employer contributions under salary sacrifice as if the employee had paid them. Employers should confirm with their pension provider which method their scheme uses and make sure payroll matches it. Any errors found should be corrected promptly, using HMRC’s digital disclosure service where tax has been underpaid.

2.2 New advisory fuel rates from 1 September

HMRC published new advisory fuel rates for company cars at the end of August, including a rise in the electric rate from 9p to 10p a mile.

The rates apply from 1 September 2023 and are used when employers reimburse business mileage in company cars, or when employees repay the cost of private fuel. Some petrol, diesel and LPG rates went up by a penny or two, while the rest were unchanged. Employers can keep using the previous rates for up to one month after the change. Mileage policies and expense systems should be updated so that reimbursements stay within the advisory rates and do not create a taxable profit for the employee.

2.3 Minimum wage: the most common mistakes

The latest round of employers named for underpaying the national minimum wage shows how easily routine payroll practices can lead to breaches.

HMRC’s August bulletin reported that the 202 employers named in the most recent round had underpaid around 63,000 workers by almost £5 million, with penalties of nearly £7 million on top. The main causes were deductions from pay, failing to pay for all working time, and paying the wrong apprentice rate. Salaried staff are a particular risk where their hours vary, and HMRC ran free webinars on this in September. Employers should review deductions, uniform and training costs, and hours worked against the minimum rates, and keep good records to show compliance.

3. Business tax

3.1 Interest denied where the group’s main aim was a tax saving

The Upper Tribunal has upheld HMRC’s refusal of all interest deductions on a loan used by a UK company to fund a US acquisition.

A UK company was set up within a US-owned group to buy another US business and borrowed from its parent to do so, under a structure that gave UK interest deductions without matching taxable income anywhere. The tribunal agreed that securing the UK tax advantage was the main purpose of the company being party to the loan, and that the purposes of the wider group could be taken into account in reaching that view. The unallowable purpose rule applied, so none of the interest was deductible. Groups should review intra-group funding where tax considerations played a significant part in the design, and keep evidence of the commercial reasons for using debt.

JTI Acquisitions Company (2011) Ltd v HMRC [2023] UKUT 194 (TCC)

3.2 A single company cannot be a group for the substantial shareholding exemption

A gain of over £53 million on the sale of a newly formed subsidiary was taxable because the 12-month holding condition was not met.

A stand-alone trading company set up a subsidiary, transferred its trade into it, and sold the subsidiary less than a year later. The company argued that the trade’s earlier use within the business should count towards the holding period, but the Upper Tribunal held that the extension only works where assets were used by members of a group, and a single company on its own is not a group. It also refused to treat the legislation as containing a drafting error. Owner-managed businesses planning a hive-down ahead of a sale should take advice early, as the order and timing of steps can decide whether the exemption is available.

M Group Holdings Ltd v HMRC [2023] UKUT 213 (TCC)

3.3 Basis period reform: online form for overlap relief figures

HMRC announced in August that sole traders and partners could ask online for their overlap relief figures from 11 September 2023.

From 2024-25, unincorporated businesses will be taxed on the profits of the tax year rather than their accounting year, and 2023-24 is the transition year in which any overlap relief is used. Businesses whose accounting date is not 31 March or 5 April may need their overlap figure, and many will not have kept it. The new form asks for the person’s details, the business name and type, the start date and the latest accounting period end. If you have a non-tax year accounting date and do not know your overlap figure, please talk to us so that we can obtain it and plan for the transition profits.

4. VAT and indirect taxes

4.1 Online platform was the principal, not an agent

An online academic writing business must account for VAT on the full amount paid by customers, despite rewriting its contracts to describe itself as an agent.

The company sold essays and similar work written by freelance writers and kept around two-thirds of each fee. After earlier litigation went against it, it changed its terms, including leaving copyright with the writers, and argued that it now only supplied an agency service. The tribunal found that the business had not really changed, as the company alone remained responsible to customers for delivering suitable work on time. Platforms and marketplaces should check that their contracts and their actual operations both support the VAT treatment they rely on.

All Answers Ltd v HMRC [2023] UKFTT 737 (TC)

4.2 Tour operator could not undo its choice of margin scheme

A golf holiday business could not use error correction to switch its wholesale supplies out of the Tour Operators’ Margin Scheme.

The company had accounted for its wholesale supplies under the margin scheme for several years and later sought repayment by treating them under the normal VAT rules instead. The tribunal held that it had made a valid accounting choice that was open to it at the time, and a choice that later turns out to be less favourable is not an error that can be corrected. Its arguments based on EU law and fiscal neutrality also failed. Businesses should consider the long-term effect carefully before choosing between optional VAT treatments.

Golf Holidays Worldwide Ltd v HMRC [2023] UKFTT 701 (TC)

4.3 Two more stamp duty land tax refund claims fail

The tribunal rejected claims that a garage let on completion made a house mixed-use, and that a run-down house was unsuitable as a dwelling.

In the first case, a buyer let the garage of a £2.1 million house to a company for £50 a month on the day of purchase and claimed a refund of £134,250 at non-residential rates; the tribunal found the garage was part of the grounds and the letting was not commercial. In the second, a developer argued that a property with a collapsed ceiling and unsafe wiring was not suitable for use as a dwelling, but the tribunal held that a structurally sound building needing repair is still a dwelling. Buyers approached by refund firms should be cautious, as HMRC is challenging these claims and any refund paid out can be recovered with interest.

Kozlowski v HMRC [2023] UKFTT 711 (TC); Henderson Acquisitions Ltd v HMRC [2023] UKFTT 739 (TC)

5. Key dates

The main tax deadlines and changes for August to October 2023 are set out below.

6. And finally

6.1 The first family allowance, August 1946

The forerunner of child benefit, the family allowance, was first paid on 6 August 1946, more than a year after the Family Allowances Act 1945 became law. It was worth five shillings a week for the second and each later child, and thanks to an amendment championed by the campaigner and MP Eleanor Rathbone it was paid to mothers rather than fathers. The first child was not brought into the scheme until child benefit replaced it in the 1970s.

Seventy-seven years on, August 2023 saw the tribunal working through a string of appeals about the high income child benefit charge, which since 2013 has clawed back the payment from higher earners. The support has moved a long way from five shillings a week, and so, it seems, has the paperwork.