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 Lifetime allowance to be abolished from April 2024

Draft legislation published on 18 July sets out how the pensions lifetime allowance will be removed altogether from 6 April 2024.

Finance (No. 2) Act 2023, which received Royal Assent on 11 July, has already confirmed that no lifetime allowance charge arises from 6 April 2023. The draft clauses for next year’s Finance Bill go further, abolishing the allowance itself and introducing new caps on tax-free lump sums: broadly £268,275 for tax-free cash and £1,073,100 for lump sums including certain death benefits, unless a protection applies. Anyone holding an existing protection, or planning to take benefits around April 2024, should review the timing with us and their pension adviser before acting.

1.2 Child benefit charge to be payable through the tax code

The government intends to let employed people pay the high income child benefit charge through PAYE, without having to register for Self Assessment.

The charge applies where someone, or their partner, receives child benefit and one of them has adjusted net income over £50,000. At present many families must file a tax return solely to pay it, and late registration is a common source of penalties. The 18 July announcement promised further detail later; until a new process is in place, those affected must still register and file, and anyone thinking of stopping their child benefit claim should first consider the effect on National Insurance credits.

1.3 Agricultural and woodlands reliefs limited to UK land

From 6 April 2024, inheritance tax agricultural property relief and woodlands relief will be available only for property in the UK.

These reliefs can currently extend to qualifying property in the European Economic Area and, for agricultural relief, the Channel Islands and the Isle of Man. Draft legislation published on 18 July removes that extension from 6 April 2024. Individuals and trustees who own farmland or woodland outside the UK should review their estate planning, including any wills drafted on the assumption that relief would be available.

2. PAYE and employment

2.1 Car allowances may qualify for an NIC disregard

The Upper Tribunal has held that car allowances paid to employees who drive their own cars for work can be partly free of Class 1 National Insurance.

Laing O’Rourke and Willmott Dixon paid fixed monthly car allowances to staff who were expected to use their cars for business, and claimed back NIC on the part representing business mileage. HMRC argued the allowances were not linked closely enough to actual use, but the tribunal found they were relevant motoring expenditure, so a disregard calculated at the approved mileage rate applies to the business miles driven. Employers paying car allowances should consider whether a repayment claim is available for earlier years, which will depend on having reliable records of business journeys and is subject to time limits.

Laing O’Rourke Services Ltd v HMRC; HMRC v Willmott Dixon Holdings Ltd [2023] UKUT 00155 (TCC)

2.2 No tax relief for a flat near the hospital

The Upper Tribunal has refused a surgeon’s claim to deduct the cost of renting accommodation close to his hospital, reversing the First-tier Tribunal.

Mr Kunjur’s family home was in Southampton, but his on-call duties in London required him to be able to reach the hospital quickly, so he rented a flat nearby. The Upper Tribunal held that the rent put him in a position to do his job rather than being spent in actually performing it, and that it also met his personal need for somewhere to live; because the cost had a dual purpose, no part of it was deductible. Employees who keep a second home for work should not assume they can claim relief, and employers should take advice before reimbursing such costs free of tax.

HMRC v Jayanth Kunjur [2023] UKUT 00154 (TCC)

3. Business tax

3.1 Full expensing is now law

Finance (No. 2) Act 2023, which received Royal Assent on 11 July, has put full expensing for companies on a statutory footing.

Companies buying new and unused plant and machinery between 1 April 2023 and 31 March 2026 can claim a 100% first-year allowance for main pool assets and a 50% first-year allowance for special rate assets such as integral features. Cars and second-hand assets are excluded, and a balancing charge can arise when assets are later sold. The £1 million annual investment allowance remains available to all businesses, including sole traders and partnerships, so the best choice of claim will depend on the business and the assets involved.

3.2 R&D relief: a single scheme from April 2024

Draft legislation published on 18 July would merge the two R&D tax relief schemes for expenditure incurred from 1 April 2024, and confirms extra support for loss-making R&D-intensive SMEs.

The merged scheme would give an above-the-line credit at 20%, modelled on the current RDEC, so most SMEs would no longer claim an enhanced deduction. Separately, loss-making SMEs that spend at least 40% of their total expenditure on R&D can claim a higher payable credit for expenditure from 1 April 2023, worth roughly £27 for every £100 of qualifying spend. Claimants should also note the new procedural rules: from 8 August an additional information form must support every claim, and first-time claimants may need to notify HMRC in advance.

3.3 Business overvalued on incorporation taxed as a distribution

The Upper Tribunal has agreed with HMRC that a business sold to a company for £8.25 million was worth only £1, so the excess was taxed as income in the owner’s hands.

The designer Jasper Conran transferred an optical licensing business to his company, but the trade mark licences that generated its income did not pass with it. The tribunal accepted that, without those rights, the business had no real value, so the amount credited to him was treated as a distribution rather than a capital receipt, and the company’s relief for the intangible assets was restricted. Anyone incorporating a business, or selling assets to their own company, should obtain a robust independent valuation and make sure that everything that gives the business its value actually passes to the company.

HMRC v Jasper Alexander Thirlby Conran; JC Vision Ltd v HMRC [2023] UKUT 00166 (TCC)

3.4 Employee ownership trusts under review

A consultation published on 18 July proposes tightening the tax rules for employee ownership trusts and employee benefit trusts.

For EOTs, the proposals include requiring the trustees to be UK resident, preventing former owners and their connected persons from making up a majority of the trustees, and relaxing the bonus rules so that tax-free bonuses need not also be paid to directors. The consultation also proposes changes to limit the tax advantages available through employee benefit trusts. It closes on 25 September 2023, and owners considering a sale to an EOT should take the possible changes into account in their timetable.

4. VAT and indirect taxes

4.1 VAT on share sale costs recoverable where proceeds fund the business

The Upper Tribunal has allowed a company to recover VAT on adviser fees for selling a subsidiary, because the proceeds were raised to fund its taxable activities.

Hotel La Tour sold its shares in a subsidiary to finance a new hotel development and reclaimed the VAT on the professional fees for the sale. HMRC argued the fees related to an exempt share disposal, but the Upper Tribunal upheld the First-tier Tribunal’s view that they were overhead costs of the company’s wider taxable business. Please note that HMRC later appealed successfully: the Court of Appeal reversed this decision and the Supreme Court has since sided with HMRC, so this ruling should no longer be relied on.

HMRC v Hotel La Tour Ltd [2023] UKUT 00178 (TCC)

4.2 Alcohol duty reform takes effect

From 1 August 2023, alcohol duty is charged according to the strength of the drink, under a single system replacing the separate regimes for beer, cider, wine and spirits.

Duty is now calculated on the litres of pure alcohol in a product, with draught relief reducing the duty on qualifying draught products and small producer relief available to smaller makers of drinks below 8.5% ABV. For an 18-month transitional period, wines between 11.5% and 14.5% ABV are treated as if they were 12.5%. Producers, importers, wholesalers and retailers should check their pricing, systems and stock records, as the duty on many products will change.

5. Key dates

The main tax deadlines and events from July to September 2023.

6. And finally

6.1 Daylight let back in, July 1851

On 24 July 1851 Parliament repealed the window tax, which had been levied in England and Wales since 1696. The number of windows was used as a rough guide to the size and wealth of a household, and many owners responded by bricking windows up, leaving homes darker and less healthy. The tax was replaced by a duty on inhabited houses.

Choosing the right measure for a tax is still a live question. From 1 August, alcohol duty moves to taxing drinks by their strength rather than by type, and the Conran case was a reminder that, when it comes to valuations, HMRC and the tribunals will look at what is actually being transferred.