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 No six-year cut-off for offshore trust tax credits

The Court of Appeal has ruled that HMRC cannot impose a six-year limit on credits claimed by beneficiaries of non-resident trusts under an extra-statutory concession.

UK resident beneficiaries who received payments from non-resident discretionary trusts asked for credit, under extra-statutory concession B18, for UK tax the trustees had paid on the trust income. HMRC would only give credit for tax paid by the trustees in the six years before the distribution, but the Court of Appeal found nothing in the relevant part of the concession supporting that restriction and allowed the beneficiaries’ judicial review. Beneficiaries of offshore trusts whose claims were cut back on this basis should ask us whether they can now revisit them.

Murphy & Anor v HMRC [2023] EWCA Civ 497

1.2 Paddock let for grazing made a house purchase mixed use for SDLT

Buyers of a country house successfully argued that a separately let paddock was not part of the grounds, so the lower mixed-use SDLT rates applied.

On the day they completed, the buyers granted a one-year grazing lease of the paddock to a third party. The tribunal noted that the paddock sat on a separate title, could not be seen from the house, was reached only through a small gate and was being used commercially, and concluded that it was not part of the garden or grounds. As a result HMRC’s attempt to almost double the SDLT bill failed. The decision turns on its facts, so anyone buying a home with land should take advice before completion rather than relying on a later refund claim.

Suterwalla & Anor v HMRC [2023] UKFTT 450 (TC)

1.3 Negligible value claims must be made in the right form

The tribunal struck out an appeal over a £200,000 loss because the negligible value claim had never been properly made.

Mr Williams claimed a loss on shares he had received in exchange for a loan, and his accountants later wrote to HMRC with supporting details during an enquiry. Their letter did not contain the formal claim the legislation requires, and the tribunal held that it had no power to hear an appeal against HMRC’s refusal to accept it. Anyone relying on a negligible value claim for shares or loans that have become worthless should make sure the claim is made clearly and in the correct form, within the time limits.

Robert Williams v HMRC [2023] UKFTT 429 (TC)

1.4 HMRC interest rates rise again

Following the Bank of England’s increase in base rate to 4.5% on 11 May, HMRC late payment interest rose to 7% from 31 May 2023.

Interest paid by HMRC on repayments rose to 3.5% from the same date, and the rates for corporation tax quarterly instalments increased from 22 May. Interest now adds noticeably to the cost of paying any tax late, including balancing payments and payments on account, so it is worth paying on time where possible or agreeing a time to pay arrangement early if cash is tight.

2. PAYE and employment

2.1 Share units received on a company sale taxed as employment income

Restricted stock units received by a selling shareholder who joined the buyer were taxed as employment income rather than as sale proceeds.

Mr Moore sold his minority stake in a software company and, as well as cash, received restricted stock units in the buyer, whose group he then worked for. The tribunal decided the units were employment-related securities provided at least partly to keep him in the business, so their value on vesting was taxed as earnings with no deduction for the shares he had given up. Shareholders selling a business and staying on should check how any deferred or share-based element of the price is structured before signing.

Louis Daniel Moore v HMRC [2023] UKFTT 399 (TC)

2.2 Most employment expense claims by a doctor rejected

A doctor was allowed only his professional subscription out of more than £40,000 of claimed employment expenses.

Dr Nduka claimed legal fees from a regulatory dispute, accommodation, commuting, training, dental treatment and computer costs against his salary. The tribunal applied the strict rule that employees can only deduct costs incurred wholly, exclusively and necessarily in performing their duties, and found that all but his college subscription failed that test. Employees should keep good records and only claim costs that clearly meet these rules, as HMRC routinely checks expense claims made through Self Assessment.

Dr Harry Nduka v HMRC [2023] UKFTT 420 (TC)

2.3 Employee share scheme returns due by 6 July

HMRC’s May 2023 employment related securities bulletin reminds companies that 2022-23 annual share scheme returns must be filed online by 6 July 2023.

A late return triggers an automatic £100 penalty, with further £300 penalties if it is still outstanding three and six months after the deadline. The bulletin also confirms that, for EMI options granted from 6 April 2023, option agreements no longer need to set out share restrictions and employees no longer have to sign a working time declaration. Companies with share schemes, including those where nothing happened in the year but the scheme is registered, should make sure their return is filed in time.

3. Business tax

3.1 Supreme Court backs capital allowances on hydro-electric scheme

The Supreme Court has dismissed HMRC’s appeal and confirmed that water conduits at a hydro-electric station were not excluded from plant and machinery allowances.

HMRC argued that the underground water conduits at the Glendoe scheme were tunnels or aqueducts, which the legislation excludes from allowances. The court gave both words their ordinary meaning in context, treating a tunnel as a passage through an obstacle for a way to pass and an aqueduct as a bridge-like structure carrying water, so the conduits did not fall within the exclusion. Businesses incurring significant construction costs should review whether parts of the spend can qualify as plant, as the exclusions are narrower than HMRC sometimes suggests.

HMRC v SSE Generation Ltd [2023] UKSC 17

3.2 Profit share paid to a shareholder lender was a distribution

The Upper Tribunal has held that a company’s payment to its shareholder of a share of the gain on a property sale was a non-deductible distribution.

Shinelock Ltd was funded by its owner on informal terms that entitled him to a share of any profit when the property was sold. The Upper Tribunal reversed the earlier decision and found that the arrangement was a security whose return depended on the results of the company’s business, which includes a one-off disposal of its only property, so the payment was a distribution and could not be deducted. Owner-managers who lend to their companies on profit-linked terms should take advice, as the tax treatment can be very different from ordinary interest.

Shinelock Ltd v HMRC [2023] UKUT 107 (TCC)

3.3 Withholding tax due on interest paid to overseas lenders

A UK property company should have deducted income tax from interest paid to connected lenders in Guernsey, despite structuring the borrowing as short-term loans.

Hargreaves Property Holdings borrowed through a series of loans that were each repaid within a year and then replaced. The Upper Tribunal agreed that, taken together, the loans provided long-term funding, so the interest was yearly interest with a UK source and basic rate tax should have been withheld; treaty relief did not help because it had not been claimed. Companies paying interest to non-UK lenders, including family members or connected companies abroad, should check whether they need to withhold tax or obtain treaty clearance in advance.

Hargreaves Property Holdings Ltd v HMRC [2023] UKUT 120 (TCC)

4. VAT and indirect taxes

4.1 Making Tax Digital now applies to every VAT return

From 15 May 2023 businesses that file annual VAT returns can no longer use their old HMRC online account and must file through compatible software.

This completes the move of all VAT-registered businesses onto Making Tax Digital, as monthly and quarterly filers had already lost access to the old service. Unless HMRC has agreed an exemption, every VAT return must now be filed using compatible software, with digital records kept throughout the period. Annual accounting scheme users who have not yet signed up should do so well before their next return is due.

4.2 VAT exemption extended to pharmacy staff

HMRC’s Revenue and Customs Brief 5 (2023) confirms that from 1 May 2023 medical services by unregistered staff working under a pharmacist’s direct supervision are VAT exempt.

Exemption already applied to services by staff supervised by other registered health professionals, such as doctors and nurses. Pharmacies providing services like vaccinations and health checks through supervised staff should review how they charge VAT from 1 May 2023 and consider the knock-on effect on their input tax recovery.

4.3 Director personally liable for VAT penalties

A plumbing company’s VAT repayment claims were disallowed for lack of evidence and its director was made personally liable for the deliberate inaccuracy penalties.

The company had made repeated repayment claims but did not produce invoices or records when HMRC asked for them over a long period. The tribunal upheld the assessments, found the errors deliberate and confirmed a personal liability notice transferring the whole penalty to the director. Businesses must keep VAT records for six years and be able to produce them promptly, and directors should be aware that they can be held personally responsible for penalties caused by deliberate errors.

Coonley Trading Ltd & Anor v HMRC [2023] UKFTT 452 (TC)

4.4 Cash flow problems were not a reasonable excuse

A recruitment agency that used VAT collected from customers to pay its workers could not avoid a default surcharge.

The agency paid workers weekly but invoiced clients only every six weeks, so it regularly ran short of cash at VAT deadlines. The tribunal held that a funding gap built into the company’s own business model was not a reasonable excuse for paying late. For VAT periods starting on or after 1 January 2023 the default surcharge has been replaced by a points-based penalty system and late payment interest, but the same approach to excuses is likely to apply, so businesses expecting difficulty should contact HMRC before the due date.

Nations Recruitment Ltd v HMRC [2023] UKFTT 494 (TC)

5. Key dates

The main tax deadlines and changes from May to July 2023 are set out below.

6. And finally

6.1 The tax that counted your fireplaces

On 19 May 1662 Charles II gave royal assent to the hearth tax, which charged one shilling for every fireplace and stove in a home, payable twice a year at Michaelmas and Lady Day. The poorest households were exempt, but collectors were allowed into people’s houses to count the hearths, and the tax became so unpopular that it was abolished in 1689 shortly after William and Mary came to the throne.

More than 360 years on, the shape of a home still decides how much tax is due, as this month’s dispute over whether a paddock formed part of a house’s grounds shows. Fortunately HMRC no longer needs to count the fireplaces, although, as the director in the Coonley case found, it does still expect to see the records.