The Act received Royal Assent in July 2011 (click here for details) and preserves the succession rights of the descendants of a person who:

1. Disclaims (or rejects) an inheritance in an estate; or

2. Forfeits his succession rights by killing the deceased person.

The Act also amends the current law so that the children of a minor are able to inherit their parent’s interest in an intestate’s estate, where the parent died before the age of 18 without having married or formed a civil partnership.

The Act will not apply where a death occurs before the commencement of sections 1, 2 and 3 (i.e. before 1 February 2012.)

Full details of the Act are here.

In its recent second annual report on the competitiveness of the UK tax system, the Institute of Directors (IoD) has suggested that capital gains tax and inheritance tax should be merged in order to help simplify the UK tax system (much in the same way as the integration of income tax and national insurance would do.) The IoD suggests that capital gains tax should be charged on those assets held at death above a fixed and “reasonably generous” (but unspecified) threshold, and that inheritance tax could then be abolished. Its full proposals are here (see page 26.)

This is not the first time that the IoD has put forward suggestions to change the tax system – in 2007, an IoD discussion paper called for the abolition of capital gains tax and inheritance tax – and it is an idea that has been mooted by others for some time.

Following on from Spain’s possible prosecution at the hands of the European Commission for discriminating against non-residents, the Commission has now referred the Netherlands to the European Court of Justice (ECJ) for discriminatory rules on inheritance and gift duties, after it failed to amend its laws following a formal request in September 2010. Under Dutch legislation, country estates located in the Netherlands are fully or partially exempt from succession and gift duties if they are open to the public, while inheritance or gifts of country estates in other European Economic Area (EEA) States are taxed on 100 per cent of their market value. The Commission considers the difference in tax treatment to be contrary to the free movement of capital.

It is interesting, though, that UK inheritance tax laws in this area could themselves be potentially discriminatory. The UK offers a conditional exemption tax incentive (which is not limited to land in the UK) to historic houses that are open to the general public. Inheritance tax and/or capital gains tax is not paid when the qualifying property (or historic item, such as a painting or sculpture) passes to a new owner on death or is gifted. However, according to HM Revenue and Customs’ (HMRC) memorandum on ‘Capital Taxation and the National Heritage’, in order to obtain the exemption, the new owner must agree to look after the item/property, keep it in the UK if it is moveable, and allow “reasonable” public access to it. HMRC’s stipulation that public access to the property should be “reasonable” means that the relief cannot realistically be given to property or land outside the UK.

Not that the Government will be overly concerned about this.

With the EU currently threatening to sue the UK over its recently-signed tax agreement with Switzerland unless the Chancellor renegotiates it, the Government has more pressing things to worry about.

In March 2011, the Office of Tax Simplification (OTS) published its interim report on the simplification of the tax treatment of small businesses. In it, the OTS recommended that the income tax and NICs regimes should be amalgamated and that the Government should begin work towards this objective by the end of 2011.

Following the Government’s call for evidence on the matter in July 2011, it became obvious that there was a real desire for reform, with the majority of respondents stating that there are potential gains to be made from aligning income tax and NICs. Respondents recommended that (1) the system for calculating NICs should be altered to reflect how income tax is calculated, and that (2) the same employee earnings should be made subject to the calculations for both taxes.

However, any reform will take time (and will only happen if the benefits outweigh the costs of making the change.)

The Government intends to work with stakeholders over the next few months, with a view to identifying high level options for reform by Budget 2012. Even if this happens, the Government has predicted that, due to the number of consultations on reform that would have to take place and the need to give employers sufficient time to prepare for a new tax system, any reform would probably not take place until 2017. Also, it appears that any reform will focus on alignment, simplification or operational integration rather than a complete merger of the two regimes.

In the past, governments have steered away from merging or integrating income tax and NICs, so it is surprising that reform is now a real possibility. However, the Government has accepted that there could be winners and losers even if there is just an integration of income tax and NICs, so it will need to fully investigate the impact any reform could have on individuals before deciding to proceed.

The Government has also published a discussion paper that outlines its proposals for simplifying the administration of personal taxes, by making tax information more accessible to taxpayers. It believes that online and mobile technology can help to improve taxpayer awareness of their tax liabilities. The discussion paper looks at systems in other countries, where taxpayers are able to access (and input) their own tax information online throughout the tax year. HM Treasury’s view is that a system that encourages greater taxpayer engagement also encourages greater taxpayer compliance.

Interesting times…

We now hear that the Chancellor has ordered an investigation into how much the tax brings into the national coffers. HMRC has been told to report back by January.

This shows us the power of the people (well, a very select group of the people) to get the Government to take action.  Or does it?  The Chancellor has done nothing but buy himself some time here. 

Time to think has to be a good thing, and it is commendable that there hasn’t been another knee jerk reaction of “yes” or “no”.  What is glaringly obvious, to me, is that whilst economists may be in a position to opine as to how measures such as the 50% rate of tax affect the economy, this is only part of the picture.

The other part is politics; and it is the politicians who are responsible for making changes.  The damage which could be done in being seen to favour the rich at a time when unemployment is high and growth is flat lining means that the merits of the 50% rate are of secondary importance to “how it looks”. 

Just listen to the news and take note of how often you hear the phrase “send a message”.  Policy seems to be more about messages sent than the merit of the measure. 

I fully expect that when the Revenue report back on this next year, the results will not show a strong case for the 50% rate.  I’ve helped enough clients to shape their affairs to reduce the impact of the 50% rate to form my own view on the matter. 

Whatever the outcome of this review, my personal opinion of this is that it won’t matter.  It’s the politicians that shape the policy.  Call me cynical if you will, but the bottom line is that any changes made by politicians are going to be based more on politics than economics

The ECJ ruled that Viking was not prevented from offering the refill service by Kosan’s trade marks on the bottles due to the fact that:

• it was industry standard to offer refills of such bottles, regardless of their shape; and
• the bottles were expensive (compared to the gas that would go inside them), had independent economic value and were designed for re-use.

As such, the ECJ ruled that it was unlikely that a consumer might assume a connection between Kosan and Viking, especially as Kosan’s bottle labelling remained intact and Viking had sticky labels to refer to its gas. The ECJ further ruled that a consumer would be unfairly restricted if, having bought the bottle, they could only have it refilled by one supplier, as the bottle had certain advantageous technical characteristics.

Simon Weinberg, solicitor in the Commercial/IP/IT team at Matthew Arnold & Baldwin LLP and assistant editor of Upload-IT, comments, “This case is interesting as it shows a situation where the industry standard was for the bottles to be refilled, avoiding any contention that a consumer may assume a connection between the supplier and the refiller. This contrasts with another recent case in the High Court in which cage containers for bottles could not be refilled with different bottles due to the confusion it might cause a consumer in thinking that both the bottles and the caged container came from the same source. Although the rulings come from different courts, the contrast clearly shows the importance of industry standards in trade mark rulings.”

The Bill was introduced into Parliament as a Private Members’ Bill, so its passage into law was uncertain. However, because the Bill more or less implemented the recommendations of the Law Commission, it was supported by the Government – a luxury most Private Members’ Bills do not receive. 

When I discussed this legislation back in February, the Act was only a Bill and at the time there was no guarantee that it would become law. Full details of it are here. As it turned out, the Bill received few amendments during its parliamentary progress and received Royal Assent relatively quickly.

The Act will amend the law in relation to who may inherit a beneficiary’s interest which is forfeited under the Forfeiture Act 1982. The forfeiture rule prevents a person from acquiring a benefit from unlawfully killing another person.

To summarise, the Act reforms the law of succession in the following two ways:

1. If a person either disclaims an inheritance or is disqualified from receiving an inheritance by the forfeiture rule, the inheritance rights of that person’s descendants will be maintained; and

2. The children of a minor (i.e. an individual under the age of 18) will be able to inherit their parent’s interest in an intestate person’s estate where that parent died before the age of 18 and was unmarried or had not entered a civil partnership.

For full details of the changes and further background information , please click here.

At the time of writing, there is no date for when the Act will come into force.

This pseudo-tax known as the, Art Resale Levy, (or droit de suite in French) means that sellers will have to pay royalties on works by European artists who have died in the past 70 years, including Pablo Picasso, Henri Matisse and Francis Bacon. Cash is payable to the artist’s heirs each time a work is resold.

The tax already exists in mainland Europe and is due in Britain from January, applying to all works priced above (EURO)1,000 (£900) and on a sliding scale of 0.25 per cent to 4 per cent. 

There will be intellectual property implications of this, if the directive is brought into force in UK.

On the other hand, so the argument goes, why shouldn’t the family reap some of the benefits (in particular when success is mostly posthumous)?

For a more detailed review of the tax’s history and the UK’s derogation until 2012, I suggest an article in the FT, which can be found here (although please note that the FT is subscription only), and for the view of the art lobbyists (LAPADA), click here: LAPADA, and follow the links at the bottom of the page.

There will be scope for planning to avoid this levy if the UK is not be able to extend the derogation beyond 2012, and if you are interested in discussing this with a solicitor, please call 01923 20 20 20 and ask for the Wealth Management Department.

Mr Gaines-Cooper wants to treated as a UK non-resident and claims that HMRC failed to interpret the IR20 guidance correctly (now replaced by HMRC6.) However, in February 2010, the Court of Appeal rejected Mr Gaines-Cooper’s application for a judicial review of HMRC’s decision that he was resident and ordinarily resident in the UK rather than in the Seychelles. Full details are here.

The hearing is expected to last two days.

UPDATE (13 July 2011): It has been reported that the judgment will be handed down in approximately 12 weeks’ time.

Last month, the French government proposed to introduce a new tax on non-residents who own a holiday home in France that they do not rent out as a long-term let. The government estimated that the total revenue from this tax would have been EURO 176 million a year, with the money used to fund proposed reform of the French wealth tax system.

However, after facing opposition from a group of senators representing French nationals living abroad, the government confirmed it was abandoning the proposal, as the new tax would have been incomprehensible to overseas French nationals.

The key points are as follows:

•  The charitable legacy must be left to a body that is a charity for UK tax purposes, that is, a charity or other organisation in the UK, European Union Member State, Iceland or Norway that would be a charity under the law of England and Wales OR settled in trust to be used for charitable purposes only OR left to a Community Amateur Sports Club.
• Beneficiaries of a will or intestacy may execute a deed of variation to make a charitable legacy.
• A beneficiary inheriting joint property by survivorship may divert all or part of that property to charity and the estate will benefit from the IHT incentive. 
• Where a discretionary trust is set up by will and there are charitable beneficiaries, a distribution within 2 years of death to charity will be treated by HMRC as though it was a legacy made under the will.  

Points for Consultation

The Consultation Paper of 10 June 2011 “A new incentive for charitable legacies – A lower rate of inheritance tax when leaving 10% of an estate to charity” seeks views on a number of detailed issues including:

• Whether, for administrative convenience, only charitable gifts of easily realised assets such as cash, land, buildings or quoted shares should count towards the 10% limit.
• How assets that are charged to inheritance tax on the deceased’s death in addition to his or her own ‘free estate’ should be treated. These assets would include those that the deceased had given away with a reservation of benefit, particular life interests in settled property and any jointly-owned property that has passed outside of the deceased’s will or intestacy.

Comments are invited by 31 August 2011.

Below is an example given by HMRC of an estate which is valued at £850,000 and where the available nil-rate band is £325,000. The minimum charitable legacy to pass the 10% test would be calculated as follows:

Planning points

If you would like to include a charitable legacy in your will or to discuss the impact of the changes, please contact a member of our Wealth Management team on 01923 20 20 20.

This law has not yet been passed, but it seems likely to take effect from 1 January 2012.  It will apply to non-French residents, including some French citizens who have emigrated, although those renting out their properties and professional expatriates seem to exempt.

This tax will be applied at a rate of 20% to the cadastral value of the home. This is typically lower than market value, but the current cadastral values date back to the 1970s and are due to be increased in the near future.

There is some question as to the compatibility of this new tax with EU law, but subject to a challenge on this basis, we understand that this is something of which all UK based owners of French property will need to take heed.

After this date there will be a significant reduction in the annual investment allowance for qualifying expenditure which potentially could result in lost 100% up-front tax relief.

Claiming on the balance not covered by AIA at rates applicable to the general, special or short-life asset pools spreads the claim for tax relief over much longer periods.

Here is an example I’ve seen from accountants Smith & Williamson:

Using an example of a 30 June 2012 year end, the table below shows the effect of delaying expenditure until after 1 April 2012 or 6 April 2012 on the maximum amount of AIA claimable for that year.

Businesses need to consider more than just the availability of allowances when incurring expenditure, however this change in allowances is significant enough to justify very careful consideration of when to incur qualifying expenditure.

For more information, please email me on shimon.shaw@mablaw.com.

The changes affect Employer Annual Returns and starter and leaver PAYE forms.  From April, employers with fewer than 50 employees must now send starter and leaver forms – P45s, P46s and similar pension information – online to HMRC.  

Further, all employers who send their Employer Annual Return to HMRC after the 19 May filing deadline will now receive a late-filing penalty.  Previously, an extra-statutory concession gave employers extra time before HMRC charged a penalty, but this has been withdrawn.

From this year, employers will be liable to a penalty if they file their annual return on paper. Last year, no penalty was charged for employers with five or fewer employees. But these transitional arrangements have now ended. HMRC will also be issuing PAYE penalties this spring for the first time in two key areas:

• Penalty notices will be sent out in April to employers with 50 or more employees who have not filed starter and leaver forms online to HMRC. The first penalties will apply for the three month period to 5 April 2011, with further penalties being issued on a quarterly basis.
• From May this year, HMRC will start sending out penalties for late payment of PAYE. Employers will be liable for a penalty if they haven’t made PAYE payments on time, and in full, from April 2010. The amount of the penalty will depend on the amounts paid late and the total number of late payments made. Penalties will be charged after the tax year-end.

Employers must file an Employer Annual Return (EAR) – a P14 for each employee and a P35 summary sheet – by 19 May. They must do this online (with some very limited exceptions, for example, people who employ their own carer and those with religious objections). If an employer has not previously sent their return online, they must act now by registering for HMRC’s online service. 

HMRC has published a list of common errors to avoid on its website.

There are a number of ways that employers can send employee starter and leaver details online. They can use commercial software, HMRC’s free Online Return and Forms – PAYE Service, HMRC’s Basic PAYE Tools (formerly Employer CD-ROM) or an agent can do it for them online. To avoid unnecessary administration work for employers and HMRC, employers should not send paper starter and leaver forms to HMRC where they have already filed online or intend to do so.

Or unless you are me.

So on to the news:

1.         DV3 v HMRC

This was the tax planning case I’ve referred to in previous posts.  The taxpayer appealed against HMRC’s assessment that stamp duty land tax (SDLT) planning (involving the sale to a purchaser followed by a subsale into a partnership) failed.

The decision was highly technical and involved an in-depth analysis of the SDLT subsale rules. 

The taxpayer won in the tribunal.  It seems likely that HMRC will, however, appeal.

2.         Shariah compliant SDLT scheme blocked

In the budget, HMRC have changed the rules for subsales and alternative property finance relief to block an increasingly popular method for avoiding SDLT.

3.         5% rate

The rate of SDLT for residential property purchases OVER £1m with an effective date on or after 6 April will increase to 5%.  Following on from the above 2 points, this is likely to lead to an increase in SDLT planning.

4.         Bulk purchases

As from Royal Assent of the Finance Act 2011 a new relief will be introduced for purchases for multiple residential properties.  The terms are not yet finalised, but in essence where you are purchasing several plots or properties you would take the total price and divide by the number of properties to find the mean.  The rate of tax will be based on the mean price.

Since opportunities for abuse abound, there will probably be some restrictions imposed.

5.         First time buyers

HMRC will review how this relief is working and report on it in the Autumn.

If any of these changes affect you or if you would like to contact someone about stamp duty, please drop me a line.

For example, as is fairly well known by now, there was a deathly silence on the subject of Winter Fuel Payments.  In fact the payments stayed the same, however the extra top ups which had previously been given were stopped.  So whilst there was no cut per se, anyone receiving these payments will have felt the difference.

So, on to the news.  Panorama tonight will reveal how research it has carried out into salaries and inflation mean that the average worker takes home £1,088 less than two years ago – a reduction of 5%.  For the full story, click here.

And then there’s the rise in national insurance by 1% again, which failed to feature heavily.  That’s going to affect a lot more people than knocking a penny off petrol, and in a far more significant way!

Tax planning can help in some cases, especially if you are a business owner or earn enough to put you into the 50% tax band.  If you would like to discuss your options, please contact our wealth management team on 01923 20 20 20.

So to add to your misery, here are some initial thoughts from me on the Fresh Business Thinking website.

Background

The first £30,000 of a termination payment is tax free for non-contractual payments made on termination. Currently, if the termination payment is paid after the P45 is issued and it exceeds £30,000, the amount over £30,000 is subject to tax at the basic rate of 20 per cent.

However, this is now changing.

What is happening?

From 6 April, employers will have to use the OT code when deducting PAYE from payments in excess of £30,000 made to employees after they leave their employment and are issued with a P45. This will mean that income tax will be deducted at source from post-termination payments at the basic (20 per cent), higher (40 per cent), or additional (50 per cent) rates of tax as appropriate, with no personal allowance. Currently employers are only required to withhold income tax at the basic (BR) tax rate.

The regulations also enable HM Revenue & Customs to specify that the 50 per cent additional rate of tax should be used by employers as a flat rate of tax, and to apply the new 0T code to pension payments received while the employee continues to receive salary payments from an employer.

This change will be relevant to businesses that deal with various types of post-termination payments, including payments under compromise agreements and income arising under employee share plans.

What should employers do?

Employers are responsible for ensuring that the correct amount of tax is deducted, or risk the possibility of HM Revenue and Customs imposing financial penalties.

Employers should ensure that they have spoken to ex-employees about the amount of tax that will be deducted from payments made to them on or after 6 April 2011.

Compromise agreements that involve terminations on or after 6 April 2011 should include appropriate wording regarding the tax deduction implications under these new rules. Also, any existing compromise agreements that make provisions for payment after 6 April 2011 may need to be checked.

Anyway, this post is about a different kind of dog…a…wait for it….hot dog.  Sorry, sorry, sorry.

Anyway, the point of this blog is that Manfred Bog, who specialised in selling sausages and chips from three mobile snack bars at weekly markets, won a ruling from the European Court of Justice that he did not have to charge the full rate of VAT.

The court’s reasoning was that his sausages required so little preparation that they did not constitute catering. It found the same rules should apply to popcorn and nachos sold in German cinemas.

VAT is a EU tax, so the effect of this will spread to the UK.  The implications here will be  that caterers, cinemas, and other hot sausage sellers in the UK will need to ensure that they charge the correct amount of VAT and may need to discuss the implications of the case with their local VAT office.

So, when you are staggering home from your football match, pub or other entertainment venue and you are hungry enough that the sausages on sale by the street vendor start to look edible, remember to ask whether they are charging VAT correctly.  Then run.

On a slightly more serious note, those of you that follow VAT rulings will recall the Subway decision (which went the other way – the court held that VAT was to be charged on the supply of subs).   In that case, there was some discussion on the impact of this on rents.  It is entirely conceivable that purveyors of certain foodstuffs from more fixed premises, might not reduce their charges and therefore pocket the difference.  If this affects profits significantly then there might be scope for landlords to argue that rents should increase in the future, especially if there is a turnover rent.

But here is some good news.

Stamp duty on property (SDLT) has to be one of the most hated taxes out there.  It is a tax on mobility and, like VAT, is imposed on cash which in most cases has already been taxed.  Not only that but it makes moving house a lot more expensive.  Hence the spread of stamp duty planning in recent years, even to transactions which in the past would never have been considered for this.

So a ray of sunshine in the doom and gloom is welcome.

An SDLT case was heard in the Tax Chamber of the First-tier Tribunal towards the end of last year.  Deputy Judge Charles Hellier heard arguments over a scheme used to avoid SDLT on the £65.1m purchase of a property in London’s Regent Street in October 2006.  The SDLT scheme in question involved a subsale of the property to a partnership resulting in no SDLT being payable.

This was the first occasion a court or tribunal has considered an SDLT scheme and its importance lies in the attitude of tribunal to the technical arguments SDLT schemes rely on.

And the winner was…..the taxpayer.

The judgement has not yet been published but watch this space as this article will be followed by an examination of the tribunal’s approach and a consideration of how this will impact on future schemes.

It is very likely that fashionistas go through the same when column inches get devoted to which shoes go with which handbags and doctors cry into their corn flakes when they read about medicine fads.  However, since I know nothing about fashion (as my wife will confirm) or health (as my Mum will confirm) it just flows over me. 

The story goes that if you purchase property in an overseas company, you can avoid stamp duty.  My comments:

1. For UK resident tax payers buying their homes, they lose out on the capital gains tax relief on the sale of their homes.  They will sell shares and pay tax on the gains.  28% CGT is a lot more bothersome than 4 or 5% stamp tax.

2. It saves stamp duty on the sale but that’s not going to help the company which is purchasing now.

3. This has the potential to make administration a nightmare and there are annual directors fees etc.

4. There can be income tax charges on the use of the property if a market rent is not paid.

5. Most UK based future purchasers won’t want to buy a company so you’ve restricted your ability to market the property in the future.  And if purchasers buy the property from the company - you’ve just wasted time and a shed load of money.

6. If you are borrowing to purchase the property, you’ll have a much harder time and the cost of finance will increase.

etc…..

So who should consider buying a property in a overseas company?

First point – don’t do this without speaking to your tax adviser (or me!).  Second this is mainly of use to wealthy overseas investors.  There is inheritance tax planning which can really benefit from a structure involving an overseas property.  But that’s not stamp tax planning.

What’s funny about the article is that tucked away at the end is a comment from a partner in KPMG with which I mostly agree ” for anyone [other than a overeas investor], it’s a ticking time-bomb”.   If they had spoken to him before writing the article, perhaps they wouldn’t have bothered.

Why? Because taxpayers are not properly planning, managing and reviewing their personal finances in a tax-efficient way, resulting in them paying more tax than they need to. The south-east of England was found to be the most tax-inefficient, with tax payers squandering a whopping £1.8bn in overpayments of capital gains tax and by not taking advantage of tax reliefs and other entitlements.

According to the research, a staggering 88 per cent of people stated that they have done nothing in the past 12 months to reduce their tax liabilities. (Last year it was 86 per cent, proving that this is not a one-off statistic.) Of that 88 per cent, 45 per cent of respondents erroneously believe that they are being as tax-efficient as possible; 28 per cent of respondents admitted that they do not know how to become more tax-efficient.

There are all sorts of ways to reduce your tax liabilities, such as using your partner’s income tax rate, making use of pension tax relief, maximising your (and your children’s) capital gains tax allowance, structuring your investment portfolios, inheritance tax planning, and writing a will. The list is endless.

At Matthew Arnold & Baldwin, we can help you and your business in all matters related to developing tax structures, mitigating tax liabilities, and the preparation of wills. If you would like to discuss your options, please contact me at iain.donaldson@mablaw.com (tax and trusts), or James Odds at james.odds@mablaw.com (tax), or Emma Alford at emma.alford@mablaw.com (wills).

The study (the Truth about Bonuses) by the University’s School of Economics involved subjects either being paid a bonus or fined depending on their performance in certain areas.  The results showed that the joint earnings of employers and workers were almost 19 per cent higher when fines were handed out than when bonuses were paid. However, while employers were better off when fines were introduced, workers earned less than in the scenario without fines.

Alternatives to bonuses

So what does work?  I suspect it depends on who you ask.

Employees (especially those in the, ahem, financial services sector) will probably say cash is king, and when it comes to it, a bonus will do nicely, thank you very much.  Now where is the Ferrari showroom?

Employers will often take a longer term approach to incentives and will often prefer employee share schemes and options.  These have the benefit of being tax efficient and of promoting long term commitment to the business since employees will benefit from future growth.

I’ve yet to come across anyone offering employee fines as an incentive and, if my boss is reading this, I am not sure that it would go down well in practice.

If you would like to discuss employee incentives for your business please contact me (for a discussion of tax), or Emma Cameron in our corporate team.

Skilled workers from overseas who do not take home big salaries will have to satisfy strict criteria.  Fewer than 21,000 a year will be let in because of a new cap on the number of people coming to the UK for employment.

Applicants will need a “certificate of sponsorship” from a UK employer and they will be given points according to the rarity of their skills, for example scientists will be ranked highly. Employers filling a vacancy that attracts a salary of £150,000 or more will not be subject to the limit on the number of certificates that may be allocated.

For more information on this change, the press release can be seen here.

Looking at the bigger picture, the Government is sending out mixed messages.  On one hand, this will be welcomed by business leaders who are concerned about a brain drain from the UK.  This is clearly intended to encourage skilled immigration and to support both the knowledge based economy as well as the City.  On the other hand, HM Treasury have raised tax to 50% on the highest earners with hints from the Chancellor that the beneficial tax regime in the UK for resident non-domiciliaries (who will be the ones most interested in the above announcement) may be restricted. In an increasingly mobile global society, there are simply too many other choices and, put simply, tax is a large part of the equation when choosing where to live.

The Government needs to have a clear policy to increase the skill set (and therefore the wealth) of the UK through targeted and consistent measures.  It is not enough to simply fiddle with immigration quotas.

I don’t act for any sports leagues.  That’s not to say I wouldn’t be interested, if someone from the FA, for example, reads this.

However, I know that stories about sports are always of interest (hence the fact that the slightly esoteric question of proper taxation of image rights is now familiar territory to a large part of the general public), so here we go.  Here we go.  Here we go.  Sorry.

HMRC have issued a notice clarifying their view of the VAT treatment of commercially operated sports leagues in response to enquiries from a number of organisations that run football leagues.

Background

Typically, a sports league provider will do most or all of the following:

• organise a league
• allocate fixtures to teams in the league 
• provide pitches for teams to play on (some league providers own pitches, others rent them from other parties) 
• provide referees
• determine results
• keep and publish scores and league tables
• award trophies to winning teams 

Payments for such supplies are collected in a variety of ways. For example, the sports league provider may charge a one off ‘admin fee’ to teams plus a ‘match fee’ for each game that is played.

Taxation

Some leagues have put it to HMRC that the essential nature of their supplies is one of pitch hire.  This relies on a series of VAT cases which rule that when you have provide one main service and there are added services ancillary to this, the VAT treatment is that of the main supply.  Following this, the leagues would not have to charge VAT.

Unsurprisingly, HMRC disagree with this and I suspect that most fans would too.  The supplies made by sports league providers consist of a bundle of elements, which are integral to each other.  HMRC consider that it cannot be said that there is one principal element to which all others are ancillary.

So what is that main supply?  In HMRC’s view, the overarching supply is of participation in a sports league, not a supply of land, and therefore subject to VAT at 20%.

Conclusion

It seems that by raising this as a question, the leagues have forced HMRC to go public with their views.  Rather an own goal, I’d say.  Sorry, again.

It’s common sense really – don’t act until you are in full possession of all the facts.  The following is a tale of woe that shows what can go wrong if you don’t.

As was reported in accountingWeb, a Sunderland based accountant is facing prison time after being found guilty of tipping off a client about a police investigation.  The accountant received a police order demanding him to hand over some accounts.  Rather than reading the order to determine what this was about, the accountant read the first couple of paragraphs and then immediately telephoned his client to let him know that he was being investigated.

The court held that this was in breach of the Proceeds of Crime Act with the possibility that he will now face a custodial sentence.

This takes me back to school and an early experience with exams.  As my teacher told me then – don’t do anything until you’ve read the full question!  Sometimes the early lessons we learn are the most important.

Tipping off is a serious issue and is one faced by many professionals, in particular those dealing with Money laundering compliance.  It is imperative to understand your obligations under these rules, and as cases like this make all too clear:  ignorance is no defence.

Although the Bill’s proposals on this issue were generally supported by respondents to the consultation and the Justice Committee, the Government has decided to defer any changes, pending the outcome of the Estates of Deceased Persons (Forfeiture Rule and Law of Succession) Bill, a Private Member’s Bill that is currently before Parliament and which proposes the majority of the reforms on the law of succession contained in the Civil Law Reform Bill.

The proposals in the Civil Law Reform Bill sought to amend the law of succession so that where a person was disqualified or refused an inheritance, his or her heirs were not disinherited. The Bill intended to reform the law governing the distribution of estates of deceased persons in three areas; that is whereby:

1. An inheritance is disclaimed (i.e. rejected);

2. An inheritance is forfeited (i.e. where a person has killed another person and is disqualified by the forfeiture rule from inheriting property from his or her victim); and

3. A person loses (but not forfeits or disclaims) a benefit on intestacy by dying under the age of eighteen and without having married or formed a civil partnership.

Under current common law, any children of a disqualified heir are also disqualified from inheriting. The Law Commission, after conducting its own consultation on the issue in 2003, deemed this situation to be unfair and its proposals for change were incorporated into the Civil Law Reform Bill. To back its call for change, the Law Commission cited the Court of Appeal’s 2001 ruling in Re DWS deceased, in which two grandparents, who were murdered by their only son, died intestate (i.e. without leaving a valid will) and the Court reluctantly held that the law did not allow their grandson (the murderer’s son) to inherit the property whilst the son (the murderer) was still alive.

The Estates of Deceased Persons (Forfeiture Rule and Law of Succession) Bill seeks to change the law by allowing the deceased’s property to be distributed as if the potential heir had died, rather than been disqualified through forfeiture. It also addresses the current situation whereby the children of a minor, who is entitled to inherit an interest in the estate of an intestate person but who dies unmarried and without entering a civil partnership before the age of eighteen, are unable to inherit their parent’s interest in that estate.

Although the Bill is supported by the Ministry of Justice, Private Member’s Bills are not usually allocated enough parliamentary time to be debated and, thus, become law. Consequently, even with the Ministry of Justice’s backing, there is no guarantee that the Bill will become law.

HMRC will target 50,000 SME’s a year looking at business records going back over the last 6 years.  There is a legal obligation to keep adequate records, and failure to do so can give rise to fines of up to £3,000.  This is a change of practice from HMRC who historically have rarely imposed these penalties.

Overtly raising taxes at the moment is political death.  So HM Treasury have to look elsewhere for money.  This seems to be a case of rummaging down the back of the sofa for those extra bits of revenue.  However, for most SMEs – £3,000 is not small change.  Businesses need to ensure that they keep all relevant documentation in addition to their accounts, such as till rolls, cheque stubs, paying-in-slips, cash receipts, etc.

If you want to speak to a solicitor or accountant about your obligations please contact us.

We also offer a business healthcheck  service, which includes a review of your business documentation and compliance.  If you are interested in this please contact our corporate team.

Dom Buckley IRS Ltd v HMRC (2011)

The taxpayer did not account for VAT on the sale of a Ford rally car to a customer in Spain.  HMRC issued an assessment charging VAT on the sale, on the basis that this was a supply to a person in their personal capacity.  The taxpayer appealed, on the basis that the customer was a taxable person (i.e. in business).  On a review of the facts, the tribunal agreed with the taxpayer.

This case highlights the need for care in identifying who your customer is.  This is relevant especially when you are making supplies overseas since the identity of the purchaser will affect the rate of tax you charge.  The easiest way of determining whether or not someone is taxable is whether they are registered for VAT within the EU.  If you want to be sure then it is possible to check VAT registration here.

It is possible to be a taxable person without being registered for VAT so it is important to know the rules if you are involved in making overseas supplies.  The VAT rules on supplies within the EU changed last year and it is important to keep on top of changes to these developments.

On a separate (but connected) point, it seems that VAT fraud is on the rise, and that suppliers who are not registered for VAT are charging VAT e.g. on building works.  Essentially, they are upping the price by 20% and pocketing this as profit.  This is fraud against you and the Revenue.  Customers in doubt are advised to ask for details of VAT registration and either call HMRC or use the above link to check that it is real.

The departure of so many non-doms has confirmed widely-held fears that the £30,000 levy would drive them overseas. Although the levy may not be the only reason for the exodus, it has certainly played its part.

So, what is the cost to the UK? Well, it is possible that the loss to the UK economy will be greater than the actual income gained from the levy. Non-doms not only bring wealth and spending power to the UK, but also expertise and entrepreneurism, which in turn creates jobs.

Back in June last year, I wrote that the incoming Coalition Government had pledged to review the taxation of non-doms during its five-year term in office. According to HM Treasury’s ’Structural Reform Plan: Monthly Implementation Update’ for December 2010, this review is still “ongoing” and an announcement on the issue will be made in due course.

The exemption had meant that businesses in England with an empty property with a rateable value below £18,000 did not have to pay business rates. The government intends to lower the threshold from £18,000 to £2,600. Also, the government does not intend to re-introduce a 50% relief, and small firms will not be able to claim Small Business Rate Relief on the property.

The FSB have written to local government minister, Bob Neill, to protest that the changes could potentially put some small firms out of business. If the cuts cannot be avoided, the FSB claims, it would be better to provide per cent relief or at least to allow a business to claim Small Business Rate Relief on their empty property.

The press release can be viewed here.

Office parties

Staff Christmas parties are less common than they used to be. But maybe the fact that you can reclaim the VAT charged on the cost of providing hospitality for staff will provide some cheer and a little incentive to treat the staff to a night out.

Be careful not to invite spouses and partners though, since entertaining non-staff members won’t benefit from the same treatment! A small charge to non-staff members attending the function may allow for the VAT element of the cost to be recovered.

Xmas gifts

The VAT rules on business gifts allow input tax to be reclaimed (and no output tax liability will be incurred) if the total cost of gifts given to the same person in any twelve-month period is less than £50, and they do not form part of a series of gifts.

A recent case considered samples of free albums and singles given away by EMI to a number of different employees within their organisation. The question was whether the ‘small gift’ allowance of £50 related to the employer as ‘one person’ or each member of staff. The good news is that each employee was deemed to be a ‘person’, so the £50 condition was easily met.

Conclusion

So the message to all employers out there – be kind to your staff and shower them with food (but not their families!) and gifts (but not more than £50 worth!) and you will all be able to have a happier new year!

Ok, maybe not, but they will be increasing tax on some of the equipment for leisure activities – sailing and caravaning.  If you own (or want to buy) a caravan or a sailboat, HMRC have put out two press releases today that could be relevant to you.

Sailaway Boats

A VAT concession on sailaway boats will stop from January 2012 because it conflicts with EU law, HM Revenue & Customs (HMRC) announced today.

From 1 January 2012 VAT registered businesses will no longer be able to zero rate the supply of a sailaway boat to a UK resident who intends to keep it outside the EC.

Businesses can continue to zero rate the supply of a boat to a UK resident provided they either undertake to export the boat themselves or make all the arrangements for the export.

Following a recent legal decision HMRC is reviewing its concessions. The majority are being retained but a minority, after a period of notice, will end. This is because they are outside the scope of HMRC’s administrative discretion and it has not been possible or appropriate for HMRC to legislate these extra statutory concessions (ESCs) as they are contrary to EU law.

Caravans

Three VAT concessions for caravan owners will cease to apply from 2012 because they conflict with EU law, HM Revenue & Customs (HMRC) announced today.

Following a recent legal decision HMRC is reviewing its concessions. The majority are being retained but a minority, after a period of notice, will end. This is because they are outside the scope of HMRC’s administrative discretion and it has not been possible or appropriate for HMRC to legislate these extra statutory concessions (ESCs) as they are contrary to EU law.

From 1 January 2012 caravan owners will no longer receive:

• the recharge of business rates as outside the scope of VAT
• zero rate water and sewerage charges where actual consumption cannot be identified; and
• first time connection to utilities as zero rated for VAT.

The lower rate of corporation tax has a threshold of £300,000.  If you have two associated companies the threshold for each is reduced to £150,000.  If you have three, then the threshold reduces to £100,000 for each.  The same will apply to the upper threshold (£1.5m).

The case below shows how this rule can apply in quite unexpected ways.

Executive Benefit Services (UK) Limited v HMRC [2010] UKFTT 550 (TC).

The taxpayer company and its associated company had completely distinct businesses.  However, a shareholder of one was found to control both companies since he had become a loan creditor of the associated company for purely commercial reasons.  Essentially by virtue of lending the other company money (combines with a minority shareholding) he became entitled to the “greater part” of the company’s assets “available for distribution to participators”.

The First-tier Tribunal held that the associated company test applied irrespective of any tax avoidance motive in structuring a company’s financing and shareholdings. 

Conclusion

This is a good reminder of some of the mischief which can be caused by the associated companies rules. 

The facts here are clear that there was no tax avoidance motive, in fact the shareholder in question was clearly trying to help out his son (who was the owner of the second company).  The loan was interest-free with no fixed repayment date and with no other entitlements, such as voting control or a share of a distribution of profits in the event of a winding-up.  Despite all this, the tribunal held that the companies were associated and reduced the rate of tax for both companies accordingly.

This case is going to be of particular interest in these times when (as happened here) lenders are holding back the flow of credit and children are turning to the bank of Mum and Dad.  When Mum and Dad are themselves in business, they need to look very carefully at the position of both companies.

For more information please contact James Odds or Shimon Shaw on 01923 20 20 20.

The personal tax details for 2011/12 have now been released.  Some of the key points:

• The personal tax allowance will rise by £1000 to £7,475.
• The higher allowance for those aged 65-74 and aged 75 or more will both go up by £450 to £9,940 and £10,090 – though only if your income is less than £24,000 (up from £22,900 last year).  Over this the higher allowance tapers back down to the standard.
• Higher rate tax will begin to be paid on annual incomes above £42,475 which is £1,400 less than the limit this year (£43,875). Therefore higher rate tax payers will not gain from the £1k rise in the personal tax allowance.
• The 50% rate remains at £150,000 and the income at which the personal allowance begins to be clawed back remains at £100,000.  Anyone with an income between £100,000 and of £114,950 – when personal allowance disappears altogether – will be paying an effective marginal rate of tax of 60% on some of their income.

Tax returns for last year will be due in January.  If you need assitance in preparing your return, please contact James Odds on 01923 20 20 20.

All in all, over 1000 tax reliefs are under review. To view them all, please click here (it may take a minute or two to download the 64-page spreadsheet!)

Following the review, which ends on 30 November 2010, the OTS will evaluate the effectiveness and relevance of all the tax reliefs, and will then recommend which ones could be simplified or even repealed. According to HM Treasury, the OTS will recommend repealing those reliefs that are “largely historic, not frequently used, create distortions in the tax system or are complex for business or HM Revenue & Customs to administer.”

There is certainly a proliferation of some tax reliefs – for example, there are 43 different reliefs from personal capital gains tax; 89 reliefs from inheritance tax; 117 reliefs from various forms of stamp duty; and 225 reliefs from personal income tax. However, whilst a number of these reliefs are historic (such as the relief for trading losses to ‘black beer’, which is described as an “historic exemption from excise duty for a fermented beverage made from malt and molasses, often without hops” – number 247 in the spreadsheet list, if you are interested!), there is a danger that some important reliefs may be lost as well during this streamlining exercise.

After considering its findings and assessing all the comments made from interested parties, the OTS will produce a final report, including its recommendations, before the Chancellor’s Budget in March 2011.

HMRC v Airtours Holiday Transport Ltd [2010] UKUT 404 (TCC)

A large holiday company (My Travel Group) suffered financial difficulties, and arranged for PwC to liaise on its behalf with its banks, bondholders and other creditors.  The company reclaimed input VAT in respect of these services.

HMRC issued assessments to recover the tax, on the basis that the supplies had actually been made to the company’s creditors, rather than to the company itself.   Their contention was that since the company had not recevied the supplies (even though they had paid for them) the company would not not be able to recover VAT.  Since the creditors had not paid for the supplies they also could not recover the VAT.

The First-Tier Tribunal allowed the company’s appeal but the Upper Tribunal reversed this decision and found in favour of HMRC.

Comment

This case seems to be a victory for the taxman but a loss for professional advisers and struggling businesses.  Since VAT will be paid but not recovered this will make professional fees that much more expensive.

In light of this decision, professional advisers should assess their letters of engagement and billing arrangements to determine who, in truth their client is.

If you would like to discuss this with anyone please contact me or Carolyn Jones (in our Banking and Finance team) on 01923 202020.

The question to ask yourself as you quaff your bananas, blackberries, strawberries and boysenberries is: “Am I having a drink or am I eating food?”. 

Innocent think that they are food, HMRC think that they are drinks.

The tribunal found that the smoothies had ‘the consistency of a moderately thin soup’ but were intended ‘to be drunk from the bottle’.   What it came down to (as is so often the case for VAT) was the intention of the customer – since they were intended and sold as drinks, the products were within the definition of ‘beverages’.

Once again the VAT man leads the cutting edge of food technology and science.

I’m posting it since it’s amusing and with no reflection of whether or not I think it is accurate.  For one thing, if I have a hard time imagining the pub suggesting that they drop the price of beer by 20%, I don’t have words to describe my feelings as to the impossibility of the Govt dropping income tax by any amount at any time before they start campaigning for the next election!

Shimon

……………………………………..

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100.
If they paid their bill the way we pay our taxes, it would go something like this..

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.

So, that’s what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem.   “Since you are all such good customers,” he said, “I’m going to reduce the cost of your weekly beer by £20.”  Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes.   So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers?  How could they divide the £20 windfall so that everyone would get his fair share?  They realized that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fairer to reduce each man’s bill by a higher percentage.  They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).
Each of the last six was better off than before with the first four continuing to drink for free.

But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a £1 too. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get £10 back, when I only got £2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”  The nine men surrounded the tenth and beat him up.

The next week the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important – they didn’t have enough money between all of them to pay for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works.

The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.  Tax them too much, attack them for being wealthy and they just might not show up anymore.

In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics.

This continues the trend in recent years of grandparents picking up increasingly more of the burden, both financially and in terms of time.

Unless your kids are really demanding, you probably won’t need to consult your solicitor to get you out of babysitting for the little darlings.  However, if you are a grandparent providing financial support (for example, school fees) there are a number of steps you can take to reduce the cost of helping.

For example, many grandparents put money or investments on trust for their grandchildren.  Any growth in the fund gives rise to tax on the grandchildren (which in most cases will mean that there is effectively no tax).  This may also be effective inheritance tax planning.

If you would like to discuss tax planning to provide for your grandchildren, please contact me or any member of the Wealth Management team on 01923 20 20 20.

If you miss the deadline it could be costly, as paper returns filed after this date could mean a £100 penalty.

An alternative to paper-filing is to file your return online, which benefits from a January deadline.

If you would like assistance in preparing and filing your tax returns, please contact James Odds on 01923 202020 or james.odds@mablaw.com.

The Treasury have just now issused the following press release, which we will consider in more detail and comment on in due course.

Financial Secretary to the Treasury announces changes to restricting pensions tax relief

Financial Secretary to the Treasury, Mark Hoban MP, announced today that the annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000, and the lifetime allowance will be reduced from £1.8 million to £1.5 million. This will replace the complex proposal legislated for by the last Government in the Finance Act 2010.

This measure will raise £4 billion per annum in steady state and will help reduce the record Budget deficit that this Government inherited. It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers 80% of those will have incomes over £100,000.

The Government is committed to protecting individuals on low and moderate incomes as far as possible. To protect individuals who exceed the annual allowance due to one-off “spikes” in accrual, the Government will allow individuals to offset this against unused allowance from previous years.

We will also consult on options enabling people to meet tax charges out of their pensions in November.

In order to protect the public finances it is necessary to introduce the reduced annual allowance from April 2011. The Government plans to introduce the reduction in the lifetime allowance from April 2012.

Mark Hoban said:

We have abandoned the previous Government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.

The Coalition Government believes that our system is fair, will preserve incentives to save and – compared to the last Government’s approach – will help UK businesses to attract and retain talent.

The government announced earlier this year that it was acquiring the Swiss bank account details of up to 6,600 wealthy Britons suspected of evading tax.

If you have received one of these letters and would like advice as to your next steps, please contact your normal MAB solicitor or ask for the Wealth Management team on 01923 202020.

It must also be filed when no tax is due as a result of the transferable nil rate band applying.  Essentially, this would be on the second death of a married couple or civil partnership where the first to die did not use all of their nil rate band.  This rule was introduced in late 2007 and is currently being used in 27,000 full estate returns each year.

HMRC now proposes to extend this exemption to some cases where the transferable nil rate band rule applies.  HMRC estimates this will apply in three out of every four cases where transferable nil rate band is invoked.  In all other more complex cases a full estate return will still have to be completed.

Not only will this save time and benefit probate practitioners, but it could lead to cost savings for clients and would be a most welcome change.

If you would like to speak to someone about probate, wills or estate planning please contact us on 01923 202020 and ask to speak with the Wealth Management team.

A statutory will is a will made on behalf of someone who lacks the necessary capacity to do so themselves by application to the Court of Protection.

In the case of Re D (statutory will), the Court of Protection considered what principles should be applied in determining whether to order the execution of a statutory will for and on behalf of a person who lacked the mental testamentary capacity to do so.

The Court of Protection held that under the Mental Capacity Act it can authorise a statutory will on the grounds that the validity of an earlier will is in dispute.  Decisions taken on behalf of a mentally incapacitated adult must be taken in his or her best interests.  This can include being remembered for having done the ‘right thing’ in his or her will.  In this case the judge ruled that the ‘right thing’ meant ensuring Mrs D’s memory was not ‘tainted by the bitterness of a contested probate dispute between her children’.

Comment

It is heartening to see the Court taking such a practical (and sensitive) approach.  The alternative would have been for the beneficiaries to have waited until Mrs D had died and to then contest her will in the courts.  This would have been far more stressful and expensive and would almost certainly not have been what Mrs D would have wanted.

If you would like advice on statutory wills or mental capacity please contact me on iain.donaldson@mablaw.com or 01923 202020.

So what should you do?

• If you have paid too much you will automatically receive a repayment.
• If you have paid too little and the underpayment is under £2,000, HMRC will automatically add this to your tax for 2011-12. This spreads the collection of the underpayment throughout the year.
• If this results in hardship, you can ask for the underpayment to be included in your tax code over a longer period.
• If the underpayment is over £2,000 HMRC will write to you and ask for direct payment.  You should contact HMRC if you wish to discuss a repayment schedule.
• If your benefits have been affected then you should contact HMRC to discuss this.

In all cases it is important that you obtain a calculation from HMRC to determine whether they are correct in their assesment.  If you have any doubts then please feel free to contact me on 01923 202020 or james.odds@mablaw.com.

Dave Hartnett, the Permanent Secretary for Tax at HMRC, has admitted that tax inspectors were sometimes too “tough”, and that a change of approach is now required. HMRC is now expected to tell its inspectors to try to settle cases out of court, where possible; it is also planning to launch a pilot scheme involving third-party mediators, to see whether they can be used to help resolve some disputes.

So why is HMRC changing its stance now? This is a pertinent question to ask when you consider that it was only three years ago, in July 2007, that HMRC adopted its ‘Litigation and Settlement Strategy’, which stated that HMRC would pursue all tax disputes through the courts whenever it considered it had a better than 50 per cent of success – a clear statement at the time that HMRC would not enter into negotiated settlements when it felt it had a good chance of winning the dispute through litigation. It is true that HMRC faced some criticism for this uncompromising attitude, but this is certainly not the only (nor the main) reason for its change in stance. Rather, and more importantly at a time of big government spending cuts, HMRC also hopes that the move will make the department more financially efficient and free up billions of pounds that have been tied up in the aforementioned tax avoidance court battles.

However, nobody should misunderstand HMRC’s change in approach as any sort of weakening in its resolve to clamp down on tax avoidance. Mr Hartnett made it perfectly (and graphically) clear in an interview with the Financial Times newspaper this week that “If it is a strong case, we will fight to the death.”

Finally, it cannot go unmentioned that the timing of HMRC’s conciliatory approach is particularly ironic. In the week that Mr Hartnett held out a metaphorical olive branch, the deputy Prime Minister, Nick Clegg, also announced that the Government is looking at the case for a general anti-avoidance rule “to ensure that wealthy individuals pay their fair share of tax.” A case of give with one hand and take with the other?

In February 2010, the Court of Appeal dismissed Mr Gaines-Cooper’s application for judicial review of HM Revenue & Customs’ (HMRC) refusal to treat him as non-resident in the UK for tax purposes. Mr Gaines-Cooper, who has lived in the Seychelles since 1976, claimed that HMRC failed to interpret its IR20 guidance correctly.

IR20 sets out HMRC’s understanding of the law on residence, ordinary residence and domicile; it states that if an individual leaves the UK permanently or for at least three years, he/she will be treated as non-resident providing that he/she does not visit the UK for more than 183 days in any tax year or for an average of more than 90 days. Although Mr Gaines-Cooper satisfied these requirements, HMRC argued that an individual could not expect to rely on IR20 as it was merely guidance, and that an individual’s status depended on his/her particular circumstances. The Court of Appeal agreed with HMRC that IR20 implied that Mr Gaines-Cooper had to demonstrate a ‘distinct break’ from his former social and family ties within the UK in order to claim that he had permanently or indefinitely left the UK. It ruled that he had failed to do this when he left the UK.

This decision highlights the need for an all-encompassing statutory definition of ‘residence’ and ‘non-residence’, but for now, individuals who choose to rely on IR20 (and its successor, HMRC6) must ensure that they fall within its terms. However, the forthcoming judicial review (for which no date has been given yet) means that the Court of Appeal ruling may now not be the end of the story…

NB: I should point out that a judicial review claim allows an individual to challenge the way in which a public authority, such as a government department (in this case, HMRC), has reached a decision. It is a separate process from appealing against the decision itself.

UPDATE: The judicial review appeal will be heard in the Supreme Court on 6 July 2011.