Weekly Tax Update 15 July 2020

HMRC has updated its forms and guidance such that all disposals of UK residential property, including those by non-residents, must now be reported using the new online service.

HMRC’s original guidance stated that indirect disposals and disposals of mixed-use property by non-residents should be reported on the old non-resident CGT (NRCGT) form. The guidance has now been updated to confirm that these disposals must instead be reported through the new CGT on UK property return. The old NRCGT form can now only be used for disposals prior to 6 April 2020.

www.tax.service.gov.uk/capital-gains-tax-uk-property/manage-clients-capital-gains-tax-on-uk-property-account

The FTT has found that, although a dividend paid on shares a taxpayer had put into trust was not a distribution to him, the settlements provisions applied such that he was liable to tax on it. This was the lead case in HMRC’s investigation into the scheme.

In 2012/13, the taxpayer had entered into an avoidance scheme designed to allow extraction of profits from a trading company free of income tax. It was notified to HMRC under the disclosure of tax avoidance schemes rules, and HMRC sought to tax the extracted profits as a dividend.

The scheme was complex, but in summary involved the creation of a new class of share in the company. Those shares were transferred to a non-resident individual (N), who transferred them to a non-resident trust. N retained an interest in the trust, but the original shareholder could benefit, and received most of the proceeds when a dividend was subsequently declared on the shares.

The taxpayer argued that under the settlements legislation only N, as settlor, was liable to tax on the dividend. HMRC contended that the taxpayer himself was a settlor of the trust, or alternatively that the dividend should be taxed on him under the transfer of assets abroad anti-avoidance provisions.

The FTT agreed that the final payment was not a distribution to him but to the trustees. It found, however, that the taxpayer was subject to the settlements provisions as a settlor and the income was therefore taxable on him. It went on to find that even if he was not a settlor, he would have been taxable under the transfer of assets abroad provisions.

Dunsby v HMRC [2020] UKFTT 271 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2020/TC07755.html

The FTT held that bonus payments, made to former employees after they became members of an LLP, should be treated as earnings for IT and NICs.

Bonuses were paid to five members of an LLP under a Long-term Incentive Plan (LTIP). They were all previously employees of the LLP and were admitted to the scheme whilst still under employment. Under the contract, payment would be made once prescribed conditions had been met. At the time of payment, the five employees had become members of the LLP. The taxpayer claimed that the payments were made to the individuals in their capacity as a member of an LLP, so should be treated as a share of the LLP profits. This would have been subject to IT and Class 4 NIC. HMRC sought to tax the payments as deferred employment income subject to IT and Class 1 primary and secondary NIC.

The taxpayer argued first, that the members’ status as an LLP member was an absolute bar to receiving employment income from an LLP. Second, they claimed that the accrued bonus payments were contingent on the contractual requirements being met, which only happened after the employees had become members. Third, they asserted that the recipients were members of the LLP at the time of payment and could only receive the payments as a share of the trading profits.

The FTT held that the bonus payments should be treated as earnings received from employment for the purposes of IT and NIC. Whilst the most common form of payment to a member of an LLP was a share of the profits, it did not follow that all payments received by a member should be characterised as such. Furthermore, the payment was not made solely by virtue of their member status. They were also required to satisfy the conditions of the scheme, which was only open to employees.

Charles Tyrwhitt LLP v HMRC [2020] UKFTT 272 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2020/TC07756.html

Two taxpayers have been refused judicial review of an HMRC interpretation of the remittance basis rules. The relevant provision was new, so they could have no legitimate expectation of a particular treatment, regardless of HMRC comments before it came into force.

The taxpayers had agreed to indemnify a company (C) against non-payment of a debt by another company (I). The parent company of I, settled the debt by making a payment to another company in the same group as C. That group then issued a credit note to I in respect of the debt. The taxpayers had taken on responsibility for the indemnity when they sold their interest in the group to C.

HMRC analysed the receipt of the credit note by I, so releasing the taxpayers from their obligation to indemnify, as a remittance of property by the taxpayers, and set out the analysis in a series of letters, including the position that the last steps were ‘uncommercial and contrived’. The taxpayers applied for judicial review on the grounds that HMRC’s reliance on its interpretation was unlawful and unreasonable.

The UT noted that the taxpayers’ argument of legitimate expectation was not arguable, as the provision HMRC relied on was new. It rejected the argument that HMRC was incorrect, as this was not grounds for judicial review: the taxpayers could take it to the FTT. The application for judicial review was therefore refused.

Mehan & Anor, R.(on the application of) v HMRC [2020] UKUT 213 (TCC)

www.bailii.org/uk/cases/UKUT/TCC/2020/213.html