Weekly tax update - Monday 20 January 2014

Recent posts include: Recognising the future relationship between agents and HMRC; Experience of working in a high street agent for HMRC trainees; Local Working Together; Tax Agent Strategy; HMRC's webinars.

Latest news items include: New VAT Statutory Instrument (SI) 2013 No. 2911; Stock transfer form delays; The Enactment of Extra-Statutory Concessions Order 2014; Statutory Instrument: The Enactment of Extra-Statutory Concessions Order 2014; HMRC Car and Car fuel Benefit Calculator.

2 Private client

2.1 Vodafone reorganisation and return of value

When Vodafone announced the sale of its US group to Verizon Communications Inc (Verizon) it indicated the intention to carry out a return of value to shareholders, partly in cash (Cash Entitlement) and partly in Verizon shares (Verizon Consideration Share Entitlement). Details of the proposals and the tax implications have now been published.

For Vodafone shareholders who are tax resident in the UK, Ireland or certain other jurisdictions there will be a choice in relation to how this 'value' is returned. The choice selected will lead to either a capital gains tax or income tax treatment. Other shareholders will go down the income route, which will be the default position for those eligible to make a choice, which means that those seeking CGT treatment will need to make the election.

Vodafone proposes allotting and issuing B Shares and C Shares to its ordinary shareholders. Those eligible for the 'capital return' can elect to be allotted B Shares. In all other cases the shareholder will receive C Shares and be subject to income tax treatment. There will also be consolidation of the Vodafone shares (New Ordinary Shares) as part of the process.

What then happens and the UK tax consequences are set out below.

Shareholders subject to the Income Option (C Shares)

A special dividend, which will become payable on each C Share, will be satisfied by:

Vodafone paying the Cash Entitlement; and Verizon issuing and delivering the Verizon Consideration Share Entitlement ie an income distribution comprising of cash and shares in lieu. The C Shares will then be converted to Deferred Shares of negligible value.

The special dividend on the C Shares will be taxed as income. The value attributed to the Verizon Consideration Share Entitlement will be treated as additional consideration for the holding as a whole.

The combined effect should be that the resultant holding of New Ordinary Shares, Deferred Shares and Verizon Consideration Shares should stand in place of the holding of Ordinary Shares held prior to the issue of the B Shares and C Shares. The historic base cost and additional consideration will then be apportioned between the new consolidated Vodafone shares, the Verizon shares and the (worthless) Deferred Shares, based on market values.

A subsequent sale of the Verizon shares will be a disposal of those shares taking into account the attributed increased base cost rather than a part disposal from the whole.

The sale of fractional entitlements to Verizon Consideration Shares should generally not constitute a part disposal for CGT purposes. Instead, the amount of any payment received by the Shareholder in respect of that sale will be deducted from the base cost of the Verizon Consideration Shares. If the amount of any payment received exceeds the base cost that will give rise to a part disposal. However, the Shareholder may elect (in effect) for the excess to be treated as a capital gain.

Shareholders electing for the Capital Option (B Shares)

Each B Share will be cancelled in consideration of which Vodafone will pay the Cash Entitlement and Verizon will issue and deliver the Verizon Consideration Share Entitlement, ie the B shares will be disposed of for cash and shares.

The combined effect should be that the resultant holding of New Ordinary Shares and Verizon Consideration Shares should be treated as the same asset, acquired at the same time and for the same consideration, as the holding of Ordinary Shares held prior to the issue of the B Shares and C Shares. This will be subject to an adjustment in respect of the cash received.

The cash received on the cancellation of the B Shares will be a part disposal and may produce a CGT gain or loss. The proportion of base cost to be allocated is in proportion to the amount of the cash received compared to the total value of the cash plus the market values of the New Shares plus Verizon Consideration Share Entitlement.

A subsequent sale of the Verizon shares will be a disposal of those shares taking into account the attributed revised base cost rather than a part disposal from the whole.

The sale of fractional entitlements to Verizon Consideration Shares should generally not constitute a part disposal for CGT purposes. Instead, the amount of any payment received by the Shareholder in respect of that sale will be deducted from the base cost of the Verizon Consideration Shares. If the amount of any payment received exceeds the base cost that will give rise to a part disposal. However, the Shareholder may elect (in effect) for the excess to be treated as a capital gain.

Further details, including some examples, are available at:

www.vodafone.com/content/index/investors/verizon-wireless-transaction/common- questions-and-answers.yes.html

2.2 Is property letting a business for the purposes of CGT roll-over?

HMRC has indicated that it will not appeal against the Upper Tribunal's (UT) decision in the case of Elizabeth Moyne Ramsay. Although the decision gives uncertainty as to where the dividing line is, it does recognise that some property letting activities can be of a sufficient nature to be a business for CGT roll-over relief purposes.

The question of whether a property letting and the receipt of rents constitutes a business is considered differently for income tax, CGT and IHT. The income tax legislation refers to a 'property business' but for the capital taxes there is a...