Tax Update - Tuesday 8 May 2012

1. GENERAL NEWS

1.1. HMRC toolkits

HMRC has published updated Toolkits as follows:

CGT for land & buildings CGT for shares Chargeable gains for companies CGT for Trusts and Estates Property Rental Directors Loan Account Toolkit Company Losses Toolkit. www.hmrc.gov.uk/agents/prereturn-support-agents.htm

1.2. The Scotland Act

The Scotland Act 2012 gives the Scottish Parliament the power to set a Scottish rate of income tax to be administered by HMRC for Scottish taxpayers. It is expected to apply from April 2016. The Act also fully devolves the power to raise taxes on land transactions and on waste disposal to landfill – it is expected that this will take effect in April 2015, at which point the existing Stamp Duty Land Tax and Landfill Tax will not apply in Scotland. The Act also provides powers for new taxes to be created in Scotland and for additional taxes to be devolved.

For employees and pensioners, the income tax change will be applied through PAYE (Pay As You Earn). HMRC will issue tax codes to employers in the months before April 2016 which will identify those employees who are Scottish taxpayers, and employers will deduct tax at the appropriate rates, which may be higher or lower than or the same as those which apply in the rest of the UK. The definition of a Scottish taxpayer is based on the location of an individual's main place of residence – further guidance will be available on in due course.

www.hmrc.gov.uk/news/news-calman.htm

2. PRIVATE CLIENTS

2.1. Mansworth v Jelley CGT loss claims

In February 2012 HMRC wrote to a number of taxpayers who had claimed Mansworth v Jelley losses inviting them to withdraw their claim so that all enquiries could be closed.

We are aware that many people responded to the effect that they believed that they had a legitimate expectation that the CGT losses calculated in accordance with the Revenue's original guidance would be allowable.

It appears that HMRC subsequently issued a standard reply to those letters which paid no regard to the detailed arguments put forward by the taxpayers and requested a further response by 1 May.

In that letter HMRC reiterated its interpretation of 'legitimate expectation' as follows:

"General guidance such as that published by the Inland Revenue on 8 January 2003 following the decision of the Court of Appeal in Mansworth v Jelley does not in itself necessarily generate 'legitimate expectation' for you. Whether you have a legitimate expectation will be determined by the facts and circumstances of your particular case.

Please bear in mind that your post Mansworth v Jelley loss claims were based on transactions which had already been carried out prior to the guidance note being issued. You did not undertake the transactions with a view to generating the losses; they were in fact a by-product of previous operations. It must follow that, in generating the losses, you could not have been relying on the HMRC guidance as the transactions had already occurred.

Please also note that the changes which have been made to HMRC guidance only return your position to what it was before the decision in Mansworth v Jelley. You are in the same position as you were when you when you undertook the initial transactions. HMRC opened enquiries into your claim to check the position, and as we have not closed our enquiry the claim has not been agreed. As you were aware that HMRC still had open enquiries into your loss claims, you should also have realised that these losses were, potentially, not going to be available to be set against capital gains in future tax years. It is therefore, at first sight, difficult to see how you can believe that you have a legitimate expectation that the losses would be allowed."

ICAEW Tax Faculty expressed its concerns to HMRC about the way that it was handling the matter and HMRC has written to the Faculty as follows:

"There are currently several hundred open enquiry cases where post Mansworth v Jelley losses have been claimed. In February 2012 HMRC issued a newsletter to those taxpayers inviting them to withdraw their claims so the enquiries could be closed and any appropriate adjustments made. Where customers considered it was not appropriate to withdraw their claim they were invited to explain the basis on which they believe their claim is valid.

In response to February's newsletter, a number of customers cited legitimate expectation as the reason they considered it was not appropriate to withdraw their claim but did not supply specific information relevant to their case. A letter was then issued to these customers asking them to provide further information/documents based on their own individual circumstances.

HMRC are currently reviewing the cases where legitimate expectation was cited and information has been provided. We will be replying to these customers individually."

There was considerable concern in the profession as to whether the correspondence issued by HMRC over recent weeks constituted a decision to deny relief for the losses where the taxpayer had claimed legitimate expectation. This was because where there is no possibility of an appeal to a tribunal, the taxpayer's only remedy would be to seek a judicial review hearing and there are strict time limits for taking such action.

In this connection the ICAEW Tax Faculty has now received the following additional comment from HMRC:

'HMRC does not see the February or March letters as decision letters. Decisions will be made in each case according to the individual circumstances. Therefore HMRC does not consider that the judicial review claims time limit runs from the issue of either of those letters.'

We will be monitoring further developments closely and if needs be we will consider seeking a judicial review on behalf of all clients who are affected. This will involve a case being taken in the name of just one person, but with the costs spread in a just and reasonable fashion.

3. IHT & TRUSTS

3.1. Trusts and Estates newsletter

The latest edition of HMRC's Trusts & Estates newsletter for trusts and estates practitioners is now available online, including items on the reduced rate of Inheritance Tax, Pre-Owned assets charge guidance, IHT421 and C1, changes to Inheritance Tax calculations practice, changes to the 2011/12 Trust & Estate Tax Return, R40 Claim Forms and the Personal Application process.

www.hmrc.gov.uk/cto/newsletter-apr12.pdf

4. PAYE AND EMPLOYMENT MATTERS

4.1. Whether changes to EMI option terms...