Tax Update: A Round-Up of Recent Tax Issues - Monday, 7 March 2011

1. PRIVATE CLIENTS

   1.1. Office of Tax Simplification: Review of tax reliefs

   The Office of Tax Simplification (OTS) has produced its detailed report looking at 155 reliefs out of the 1,042 originally identified. The report identifies a number of long-term projects which are ripe for detailed review:

   The possible merger of income tax and NIC; Align the treatment of employee benefits, simplifying many minor benefits with a de minimis limit; Complete review of IHT and the taxation of trusts rather than tinkering with reliefs; Consider a review of CGT and in particular the growing difference between the regimes for individuals and companies. The OTS listed two reliefs which are out of date, 45 reliefs which it considers have no ongoing policy rationale and should be abolished and 17 reliefs which could be simplified.

   The list of 45 reliefs which OTS considers could be abolished include provision of meals for cycle to work days, late night taxis, 15p per day tax-free luncheon vouchers, miners free coal, business premises renovation allowance, flat conversion allowances and blind person's allowance.

   The list of 17 reliefs which OTS have recommended for simplification include EIS, VCT, entrepreneur's relief, enhanced capital allowances for energy and water efficient technologies, purchase of own shares, demergers, principal private residence, chattels relief, REITs and lease premium relief.

   The OTS recommended that 54 reliefs should be retained including employer supported childcare, short-life assets, small profits rate for corporation tax, post cessation trade relief, gifts of investments to charity, 5% rule for insurance policies and top-slicing relief, film tax relief, farmers averaging and woodlands relief.

   It is expected that the Chancellor will respond to the OTS report in the Budget on 23 March. It is likely that he will embark on a period of consultation on any reliefs that he wishes to abolish or simplify with a view to legislating in the 2012 Finance Bill.

   The OTS has carried out its initial review in a methodical fashion and in a short time-frame. They make the point that they are "well aware of the argument that simplification should start with a tax in its entirety, rather than looking at individual reliefs".

   Clearly major pruning of the existing tax code would be necessary to achieve a real simplification of the system and it remains to be seen whether the Chancellor has the appetite to tackle all or indeed any of the long-term projects mentioned above.

   www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_final_report.pdf

2. PAYE AND EMPLOYEE BENEFITS

   2.1. Whether contributions to FURBs are earnings for NI purposes

   The Upper Tribunal was the Tribunal for the first hearing of Forde & McHugh, a lead case behind which a number of others stood. It considered whether employer contributions into a funded unapproved retirement benefits scheme ("FURBS") were earnings for Class 1 NI purposes. The contributions, made during 2002/03, consisted of Treasury Stock with a nominal value of £162,000 and £1,000 by way of a cash contribution. The employee was entitled to benefits under the scheme's Trust Deed and Rules on Retirement from Service, namely Death Benefits, Benefits on Change in the Nature of Service, and Benefits on Leaving Service Before Retirement Age.

   NI is due where earnings are paid to or for the benefit of an earner (SSCBA92 s6(1)) and 'earnings' includes any remuneration or profit derived from an employment. Payments in kind are excluded by Regulation from the calculation of earnings unless they confer a beneficial interest in certain assets. Regulations also provide a means of calculation of individuals' earnings where a payment is made with a view to provision of benefits under a retirement benefit scheme for more than one member.

   This has been a contentious area for some years. Prior to the changes to the pensions legislation in April 2006, employers used FURBS both as an NI avoidance device and to top up the pension entitlement of executives for whom contributions to an approved pension scheme were capped. Specific tax legislation meant that the contributions were liable to tax when they were made but there was no equivalent charging provision under NI law. It had been announced in July 1997 that clauses would be included in that year's Social Security Bill to bring contributions to FURBS into the charge for NI from 6 April 1999, but later that year the Contributions Agency announced that there was no need to make a change in the law as the charge on contributions already existed. A press release was issued in November 1997 in which the Agency announced that they expected employers to comply from 6 April 1998.

   The critical question according to the Tribunal was whether payments of gilts into the retirement benefit scheme amounted to "earnings paid" for the employee's benefit. The Tribunal was influenced by the decisions in two conflicting cases:

   Tullett & Tokyo, where the High Court decided in 2000 that employer contributions into a fund over which the employee held contingent rights did not constitute earnings; and Telent, where the Special Commissioners decided in 2008 that the circumstances under which cash payments had been made into a FURBS for one employee, according to the contract of employment, were not on all fours with Tullett & Tokyo and that those contributions did constitute earnings. The Tribunal effectively followed the decision in Tullett & Tokyo. It was unconvinced of the wide interpretation placed by HMRC on the definition of earnings for NI purposes. It determined that neither the transfer of the gilts nor the cash payment to the trustees fell within "earnings paid to or for the benefit of an earner".

   The Tribunal was also not persuaded by the argument that it was possible to treat as earnings the grant of a contingent interest in a fund which could be valued by reference to the payments into the fund. It also found that the employee did not have a beneficial interest in the assets held in the trust fund, but merely a right to undetermined benefits on the occurrence of uncertain events.

   www.tribunals.gov.uk/financeandtax/Documents/decisions/FordeandMcHugh_v_HMRC.pdf

   2.2. Advisory Fuel Rate

   HMRC increased the Company Car Advisory Fuel Rates for petrol and diesel cars from 1 March 2011.

   The new rates from 1 March 2011 are:

   Petrol

   1,400 cc or less – 14p 1,401 cc to 2,000 cc – 16p Over 2,000 cc – 23p

   Diesel

   1,400 cc or less – 13p 1,401 cc to 2,000 cc – 13p Over 2,000 cc – 16p

   www.hmrc.gov.uk/cars/advisory_fuel_current.htm

3. BUSINESS TAX

   3.1. Draft amendments to Offshore Fund rules

   HMRC has published, for industry comment, a full draft of proposed amendments to The Offshore Funds (Tax) Regulations 2009 (SI 2009/3001 as amended). The intention is to make these regulations by late April 2011 to come into force by the end of May.

   As well as the rules for funds operating equalisation which were...