Weekly Tax Update - Monday 22 August 2011

1. General news

   1.1. Litigation & settlement strategy and alternative dispute resolution

   HMRC has published draft guidance on its litigation & settlement strategy (LSS) and use of alternative dispute resolution (ADR), for comment by 31 October 2011.

   The ADR guidance refers to ADR in use for large and complex cases. Further guidance will be issued in due course for the use of ADR in smaller and non-complex cases.

   The LSS guidance comments as follows:

   The LSS encourages HMRC staff to:

   Minimise the scope for disputes and seek non-confrontational solutions; Base case selection and handling on what best closes the tax gap; Resolve tax disputes consistently with HMRC's considered view of the law; Subject to that, handle and resolve disputes cost effectively – based on the wider impact or value of cases across the tax system and across HMRC's customer base; Ensure that the revenue flows potentially involved make any dispute worthwhile; (in strong cases) settle for the full amount HMRC believes the Tribunal or Courts would determine, or otherwise litigate; (in 'all or nothing' cases) not split the difference; (in weak or non-worthwhile cases) concede rather than pursue. The two key elements of HMRC's approach to tax disputes are:

   i) supporting customers to get their tax right first time, so preventing a dispute arising in the first place; and

   ii) resolving those disputes which do arise in a way which establishes the right tax due at the least cost to HMRC and to its customers, which in most cases will involve working collaboratively.

   Resolving disputes 'cost effectively' does not mean HMRC making compromises on what it believes to be the right tax liability consistent with the law. It means securing the right tax liability consistent with the law, fairly and even-handedly across all taxpayers, in a way which minimises unnecessary costs. This means that the concept of cost-effective dispute resolution in this guidance may be different from the generally understood concept of cost-effective resolution of a purely commercial dispute.

   The following factors are likely to be relevant to HMRC's consideration of what may or may not be 'cost effective' in relation to the resolution of a particular tax dispute:

   The potential tax at stake in the current year(s), as well as any prior or future years, for that particular customer; The potential tax at stake in any year(s) for other customers (including the wider impact of any HMRC intervention, such as through behavioural responses); An assessment of the potential impact/ effort or cost/ benefit analysis of the different ways of taking forward the dispute (or not taking forward the dispute); Strength of HMRC's view; Overall assessment of whether taking a particular course of action (e.g. litigation) is likely to be a better use of HMRC's resources than taking forward other activity which might otherwise be undertaken. www.hmrc.gov.uk/practitioners/lss-intro.htm

2. Private Clients

   2.1. Form 17 Declaration of beneficial interests in joint property and income

   Following HMRC's update to its guidance on property held jointly by married couples or civil partners the form '17 - Declaration of beneficial interests in joint property and income' has also been updated.

   The guidance and form both state that evidence of the beneficial interests in the property being unequal is required, for example a declaration or deed. Previously HMRC had asked for evidence only in the case of bank and building society interest. The evidence requirement now applies to declarations in respect of all types of property.

   Income from property held jointly by married couples and civil partners is treated as beneficially owned by the individuals in equal shares (under ITA 2007 s836), subject to some exceptions (see below). This means that by default they are taxable on such income on a simple 50:50 basis and the rule applies even if the individuals own the property in unequal shares.

   Where the actual division of ownership is different a joint election can be made for the income to be assessed based on their actual underlying beneficial interests. The different basis applying from the date of the election, which has to be filed with HMRC within 60 days, apply until such time as the asset is sold or there is a change in their interests.

   The default 50:50 rule does not apply to:

   income to which neither of the individuals is beneficially entitled; partnership income (other than taxed investment income); income arising from the commercial letting of furnished holiday accommodation; and income from jointly held shares in a close company. www.hmrc.gov.uk/forms/form17.pdf

   www.hmrc.gov.uk/trusts/agents/updates-tsem.htm

   The relevant updates to HMRC manuals can be found in the Trusts, Settlements & Estates Manual (TSEM) at TSEM9000 to 9978 (www.hmrc.gov.uk/manuals/tsemmanual/tsem9000.htm ).

   Most of this guidance is brand new and has not featured previously in a HMRC manual. It covers the taxation of rental income, bank and building society interest and dividends. It provides legal background to the subject of ownership of property, and includes guidance on express and implied trusts. It also gives examples illustrating the principles of ownership and joint ownership in the context of taxation of income.

   Part of the guidance in the section TSEM9800 to 9874 - property held jointly by married couples or civil partners - replaces and updates guidance in the Independent Taxation Manual (IN) at IN115-144. This will be withdrawn later this year along with the rest of the Independent Taxation manual. HMRC advise only TSEM9800 to 9874 should now be used.

   2.2. HMRC guidance on the changes to the Furnished Holiday Lettings rules

   HMRC has issued an advance version of a new Helpsheet (HS253) on furnished holiday lettings. It covers the changes to the rules for 2011/12 and for 2012/13 and following.

   Note that references to Property Income Manual (PIM) guidance are to material that has not yet been included in the PIM but will be included by the time the Helpsheet has been published as part of the SA forms and guidance material for 2011-12.

   www.hmrc.gov.uk/manuals/pimmanual/attachments/PIM4100_helpsheet.doc

3. Employment tax

   3.1. NIC treatment of payments purportedly for mileage allowances

   The Upper Tribunal has overturned the First Tier Tribunal's decision in Total People Ltd, holding that they had asked the wrong question and reached the wrong conclusion. Accordingly the Upper Tribunal has determined the payments were not of relevant motoring expenditure and they were accordingly emoluments of employment, liable for NICs (so Cheshire Employer and Skills Development Ltd, CESD's, claim for repayment of overpaid NICs failed).

   The case concerned employees using their own cars for business motoring who were paid less than the full mileage allowance that could have been treated as exempt from NIC. The employees were paid a low mileage rate because they also received an annual car allowance paid in monthly instalments: at the time of payment of the car allowance, the employer had applied NIC. The employer had applied to HMRC...