Weekly Tax Update - Monday 20 February 2012

1. GENERAL NEWS

   1.1. Updated HMRC DOTAS guidance

   HMRC has updated its DOTAS guidance to incorporate supplementary guidance published between November 2010 and April 2011 and to clarify areas where previous advice may have been unclear.

   The main changes are detailed below:

   Paragraphs 12.7 and 19.3 amend HMRC's definition of reasonable excuse to provide greater clarity following a number of tribunal judgements criticising HMRC's use of the word 'exceptional'.

   Paragraph 15.7 correction to bring it into line with the requirements in regulation 8(15) of SI 2004/1864. This refers to time limits by which an employer of a PAYE scheme involving the employer and a director or employee or a person connected with them must provide a scheme reference number and the time the resulting expected tax advantage is expected to be obtained. The time limit is revised to no later than 19 May following the end of the tax year.

   The amended section 19.3 now reads as follows:

   "Section 118(2) TMA 1970 provides that:

   'For the purposes of this Act, a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the Board or the tribunal or officer concerned may have allowed; and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.'

   This means that in the event of a reasonable excuse the legislation deems that no failure occurred.

   The law does not define 'reasonable excuse', and it is left it to the judgment of the tax authorities and the tribunals as to whether a reasonable excuse exists in any particular case. This recognises that there probably cannot be a single absolute standard by which the words 'reasonable excuse' can be defined.

   What constitutes a reasonable excuse will vary according to the nature of the failure and the type and circumstances of the person concerned. But generally, reasonable excuse is seen by HMRC, as developed by case law, as being an unusual event that is either unforeseeable or beyond the person's control (for example, serious illness) that formed an insurmountable obstacle to timely compliance.

   Example

   Promoter P has put a reasonable and proportionate system in place to ensure that schemes are captured and disclosed on time. Something occurs, so unusual that it cannot be captured by the system and reported on time. P discovers the error and then discloses the scheme promptly with an explanation of what has happened. We would consider P to have a reasonable excuse."

   www.hmrc.gov.uk/aiu/dotas.pdf

   1.2. SDLT avoidance schemes

   For information the Solicitors Regulation Authority has issued a warning to solicitors about the use of SDLT schemes. This includes the following:

   "Factors to consider to help you decide if a SDLT scheme is in the interests of your clients

   Below is a list of some of the factors which may be relevant in deciding if a SDLT scheme is in the interests of your client(s).

   SDLT schemes are constantly changing and are usually very complex, bearing in mind what purchasers want to achieve. HMRC publish information on schemes which have been discredited; Be wary of claims by promoters of SDLT schemes that the scheme is backed by a "robust counsel's opinion". Based on what we have seen, we warn that you must check that the opinion is genuine, has not been tampered with, is up to date, and specifically covers the scheme which is being promoted. Bear in mind that reliance on counsel's opinion is not necessarily a defence to allegations of breaches of the Principles, and such a position is substantially weaker if the opinion has not been obtained by you for the particular client and the transaction in which you are acting; Be wary of claims that the SDLT scheme is approved by HMRC. Be aware that disclosure of the scheme to HMRC, and the issue of a scheme reference number by HMRC, is not confirmation the scheme is backed by HMRC; Be aware that HMRC can currently challenge SDLT schemes up to four years after the effective date of the transaction and this can be extended if there has been a careless or deliberate error in the submission of the SDLT return; Consider carrying out due diligence on the promoter of the SDLT scheme. If the promoter claims they will repay the fee charged for implementing the scheme, robustly check how realistic this is, bearing in mind that HMRC has four years to challenge the scheme. If the promoter is unable to repay the fee, the buyer may look to you to reimburse them; If the SDLT scheme is based on a supposed "no win no fee" basis said to be backed by insurance, robustly check that the policy is suitable and relevant to the purchasers circumstances. The links to the news release and warning are below: www.sra.org.uk/sra/news/press/sdlt-schemes-warning-profession.page

   www.sra.org.uk/solicitors/code-of-conduct/guidance/warning-notices/stamp-duty-land-tax-schemes--warning-notice.page

2. PRIVATE CLIENTS

   2.1. Entrepreneurs' relief – practical issues

   ICAEW Tax Faculty issued a Taxguide in February 2012 covering a number of technical queries on the operation of Entrepreneurs' Relief (ER) that were put to HMRC through the Capital Gains Tax Liaison Group. This note reflects the queries in sections B (ordinary share capital), C (associated disposals) and D (the remittance basis) together with HMRC's responses.

   It is understood that the HMRC guidance on ER (which can be found at CG63950 et seq of the HMRC Capital Gains Manual) will be extended to cover most, if not all, of the issues raised in this guidance.

   All references are to TCGA 1992 unless otherwise noted.

   SECTION B – ORDINARY SHARE CAPITAL AND THE 5% TEST

   EXAMPLE B1 – The meaning of ordinary share capital

   In relation to ER, s 169S(5) states:

   "ordinary share capital" has the same meaning as in the Income Tax Acts [see s 989, ITA 2007]." Section 989, Income Tax Act 2007 (ITA 2007) defines "ordinary share capital":

   "ordinary share capital", in relation to a company, means all the company's issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company's profits."

   HMRC response to Example B1

   The meaning of "issued share capital" was considered by Megarry J in Canada Safeway Ltd v IRC [1973] 1 CH 374 and is authority that it is nominal value that is adopted. Megarry J's analysis was extensively considered and applied in the more recent Upper Tribunal case of HMRC Commissioners v 1) Taylor and 2) Haimendorf [2010] 417 (TCC) at paras 14–18. In particular at para 17, The Hon Mr Justice Roth considers the meaning of the phrase in the context of the legislation:

   "Although the Canada Safeway case was therefore not addressing directly the issue of subscribed value, its reasoning appears to me to apply equally in the present case. Moreover, the expression "issued share capital" is used frequently throughout the ICTA. As the Respondents were constrained to recognise, it would be a striking result if the same form of words were to receive a very different interpretation within the same statute. In my judgement, if that result was intended, the draftsman would have made express provision for this by including a distinct definition of issued share capital specifically for the purpose of this part of the legislation in s 312. In the absence of such special definition, I consider that the phrase must receive the same meaning throughout ICTA. That meaning has been well-established since the Canada Safeway judgement that has been applied for almost 40 years. Accordingly, I consider that it is clear that issued share capital in paragraph (b) refers to the nominal value of the shares. Once that is determined as the correct interpretation, the potential practical difficulty of aggregating the two elements in paragraph (b) falls away; the actual calculation is straightforward."

   Author's note

   To conclude, when considering whether the 5% test is met HMRC's settled view is that one must look to the nominal value of the ordinary shares not to the number of ordinary shares that have been issued.

   SECTION C – ASSOCIATED DISPOSALS

   EXAMPLE C1 – What constitutes a 'withdrawal from the business'?

   CG63995 of the Capital Gains Manual states that a withdrawal from participation in the business relates to a "material disposal of business assets".

   Section 169K, TCGA 1992 provides that three conditions (conditions A, B and C with condition C relating to the necessary qualifying period) must be met for there to be an associated disposal. A "material disposal of business assets" is condition A and it is only in condition B where the disposal is connected with a withdrawal from the business. Section 169K(5) makes it clear that the disposal referred to in condition B is the associated disposal not the relevant material disposal.

   We would welcome HMRC's views on the following two points:

   How can the withdrawal from the business relate to both disposals and be caused by the same event?; and HMRC guidance says for a withdrawal from the business to occur it is not necessary to reduce the hours worked. So if the hours worked remain the same what exactly is a withdrawal from the business? HMRC response to Example C1

   It is a question of fact in each case whether there has been a "withdrawal from the business". The issue is not linked to the amount of work done or time spent working in the business, but the material disposal and the associated...