Weekly Tax Update - Monday 5 November 2012

1. GENERAL NEWS

   1.1. Code of Governance For Resolving Tax Disputes

   In February 2012 HMRC announced there would be a range of changes to improve transparency and strengthen their governance of significant tax disputes and it subsequently published a draft Code of Governance for disputes.

   HMRC has now issued the final version of its 'Code of Governance For Resolving Tax Disputes' which includes:

   tables detailing the decision making process in standard cases and those impacting more than one taxpayer; specific approaches for complex cases and sensitive cases (which include those involving tax of at least £100 million); a specific approach for transfer pricing cases; a new approach to review settled cases. www.hmrc.gov.uk/adr

2. PRIVATE CLIENTS

   2.1. High Income Child Benefit Charge

   Although announced and referred to in the media as a withdrawal of Child Benefit, it should be noted that what actually emerged is a tax charge which can be 100% of the child benefit received by someone or their 'low income' partner. Going about it this way is no doubt cheaper than means-testing prior to payment but is not the same as an automatic removal of income from the recipient.

   However, referring to it as the withdrawal of benefit is misleading and causes confusion.

   There is a claw-back of child benefit on those with incomes over £50,000 by way of an High Income Child Benefit tax charge. For taxpayers with income between £50,000 and £60,000, the amount of the charge will be 1% of the child benefit received for every £100 of income over £50,000. For those with income above £60,000, the amount of the charge will equal the amount of child benefit received.

   The charge is added at the final step in the calculation of the income tax liability for the tax year so will be reflected in the balancing payment for 2012/13 due on 31 January 2014, as well as the interim payments for the following tax year.

   It should be noted that the fact the charge due for 2012/13 is part of the tax liability of 2012/13 may have been overlooked by people claiming to reduce their interim payments for the current year.

   The key points are:

   child benefit should always be 'claimed' so as not to lose out on the associated NIC credits for children under 12; if income/highest income is likely to exceed £60k annually the recipient might consider electing not to receive to avoid the charge applying (especially if it keeps them or their partner out of self-assessment); but a couple – particularly the low income party - might prefer the cash flow with the low income person (possibly non-working spouse) continuing to receive the income stream with the high income one in effect paying it back. The election not to receive can be revoked at any time and this revocation back-dated, within two years, if the income/highest income for year was under £60,000 and the full charge would not have applied. This backdating of the revocation will be in point should income drop and/or reliefs are carried back. When considering the effects of loss relief options. The potential to recover child benefit will need to be added to the mix.

   The charge applies to child benefit entitlement from 7 January 2013 so those wanting to make the election should take the necessary action well as soon as possible and well before Christmas. Child Benefit recipients can make the election online at HMRC's website.

   HMRC will no doubt over the next few months be trying to identify those households continuing to receive child benefit that have an high income individual. Where that high income individual is employed, HMRC is likely to adjust the PAYE coding so as to incorporate the charge and may also issue them with a self-assessment return.

   Anyone who is not automatically issued with a tax return that has a tax liability for a tax year due to the charge, or for any other reason, has an obligation to notify HMRC of this fact by 5 October following the end of the tax year.

   The Treasury estimated that 1.2 million families will be affected by the charge, with 70% of these losing all of their child benefit and 0.5 million people being added to the self-assessment population.

   2.2. Child benefit and non-UK domiciliaries with the remittance basis charge.

   An individual meeting the 7 or 12 year residence test claiming the remittance basis has an additional tax charge. This £30,000 or £50,000 charge is effectively created by way of nominating sufficient unremitted income/gains to be taxed on the arising basis to give rise to an additional tax liability equal to the relevant remittance basis charge.

   For such individuals their 'net adjusted income', as used for the High Income Child Benefit charge test, will therefore include this nominated income. The combination of UK source, remitted and nominated income therefore all need to be considered and compared with that of their partner.

   The amount of income and gains needing to be nominated is set out in ss809C and 809H ITA 2007 so as to create an amount of 'relevant tax increase' to equate to the remittance basis charge. The 'relevant tax increase' is the amount of income tax and capital gains tax payable for that year (which will be calculated including the nominated income/gains) less the amount of income tax and capital gains tax if the remittance basis did apply to the nominated income/gains.

   This could have two implications:

   the amount of income, as opposed to gains, nominated could bring the individual into the scope of the High Income Child Benefit charge, possibly in place of their partner; and if brought within the scope of the High Income Child Benefit charge by nominating income the difference in tax liability will incorporate the additional High Income Child Benefit tax charge so reducing its impact. 2.3. Tackling tax avoidance: Spotlights

   HMRC publishes details of tax avoidance schemes which it believes are ineffective on the 'Spotlights' section of its website. Two new Spotlights have been added recently as follows:

   Property business loss relief schemes

   The Government announced on 13 March 2012 that it had acted to close down tax avoidance schemes which set out to abuse tax relief available to property businesses with agricultural land. However, HMRC has evidence that some people have continued to take part in such schemes after the date that the new legislation took effect. HMRC is concerned that these people may not fully understand the serious risks and consequences that may follow. HMRC is relentless in pursuing those who seek to bend or break the rules and they will challenge all users of these schemes, regardless of when they entered into them.

   These schemes generally involve a series of highly artificial transactions intended to create an artificial tax loss which can be used to avoid tax properly payable on other income. Although the land itself and the business owning it will exist, the transactions are not part of a genuine agricultural business.

   Legislation brought in by S10 Finance Act 2012 stops relief for such a loss when it arises from tax-motivated arrangements. This new legislation applies to transactions or arrangements made on or after 13 March 2012. This makes it clear that these schemes do not work for anyone who joins or has joined a partnership on or after 13 March 2012 in order to reduce their tax liability by claiming property loss relief.

   If you're thinking of using one of these schemes to avoid tax HMRC strongly recommends that you seek independent advice. Remember - you are responsible for making sure that your tax return is correct.

   Taxing the rewards for work carried out for a UK based employer

   HMRC is aware that new tax avoidance schemes that seek to avoid Income Tax and National Insurance contributions (NICs) are being advertised to contractors, highly paid employees and those using recruitment agencies. It is claimed that these schemes get around new disguised remuneration rules.

   Arrangements may involve payments passing through a series of companies, loans from a third party or an offshore alleged employer, a deed of...