Weekly Tax Update - Monday 22 October 2012

1. GENERAL NEWS

   1.1. Meetings of HMRC permanent secretaries with external bodies

   HMRC has published the latest information on Permanent Secretaries meetings with external organisations, giving details of meetings up to June 2012. The current chief executive and permanent secretary of HMRC, Lin Homer has recently met with a number of external organisations and has commented (amongst other things) on a commitment to the working together initiative, the desire to reinforce HMRC's involvement in the policy making process and on the dividing line between acceptable and unacceptable tax avoidance.

   www.hmrc.gov.uk/transparency/perm-sec-meet-ext-org.htm

   1.2. The tax gap

   HMRC has published its latest findings on the 'tax gap', covering the tax years to 2010/11. The overall tax gap in 2010/11 is estimated to be £32 billion which is 6.7 % of tax liabilities. The overall tax gap time series, 2004/05 to 2010/11, has been revised down substantially following significant changes to the VAT gap estimates.

   The tax gap is defined as the difference between tax collected and the tax that should be collected (the theoretical liability). The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC's interpretation of the intention of Parliament in setting law (referred to as the spirit of the law). The tax gap estimate is net of the Department's compliance activities.

   An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attacks.

   www.hmrc.gov.uk/stats/mtg-2012.pdf

   1.3. FSA proposals on unregulated collective investments schemes and the impact on EIS and VCT markets

   The FSA has issued a consultation on tightening up the regulation on sales of unregulated collective investment schemes. The proposals are to ban the promotion of unregulated collective investment schemes (UCIS) and close substitutes to ordinary retail investors in the UK. Although not specifically referred to in the consultation document (issued in August 2012 and open for comment until 14 November 2012) it is thought that certain VCT and EIS investments might be caught within UCIS and so will become a class of investment that can only be marketed to:

   customers certified as sophisticated investors; customers self-certified as sophisticated investors; and customers who meet the criteria to be regarded as high net worth individuals. It is understood that VCTs, as listed companies, will fall under the non-mainstream pooled investments rules and the FSA's UCIS guidance unless they are investment trusts. VCTs that primarily invest in listed shares will fall outside the rules, while those investing in unlisted shares might be caught, depending on how the VCT is structured. Similarly the underlying investments of an EIS will partly determine whether it is deemed UCIS or not, again how the fund is structured will be an important criterion. If portfolios of EIS investments are structured as collective investments schemes, these will be caught by the UCIS rules.

   www.fsa.gov.uk/library/policy/cp/2012/12-19.shtml

   www.investmentweek.co.uk/investment-week/news/2207265/vcts-face-fundraising-squeeze-of-up-to-75-research-warns

   http://citywire.co.uk/new-model-adviser/eis-providers-lobby-fsa-amid-fears-over-ucis-sales-ban/a595328

   1.4. Launch of Gov.uk website, initially replacing Business Link and Directgov websites

   Gov.uk launched 18 October, initially replacing Business Link and Directgov. This is the first step towards making Gov.uk the definitive website for interacting with central government.

   In the meantime, HMRC's website is still available as a primary source of online support and it's important to note that there will be no immediate changes to HMRC's online services such as Self Assessment Online and PAYE Online.

   www.gov.uk/

2. PRIVATE CLIENTS

   2.1. CGT entrepreneurs' relief – sale of business asset or part of a business.

   The First-tier Tribunal has recently heard a case concerning a claim to entrepreneurs' relief on the sale of land, farmed in partnership (William S G Russell-TC02299).

   Mr Russell and his two brothers each owned an equal share of farmland that had been bequeathed to them by their mother in 1993. In 2008/2009 it was being farmed in partnership by Mr Russell, his brother and his sister-in-law.

   The partners disposed of about 35% of the land suitable for cropping (6.72 acres), but continued to farm the remainder. Mr Russell claimed entrepreneurs' relief on his share of the disposal.

   The partnership profits in the five years to 05/04/11 were as follows:

   Year to 5/04/07 £2,796 Year to 5/04/08 £2,895 Year to 5/04/09 £2,175 Year to 5/04/10 £1,902 Year to 5/04/11 £1,740 An agricultural contractor worked the land on behalf of the partnership. The only source of income was the sale of barley. The only asset of the farming partnership was the land itself.

   Mr Russell gave evidence that the primary reason he and his brothers had retained the land was because of its potential for development. He had been trying for years to get various planning permissions. The land that had been sold had been sold for development.

   Mr Russell was explicitly asked whether what the partnership did in connection with the farm business had changed at all after the sale of the land. He said that the only difference was that they had lost a field and as there was less barley the profits went down.

   The primary argument for Mr Russell was that the land that was sold represented a material disposal of a business asset particularly because the fall in profit correlated with the percentage of land sold. The land was the only asset of the business that generated income so therefore the sale had a material impact on the profit earning capacity of the business.

   HMRC argued that no entrepreneurs' relief was due because the disposal was a part disposal of an asset used for the purposes of the Appellant's business, it was not a disposal of part of the business.

   Both parties relied on the following excerpt from the judgement of Fox J in McGregor v Adcock:

   "In my view, there is a clear distinction between the business and the individual assets used in the business. Prima facie, therefore, it seems to me wrong to assert that the mere sale of the farmland is a disposal of part of a farm business. The true position, I think, is that the sale is merely a factor which the court has to consider in deciding whether there has been such a disposal. There are cases in which it may be the determining factor. Thus if a man is farming 200 acres and sells off 190 acres, it may very well be that the nature and extent of the man's activities after the sale would be so wholly different from what they were before the sale that the inevitable conclusion would be that there had been a disposal of part or even the whole of the business".

   HMRC referred the Tribunal to Barrett v Powell where Lightman J quoted with approval from the judgement of Peter Gibson J in Atkinson v Dancer, Mannion v Johnston to the following effect:-

   "... the fact that a farmer sells some land alone which he has been using for a farming business prima facie will not amount to the sale of his farming business or any part thereof because it is only the sale of a chargeable business asset and not in itself the sale of the business or any part of it, this notwithstanding that it will be virtually inevitable that the sale of land on which the business has been conducted will reduce the activity of the farmer and probably his profits."

   The tribunal dismissed the appeal on the basis that there was simply a sale of a business asset and not a sale of part of a business.

   http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02299.html

3. PAYE AND EMPLOYMENT MATTERS

   3.1. Applications for refunds of National Insurance contributions paid in error

   The Social Security (Categorisation of Earners) Regulations 1978 (the Regulations) made provision for treating lecturers, teachers, instructors or those in a similar capacity in traditional educational establishments, such as schools, colleges or...