Weekly Tax Update - Monday 3 September 2012

1. General news

   1.1. SDLT on purchase of a chargeable interest by joint purchasers using a bare trustee

   The Pollen Estates Trustee Company Ltd (PETCL) and Kings College London (KCL) was a case concerning an appeal against decisions made by HMRC where charities relief was denied in respect of the portion of a joint interest purchased by a charity via a bare trustee acting for the whole purchase.

   PETCL had previously appealed to the First-tier Tax Tribunal (FTT) against the decision made by HMRC in its Closure Notice dated 16 February 2010 issued under paragraph 23 of schedule 10 to the Finance Act 2003 following the enquiries HMRC had made into the land transaction returns made by PETCL in respect of the acquisition of four properties in London. The FTT decision was to refuse PETCL's claim for repayment of a proportion of the SDLT which PETCL had already paid in respect of these acquisitions. The basis of the claim for repayment was that as PETCL was acting as bare trustee for the beneficiaries of The Pollen Estate Trust ("The Pollen Estate") in making those acquisitions and since two of those beneficiaries were UK registered charities, partial relief should be allowed under schedule 8 to the FA 2003 in respect of the 74.33% proportion of the properties attributable to those charitable beneficiaries.

   PETCL had also claimed that since one of the beneficiaries was Greenwich Hospital, whose assets were held by the Secretary of State for Defence in his capacity as trustee for the Queen holding all the land and property for the exclusive benefit of Greenwich Hospital, then the Minister of the Crown exemption should apply under section 107 of the FA 2003 in respect of the proportion of the properties attributable to Greenwich Hospital.

   HMRC had refused the claim as their view was that relief from SDLT is only available in the case of joint purchasers where all of the joint purchasers are entitled to the relief; their view was that by virtue of paragraph 3(1) to schedule 16 to the FA 2003 where a land transaction involves a number of persons acquiring a property through a bare trust the purchasers are treated as joint purchasers and the transaction is taxed as a single land transaction.

   The second appellant KCL had also appealed to the FTT against the decision made by HMRC in its Closure Notice dated 28 September 2006 following enquiries HMRC had made into the land transaction return made by KCL in respect of the acquisition that a Professor Trembath, one of KCL's senior academic employees, had made of a property in London. The FTT decision was to refuse KCL's claim for charities' relief on a portion of the purchase price of the property. The basis of the claim for relief was that as Professor Trembath was acting as bare trustee for himself and KCL in making that acquisition and KCL was a UK registered charity, partial relief should be allowed under schedule 8 to the FA 2003 in respect of the 46.3% proportion of the property attributable to KCL. HMRC refused the claim on the basis of arguments similar to those made in respect of PETCL's appeal, as described above.

   Both cases were then considered at the Upper Tier Tribunal, who could find no or little policy rationale for treating the acquisition of an existing undivided share by a charity differently compared to the acquisition of an undivided share as a result of a joint purchase between a charity and a non-charity, and considered the issues as if there was no such policy. The judges agreed with HMRC that the charity relief required the purchaser to be a charity, and as the acquisition by a bare trustee for the joint purchasers was regarded as a single land transaction, the charity exemption could not be met.

   www.bailii.org/uk/cases/UKUT/TCC/2012/277.html

   1.2. Discovery assessments and time limits

   Two cases have been heard at the First-tier Tribunal concerning HMRC's ability to raise discovery assessments. In both cases the discovery assessments were upheld. A further recent case questioning the ability of HMRC to raise a discovery assessment, again with HMRC's view upheld by the Tribunal is covered at 5.9 below.

   Christopher Johnson and the ability to offset losses against general income

   This case concerned an individual who had bought a yacht for personal use and boat chartering and sought to offset losses arising in this business from capital allowance claims against his other employment income from Jupiter International Group. The loss offset claims which were subject to discovery assessment were made for the years ended 5 April 2004 to 5 April 2006 and were made on 24 March 2010.

   The issue as to whether the loss from the yacht business could be offset turned on whether the business was one of provision of services or leasing of plant or machinery. In the latter case, the loss offset would have been restricted as a result of what was ICTA s384(6) and is now ITA s79(1), where the individual does not devote substantially the whole of his time to the business. The Tribunal determined that the business was one of provision of plant or machinery rather than services, so the losses relating to capital allowances were not available for offset.

   Concerning the discovery point, the Tribunal determined the taxpayer had not been negligent in filing his returns on the basis that relief was due. However they also determined the HMRC officer could not reasonably have been expected to be aware of the under-assessment until the enquiry was opened and the taxpayer provided further information about the boat chartering business on 22 September 2008 in response to an enquiry raised in relation to his 2006/07 return. The time limit for raising discovery assessments at the time was five years and 10 months after the end of the tax year (the ordinary time limit then in operation by virtue of TMA s34), so that the assessment for 2003/04 was dismissed, while those for 2004/05 and 2005/06 were upheld.

   www.bailii.org/uk/cases/UKFTT/TC/2012/TC02094.html

   Matthew and Daniel Brown and the validity of discovery assessments in respect of gains that should have been declared as income

   In this case two shareholder directors submitted their self-assessment returns (through an agent) for 2007/08 on the basis that share purchases by their company resulted in capital gains rather than income distributions. It was accepted that they should have been declared as distributions and therefore subject to income tax. The enquiry window for this year closed on 31 January 2010.HMRC only started to enquire into the return on 17 September 2010 and discovery assessments were raised in May 2011.

   On behalf of the taxpayers the argument was put forward that a reasonable inspector should have inferred that the purchases from the directors were made by the company, though the personal tax returns did not identify the purchaser. It was also contended that the inspector should been expected to liaise with the inspector dealing with the company's corporation tax return and should have reviewed the company accounts.

   These arguments were rejected by the Tribunal. Without any finding of fact regarding careless or negligent behaviour the time limit for raising these assessments was four years after the end of the year of assessment (by virtue of the updated TMA s34) and so the assessments were upheld

   www.bailii.org/uk/cases/UKFTT/TC/2012/TC02107.html

   1.3. HMRC agent update

   The latest HMRC agent update can be found at the following link. Amongst other things it covers:

   Gift aid small donations relief. Penalties factsheet. Tax adviser authorisation for compliance checks. Contractual schemes for collective investments. National minimum wage rates from 1 October 2012. RTI - customer migration - legal direction. Scope of RTI pilot. Business investment relief. Direct selling campaign. Providing information about new limited companies. Latest consultations. www.hmrc.gov.uk/agents/update31.pdf

   1.4. Pilot of 'agent view'

   HMRC recognises the concerns raised by agents in response to last year's consultation - 'Establishing the future relationship between the tax agent community and HMRC' about proposals for an 'agent view' (bringing information together on agents and their clients) and...