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Speakers
- Francesca Lagerberg, Grant Thornton
- Chris Whitehouse, barrister
- Peter Rayney, Peter Rayney Tax Consulting
- Richard Mannion, Smith & Williamson
- Tim Good, Professional Training Partnership
- Gerry Hart, lecturer
- Andrew Meeson, Tudor Capital Management
Dates: 8 April to 10 April
Entrepreneurs’ relief
Francesca Lagerberg considered the problem of ensuring that the 5% ownership test is met when giving employees shares in the company they work for, so that capital gains qualify for entrepreneurs’ relief.
In principle, if the employees are grouped together in a special holding company, which holds at least 10% of the trading company, then provided the employees each own at least 5% of the holding company the joint venture provisions at TCGA 1992, s 165A(7) should allow the relief to be claimed.
She stressed that there were a number of issues in creating such a structure, and this approach should be pursued with caution.
LLPs and entrepreneurs’ relief
Francesca also pointed out that the lack of any 5% holding requirement in limited liability partnerships (LLPs) means that the prospects of moving to such structures could be ‘interesting’.
In principle, entrepreneurs’ relief should be available whatever the level of capital interest in the LLP.
However, this has yet to be tested in the courts.
EIS more attractive
Francesca considered that the increase in the top rate of capital gains tax to 28% should make enterprise investment scheme (EIS) investments more attractive again.
The combination of 20% income tax relief plus 28% capital gains tax relief gives a total of 48%, which is significantly in excess of the 30% offered by investment into a venture capital trust (VCT).
Home loan schemes
Chris Whitehouse highlighted the change of opinion in HMRC about the validity of home loan schemes to reduce inheritance tax.
They had previously accepted that schemes ‘worked’ provided the debt was not repayable on demand and the donor survived for seven years from the gift of the debt.
They now contend that even if the debt is not repayable on demand the trustees have a lien over the property such as to create an ‘incumbrance’ for FA 1986, s 103, as well as the scheme as a whole being caught either by the Ramsay principle or by associated operations.
A test case is expected.
Debt/equity swaps
Peter Rayney, looking at debt/equity swaps, pointed out that in some cases the result would be that the lending company would acquire control of the borrower.
The borrowing company therefore had to consider the effect of this on issues such as tax group reliefs, degrouping charges, and the ability to carry forward tax losses after a change of ownership.
Hive down
Peter warned that one of the conditions for a successful hive-down of a distressed business was that the subsidiary should carry on the trade for a suitable period after the hive down while it was still under the control of the transferor holding company.
He suggested a period of at least a month, with a profit and loss account being prepared for the period.
Holiday letting losses
In a lecture on furnished holiday lettings, Richard Mannion commented on the introduction (in 2007/08) of the requirement for a ten hour a week minimum level of work in a loss-making trade before a claim for sideways loss relief of more than £25,000 could be made.
He said that initially there was uncertainty within the profession whether this could apply to furnished holiday lettings, because they were only a deemed trade, not an actual one.
However, he said that in 2010 HMRC had confirmed that in their view the cap certainly did apply. Note that sideways FHL loss relief is abolished entirely from April 2011.
Capital allowances on FHL
Despite the HMRC manual saying that ‘there are no capital allowances for the cost of the property itself’, Richard pointed out that the furnished holiday lettings business was a deemed trade, and therefore allowances could be claimed as for an ordinary trade (but see the next point).
This meant that it was possible to claim fixtures and fittings embedded in the property if the furnished holiday lettings requirements were met.
However, he pointed out that the capital allowance rules were themselves subtly different before and after 5 April 2008.
Dwelling house
Capital allowances are not generally available on plant and machinery in a dwelling house. As of 22 October 2010, HMRC changed the wording of CA11520, moving ‘accommodation used for holiday letting’ into the definition of properties which were a dwelling house, where previously it had been listed as a property which was not a dwelling house.
Richard said the CIOT had been asking for clarification on the implications of the change, but had yet to receive an answer.
Short life assets
Speaking about the Finance Bill 2011, Tim Good reminded delegates that any asset could initially be depooled and treated as a short-life asset.
What the new proposals would do is to raise the time limit for when any undisposed-of assets had to be returned to the pool from four to eight years.
The result will be a greater similarity between the capital allowances treatment of such assets and the economic depreciation charged in the accounts.
However, cars are not permitted to be treated as short-life assets.
Charitable relief
Looking at the reduced rate of inheritance tax if 10% of a deceased’s net estate was left to charity, Tim said that the figures did not look particularly attractive.
A net estate of a million pounds left £600,000 for beneficiaries after 40% tax. If £100,000 is given to a charity and the 36% rate applied to the rest, the result is that only £576,000 is available for beneficiaries.
Good practice
Andrew Hubbard asked what constituted good practice, and how could we improve our dealings with HMRC.
Looking at the complexity of some tax calculations submitted to HMRC, he asked whether they wanted so much detail and concluded that they probably did not.
He also wondered whether the ubiquitous use of tax software was at least partially responsible for the provision of very detailed computations to HMRC, since it made them so easy to produce.
White space disclosure
Andrew was doubtful whether a disclosure in the white space was often going to be sufficient to prevent the inspector making a discovery assessment.
The only situation in which he thought it was likely to do so was if it clearly declared that a different view had been taken from HMRC stated practice, and that to do so was to invite an enquiry.
There are still situations where a white space disclosure is merited, in Andrew’s view, but it should always be done for a particular reason, not as an unthinking habitual practice.
Annual investment allowance
Gerry Hart looked at the complexities which can arise in claiming annual investment allowance when two businesses have to share the limit but have different chargeable periods.
The maximum any business can claim is reduced (but not below nil) by any amounts allocated to a business with the same or later ending chargeable period.
Preliminary expenditure
Gerry highlighted the part of the decision in J D Wetherspoon v HMRC [2009] UKFTT 374 (TC), TC00312, relating to preliminary expenditure.
He said that HMRC had been challenging a pro-rata allocation of preliminary costs for many years, believing that it overstated the amount relevant to plant and machinery.
The tribunal held that ‘a global apportionment which accords with commercial practice will normally be appropriate’.
Pension input periods
Andrew Meeson looked at the implication of pension input periods (PIPs). Unless otherwise amended, the first PIP started on 6 April 2006 and ended on the anniversary of that date, 6 April 2007.
The result was that there was no input ‘for’ 2006/07 since there is no PIP ending in that year. PIPs could be altered retrospectively up to 6 April 2011, but can now only be altered prospectively.
While the annual allowance was increasing year on year, or at worst remaining static, this was not a problem; from 6 April 2011 this may be more of an issue.
Corporate partners
There has been increasing interest in introducing a limited company into a partnership as a partner to siphon off retained profits which would otherwise be taxed at 52%.
Richard Mannion said this could lead to ‘interesting discussions’ about how each partner would access their share on retirement.
While it would be possible for each partner to form their own company which became a limited partner, there was anti-avoidance legislation in this area which needed to be carefully considered.
This included the rules for transfers of an income stream, sales of occupation income, and the settlements legislation.
Goodwill
In the Balloon Promotions case ([2006] SSCD 167 (Sp C 524)), the Special Commissioner cautioned against an over-analytical approach to goodwill, and in particular criticised HMRC’s ‘zoological definition’ which categorised the goodwill arising from different types of customers described as cats, dogs, rabbits and rats.
Following the case, said Richard, HMRC were increasingly arguing that what had been disposed of was not actually goodwill at all.
Partnership disputes
When there are disputes about the allocation of profits to retiring partners, until recently HMRC took the view that they would only deal with the nominated partner of the partnership about the computation of its tax liability.
The case of Raymond John Philips v HMRC, following closely on the heels of the Graham Morgan and Heather Self case contradicted that view.
Richard said the partnership specialists at HMRC were understood to be reviewing the existing guidance, and would in future allow partners to show a deduction of the disputed amount in their personal tax return, provided they also gave a full explanation of their reasons for disputing it in the white space on the return.
Surely income tax relief on EIS is 30% now, not 20%? So the total is 58% including CGT deferral, as against 30% in a VCT?