UK Tax Roundup – June 2022 | Proskauer Rose LLP

Welcome to the June edition of the UK Tax Round Up. This month’s edition features a summary of HMRC’s recent guidance on QAHCs and loan funds, the publication of the new UK-Luxembourg double taxation agreement and the delay in the UK’s implementation of the OECD-related Pillar Two rules on global minimum taxation, as well as a interesting case on whether “disclosure of whitespace” was a defense against a tax official’s negligence.

Developments in UK case law

Disclosure of whitespace is not a defense for tax official negligence

in the Johnson and others v HMRCthe first-tier tribunal (FTT) examined whether a tax return had been prepared carelessly despite disclosure of spaces in the return.

The complainants had entered into a swap deal with a bank in 2007 and were subsequently awarded compensation by the bank after the FCA verified the nature of the interest rate hedging product they had entered into. The first applicants received a letter from the bank detailing the amount of compensation payable to both applicants and information on the gross interest and the amount of tax deducted therefrom, together with a statement that the balance of the payment was to be on the applicants’ tax returns reported. The swaps concerned a loan or loans taken out by the applicants to purchase property in their own name that they had rented out.

The applicants’ tax advisor, Mayfield & Co, did not include the payment from the bank as taxable income on the applicants’ tax returns. Instead, Mayfield included a white space disclosure saying that “during the year a compensation payment of £43,218 was received from the bank in relation to interest rate hedging products which is not considered to be taxable”. HMRC, following extensive correspondence between HMRC and Mayfield, collected assessments of complainants for the 2013/2014 tax year after the standard 12 month inquiry window. The assessments were made on the basis that Mayfield, representing the applicants, had been negligent in preparing the tax returns and that the loss of tax arose from the negligence. Section 118 TMA 1970 provides that a tax loss is negligently caused when the taxpayer (or the taxpayer’s representative) “fails to exercise reasonable care to avoid causing it”. [the loss of tax]“.

HMRC argued that the complainants’ representative had been negligent in filing the declarations, as clear guidance had been published on HMRC’s website stating that compensation payments were taxable where the taxpayer claimed a operating deduction for the payments under the Swaps asserted. Mr Green, a senior tax manager employed by Mayfield, admitted that he was unsure of the tax treatment of the indemnity payment at the time the declarations were made, although he accepted that HMRC’s guidance was readily available and that he had actually read it had it. However, Mr Green said that he believed the payment related to compensation paid to the applicants in their personal capacity and therefore felt it was unlikely to be taxable as it did not relate to a conduct business from them. Mr Green argued that the inclusion of the disclosure of spaces meant that neither he nor Mayfield were negligent and that HMRC should have asked for the return in the standard inquiry window. He explained that the tax loss was caused by HMRC’s failure to investigate the declarations in a timely manner and not by his or Mayfield’s negligence.

In determining whether Mr Green acted reasonably (or negligently), the FTT said the test to be applied was a comparison of Mr Green’s actions with the actions of a reasonably competent tax advisor. The FTT concluded that a reasonably competent tax adviser would have considered more carefully whether HMRC’s guidance applied to the complainants’ circumstances. HMRC acknowledged that an agent who reads HMRC’s guidance but subsequently takes a different and respectable view on his merits is not negligent. However, in the circumstances of this case, the FTT found that Mr Green had failed to establish basic facts in relation to the compensation payment in question and that this demonstrated a lack of reasonable care which caused the loss of tax. The FTT found that if Mr Green had made a careful analysis of the Compensation Payment and the Complainants’ circumstances, the Complainants’ tax returns would have included the payment as taxable income, as Mr Green would have concluded that the Swaps for that purpose of the applicants’ real estate rental business and that they claimed deductions from their rental income for their payments under the swaps. Mr Green argued that the inclusion of the disclosure was sufficiently detailed to comply with HMRC’s Statement of Practice SP 1/06 as HMRC had been provided with sufficient detail to recognize within the inquiry period that the self-assessment is insufficient. However, the FTT noted that this argument does not constitute a defense against negligence, which effectively constitutes strict liability for taxpayers (and their representatives).

This case underscores the importance of taxpayers and their advisers alike having due regard to the expected tax consequences of payments, any published HMRC guidance that may be relevant to those consequences and ensuring that any disclosure of whitespace is sufficiently detailed to explain the considered and respectable basis on which a taxpayer may have taken a position contrary to relevant HMRC guidance. Furthermore, simply referring to a matter in a whitespace disclosure is not sufficient to shift responsibility for investigations to HMRC where the tax return and disclosure were prepared without due diligence.

Other tax developments in the UK

HMRC provides useful guidance on Corporate Lending Vehicles and QAHCs

On 6 June HMRC updated its guidance in relation to the new UK tax regime for qualifying asset holding companies (QAHC), which was introduced on 1 April this year to cover companies acting as vehicles for corporate credit (e.g. from loan funds) be used.

One of the requirements for a company to qualify as a QAHC is that the company engages in an investment business and that any other (e.g. trading) activity is only ancillary to that investment business and is not exercised on a significant scale . Since the rules were published, concern has been raised that companies that have made loans (either by originating or acquiring existing debt) and that receive associated fees may be treated as trading activities and therefore may not qualify as QAHCs.

The new guidance clarifies HMRC’s approach to whether corporate lending vehicles used by loan funds should be treated as the pursuit of an investment activity and whether any other activity, such as receiving fees or disposing of acquired debt, could be treated as trading, which was not the case alongside the main investment activity of the company. The updated guidance confirms that in the context of loan funds, lending per se is not indicative of a business and that where loan originators receive standard fees as part of their lending activity, the fee income is likely to be considered part of the investing activity. There’s a similarly helpful clue to companies that acquire debt to hold it to maturity, but then may sell it on a speculative basis.

While the guidance states that facts and circumstances must be taken into account in all cases, the updated guidance provides a welcome clarification of HMRC’s interpretation of how the QAHC legislation applies to loan fund established loan/debt acquisition firms, which should provide a high level Convenience for loan fund wealth managers considering using QAHCs in their fund structures.

For more information on the updated guidance, visit our Tax Talk Blogs here and the updated guide here.

The UK is delaying the implementation of the global minimum tax rate under the second pillar

The UK Treasury confirmed on June 14 that it would delay the introduction of the global minimum corporate tax rate of 15% under the OECD’s digital taxation (Pillar 2) proposals after talks failed to advance at OECD level.

in one Letter It was confirmed by the Treasury Secretary that the rule would initially apply to accounting periods beginning on or after 31 December 2023, rather than April 2023 as originally proposed. In the letter, the Treasury Secretary noted that respondents had concerns about the implementation of the rules in United Kingdom before other countries, as this would likely put British companies at a competitive and administrative disadvantage. This delay will be welcomed by many as previous responses to consultations had made it clear that the complexity of the rules would require sufficient lead time for the new regime to be properly implemented.

The draft law implementing the rules is expected to be published later this year, although the actual date and terms of implementation may still depend on progress being made on the rules at OECD level.

HMRC publishes new double taxation agreement between the UK and Luxembourg

A new Double tax treaty Great Britain/Luxembourg was signed on June 7th and will replace the existing treaty once ratified by both countries.

Whilst the changes are mainly intended to bring the agreement in line with the OECD model (including the changes made under the BEPS-related multilateral instrument), the new agreement also includes significant changes for UK property investors with Luxembourg holding structures. Under the current agreement, the UK cannot tax capital gains of Luxembourg residents. The new agreement changes this and allows the UK to tax gains accruing to a Luxembourg resident where the gain arises from the sale of shares or similar shares which are at least 50% of their value derived from UK property (although domestic UK regulations require this for any company that derives at least 75% of its value from UK property).

In addition, under the new agreement, investors in investment funds will no longer have to submit individual applications for withholding tax reductions on interest and dividends (note that no withholding tax is currently levied on Luxembourg interest payments). Alternatively, such claims may be made directly by an authorized representative of the Fund on behalf of the investors. Further details on the practical aspects of these agreements are subject to confirmation by both the UK and Luxembourg tax authorities.

[View source.]

About Nina Snider

Check Also

Is a commercialized British military helping China too much? – Palatinate

Through Hannah Redman The latest iteration of the Chinese Communist Party’s plans to undermine critical …