2020 INNOVATION Monthly Tax Update Webinar 20 April 2015...Apr 20, 2015 · 2020 Monthly Tax Update Webinar – April 2015 Page 4 1. NEW LEGISLATION 1.1 Finance Act 2015 Enacted The

2020 Monthly Tax Update Webinar – April 2015 Page 1

2020 INNOVATION

Monthly Tax Update Webinar

20 April 2015

Martyn Ingles FCA CTA

Ingles Tax and Training Ltd


2020 – Monthly Tax Update Webinar – April 2015

1. NEW LEGISLATION ....................................................................................................... 4

1.1 Finance Act 2015 Enacted...................................................................................... 4 1.2 Changes to CASC scheme in April 2015 ................................................................. 4

1.2.1 Open to the whole community .......................................................................... 4 1.2.2 Organised on an amateur basis ........................................................................ 5 1.2.3 Payments to players ......................................................................................... 5 1.2.4 Provide facilities for or promote participation in an eligible sport ....................... 6 1.2.5 The income condition ....................................................................................... 6 1.2.6 The management condition .............................................................................. 6 1.2.7 The location condition....................................................................................... 6 1.2.8 The benefits of becoming a CASC.................................................................... 6 1.2.9 Trading income exemption ............................................................................... 7

2. TAX CASES AND OTHER DEVELOPMENTS ............................................................... 8

2.1 Disposal of Main Residence or Trading? ................................................................. 8 2.2 Property Development - Investment or Trading? ..................................................... 9 2.3 Dividends or Remuneration? Was PAYE due? ...................................................... 10 2.4 Farming Losses – Any Sideways Loss Relief? ...................................................... 10 2.5 Confirmation Of Income For Mortgage Purposes ................................................... 11 2.6 HMRC Guidance on New Reporting by Employment Intermediaries ..................... 11

2.6.1 Implications for Personal service companies .................................................. 12 2.6.2 How to send reports to HMRC ....................................................................... 12 2.6.3 Penalties ....................................................................................................... 12 2.6.4 Information that should be included in the report ........................................... 13 2.6.5 Worker details ............................................................................................... 13 2.6.6 Engagement and payment details .................................................................. 13 2.6.7 What This Means For A Worker ..................................................................... 14

2.7 Revised SP D12 – Partnership CGT ...................................................................... 14 1. Valuation of a partner’s share in a partnership asset ............................................. 15 2. Disposals of assets by a partnership ..................................................................... 15 3. Partnership assets divided in kind among the partners .......................................... 16 4. Changes in partnership sharing ratios ................................................................... 17 5. Contribution of an asset to a partnership ............................................................... 20 6. Adjustment through the accounts .......................................................................... 21 7. Payments outside the accounts ............................................................................. 21 8. Transfers between persons not at arm’s length ..................................................... 21 9. Annuities provided by partnerships ........................................................................ 23 10. Mergers ............................................................................................................. 24 11. Shares acquired in stages .................................................................................. 24 12. Pooling Elections under TCGA92 Sch2 Para4 ................................................... 24 13. Partnership goodwill ........................................................................................... 25 14. Entrepreneurs' relief and “roll-over” relief on transfer of a business .................... 25

3. MANIFESTO TAX POLICIES OF THE MAJOR PARTIES ........................................ 26

3.1 Conservative Party Tax Policies ............................................................................ 26 3.2 Labour Tax Policies ............................................................................................... 26 3.3 Liberal Democrat Tax Policies .............................................................................. 26 3.4 UKIP Tax Policies .................................................................................................. 27 3.5 Green Party Tax Policies ....................................................................................... 27


2020 MONTHLY PRACTICAL TAX UPDATE WEBINAR – APRIL 2015

Despite being an Election year the Finance Bill issued on 24th March and enacted on 26th March 2015 contained 127 sections and 20 Schedules! With such limited time for scrutiny by Parliament there may well be a number of drafting errors that greater scrutiny may have eradicated. Note however that many of the Finance Bill clauses were issued for consideration on 10 December 2014 just after the Autumn Statement. Note also that many of the announcements in the Budget on 18 March 2015 were not included in the first Finance Act of 2015 and may either be included in future Finance Acts, or not at all depending upon the outcome of the General Election on 7 May 2015. Depending on the outcome of the Election there may well be a further Budget after the Election, and who knows, if no party gets a working majority, we could find that there is a second General Election and maybe yet another Budget later in the year. As in previous webinars the material for the content of these webinars will be drawn from:

New legislation, in draft and enacted

HMRC practice and guidelines

Recent tax cases and Tribunal decisions

New thinking and forward planning

And this month the Election Manifestos of the main political parties


1. NEW LEGISLATION

1.1 Finance Act 2015 Enacted

The Finance Bill issued on 24rd March and enacted on 26th March 2015 contained 127 sections and 20 Schedules and many of the clauses issue for consultation on 10 December 2014 found their way into the legislation that was enacted. The very controversial “diverted profits tax” and country by country reporting targeting multinational companies took up 40 sections and 2 Schedules. A number of measures did not go ahead in the first Finance Act and may reappear in a future act. Notable exclusions were the new powers for direct recovery of debts from taxpayers bank accounts and the proposed change to exempt “trivial” benefits in kind. The latter was intended to provide an exemption from income tax for qualifying trivial benefits in kind (BiKs) where the cost of providing the BiK does not exceed £50. The trivial BiKs exemption was intended to replace a concessionary practice, whereby an employer is required to agree with HMRC whether a BiK can be treated as trivial and therefore not chargeable to income tax or liable for National Insurance contributions (NICs). Following technical consultation an amendment was made to set an annual cap of £300 for office holders of close companies and employees who are family members of those office holders.

1.2 Changes to CASC scheme in April 2015

New legislation introduced a number of changes to the Community Amateur Sports Club (CASC) scheme with effect from April 2015. There was also an increase in the tax exemptions for property and trading income. Note that if a sports club is registered as a CASC then the club is treated in a similar way to a charity with various tax exemptions, and individuals and companies are able to obtain tax relief for their donations. HMRC have issued new guidance which explains what these changes mean for clubs in relation to:

increases in exemptions

the new income limit condition

the requirement that CASCs have 50% participating members

travelling and subsistence expenses

payments to players

restrictions on the level of membership costs

To be registered as a CASC a sports club must:

be open to the whole community

be organised on an amateur basis

have as its main purpose the provision of facilities for, and the promotion of participation in, one or more eligible sports

not exceed the income limit

meet the management condition

meet the location condition

1.2.1 Open to the whole community

To be open to the whole community a club must:

have a membership that is open to all without discrimination

have facilities that are open to all members without discrimination

have fees that do not represent a significant obstacle to membership or use of its facilities

The term “membership” refers to the people the club recognises as having accepted the rights and liabilities as set out in its governing document. It's up to a club to set out in its governing documents the rights of the members. Usually clubs allow members to attend general meetings and decide resolutions by majority vote. However a club may accept juniors as members without a right to vote until they reach the age of 18.


This club would not be discriminating against juniors; membership is open to all even though juniors may have to wait until they are 18 to vote at AGMs. Clubs cannot restrict membership to only those prospective members who have already achieved a certain level of ability. The club should encourage participation in the sport at all levels and restrictions based on ability are not acceptable. For example, a golf club that restricts membership or access to facilities based on a prospective member's handicap certificate would not be suitable for CASC status. Any club that required prospective members to complete a “trial” to test their ability before accepting them as a member would also be discriminating and could not be a CASC. If a club charges any member more than £1,612 a year (£31 a week) for membership fees then it would not be considered open to the whole community. The club would not be eligible for CASC status even if they offered discounted or cheaper memberships to other members. If a club has costs associated with membership that are more than £520 a year then it will be required to make provisions for those who cannot afford to pay more than £520 a year. If no suitable arrangements are made then this club will not be able to be a CASC because it is not open to the whole community. There is also guidance on calculating other costs associated with membership such as the hire or purchase of equipment.

1.2.2 Organised on an amateur basis

A club is organised on an amateur basis if it:

is non-profit making

only provides the ordinary benefits of an amateur sports club for members and their guests

has a governing document that requires any net assets on the dissolution of the club to be applied for approved sporting or charitable purposes

HMRC considers all the facts to decide whether a club meets this requirement. For example, it would not be acceptable for a privately-owned club or business to draw up rules to meet this requirement. HMRC requires detailed evidence to show a club is run as a members' club whose rules require it to be non-profit making. The CASC scheme is not suitable for proprietary clubs and businesses. A club should only provide the ordinary benefits of an amateur sports club for members and their guests. These are:

the provision of sporting facilities

reasonable provision and maintenance of club-owned sports equipment

the provision of suitably qualified coaches

provision for reimbursement of the costs of coaching courses

insurance cover

the provision of medical treatment

the reimbursement of necessary and reasonable travel and/or subsistence expenses incurred by players, match officials, coaches, first aiders and accompanying individuals travelling to away matches

reasonable provision of post-match refreshments for players and match officials

the sale or supply of food or drink as a social benefit which arises incidentally from the sporting purposes of the club

The HMRC guidance sets out what would be acceptable activities on a club tour!

1.2.3 Payments to players

For HMRC to accept that a club is organised on an amateur basis they must not pay players more than £10,000 in a 12 month accounting period. There's no limit on the number of players that a club can pay for playing as long as the total amount paid to all players is less than £10,000 a year. To work out how much your club can pay players you must also include the value of any non-cash benefits. HMRC expects clubs to follow the benefits code to work out the value of any benefits they offer to paid players. The value of the benefit is worked out on the “cash equivalent” of the benefit – this is usually the cost to the club less any amount made good by the paid player. In some cases there could be a scale


charge (for example car benefits), so to work out the amount of the cash equivalent in each case you'll need to look at the instructions for that particular benefit. Payments to members for non-playing services do not count towards the £10,000 limit. Clubs may enter into agreements with members to supply goods or services to the club, or employ members. This means that clubs can pay members for work done on a self-employed basis, or as staff for the club, provided that the arrangements are the same as if the people doing the work were unrelated to the club. Examples would include catering services, bar work, coaching and ground work.

1.2.4 Provide facilities for or promote participation in an eligible sport

The main purpose of the club must be clearly stated in its governing document, or constitution, and must be to provide facilities for, and encourage participation in one or more eligible sports. Eligible sports are those on the list of recognised sports which is maintained by the National Sports Councils. To meet the main purpose test a club must ensure at least 50% of the members are “participating members”. To be a participating member they must participate in the sporting activities of the club on a number of occasions that is equal to or more than the club's participation threshold. The participation threshold is based on the number of weeks in the club's accounting period but there are reduced thresholds for members who join or leave a club at a time other than the start of an accounting period. HMRC guidance suggests that a member must participate at least 12 days a year to count towards this test.

1.2.5 The income condition

CASCs can earn up to £100,000 a year from non-member trading and property income, known as the “relevant threshold”. There's no limit on the amount of income clubs can generate from members (apart from property income from members which also counts towards the £100,000 cap). “Property Income” for purposes of this test means gross income* (or receipts) from a UK property business or an overseas property business. For example, this would include income received from renting out the club's grounds or clubhouse. If a CASC is considering setting up a trading subsidiary it should consider seeking professional accountancy and legal advice. You could also consider contacting your sport's governing body who may be able to provide further advice and assistance. If the club is already a registered CASC with high levels of non-member trading income and/or property income and you do not want to be deregistered you may want to consider setting up a trading subsidiary. Any income that is generated by a trading subsidiary will not count towards the club's income threshold. A trading subsidiary should be owned and controlled by the CASC. The trading subsidiary can trade but will not be entitled to any CASC reliefs.

1.2.6 The management condition

This condition for eligibility as a CASC was added by Finance Act 2010. The condition is met where a club's managers are fit and proper persons. “Club's managers” mean people who have the general control and management of the administration of the club. This might include committee members.

1.2.7 The location condition

The location condition for eligibility as a CASC was added by Finance Act 2010 to make it clear that the CASC scheme is open to qualifying sports clubs in other European Union member states and relevant territories.

1.2.8 The benefits of becoming a CASC

Registered Community Amateur Sports Clubs are entitled to certain tax reliefs:


exemption from Corporation Tax on UK trading profits if the turnover from that trade is less than £50,000 a year (£30,000 a year before 1 April 2015)

exemption from Corporation Tax on UK property income if the total income from property is less than £30,000 a year (£20,000 a year before 1 April 2015)

exemption from Corporation Tax on interest received

exemption from Corporation Tax on chargeable gains

To be eligible for these reliefs the club must use all of its income and gains for qualifying purposes. This means that you must use your money to promote participation and provide facilities for your eligible sport. If you do not use all of your income and gains for qualifying purposes then you may have to pay tax. CASCs also benefit from:

Gift Aid on qualifying donations

Gift Aid Small Donations payments on small cash donations

mandatory 80% charitable rate relief

other tax reliefs available to encourage individuals and companies to support CASCs

Note that there are no specific VAT reliefs for CASCs (unlike charities). CASCs are therefore not eligible for the charity VAT reliefs on purchases of goods and services.

1.2.9 Trading income exemption

Where a club is a CASC for all its accounting period and its turnover from trading isn't more than the limit of £50,000, the whole of the profit from that turnover is exempt provided it is applied for qualifying purposes. If the limit is exceeded there is no marginal relief available and the whole of the profit will be subject to Corporation Tax. Where a club is registered as a CASC for only part of its accounting period, the period for which it is registered is treated separately. The effect is that the club is treated as having 2 separate accounting periods, and the relevant limits and reliefs are correspondingly reduced. For income to benefit from the trading exemption it must be trading income. The supply of goods or services with a view to making a profit will amount to trading, and the profits will be liable to Corporation Tax as trading income. This is not normally the case where a members club makes supplies to its own members. So membership subscriptions paid to a CASC will not be trading income. Similarly, amounts paid by members to use facilities or for bar and catering are unlikely to be trading income.


2. TAX CASES AND OTHER DEVELOPMENTS

2.1 Disposal of Main Residence or Trading? Hartland v HMRC

(2014) UKFTT 1099

In determining whether or not the disposal of a property is a trading transaction the courts will consider a number of factors, in particular the intentions of the taxpayer. HM Revenue and Customs will often give the transaction more scrutiny where the taxpayer is in the building industry.

In this particular case Mr Hartland, who was self-employed, ran a plant hire business. In January 1996 he bought a property (“W”) for £70,000 and, after renovating it, sold it four years' later for £181,000. He then acquired a property (“P”) which he sold in July 2002 for £550,000. In September 2002 he purchased another property (“G”) for £170,000 which was sold in February 2004 for £625,000. In the meantime, in January 2004, he acquired a property (“N”) which was in a poor state of repair. While N was being rebuilt, Mr Hartland decided to buy another property (“C”). He did not make any references to the purchases and sales in his tax returns for the relevant years. HMRC issued a discovery assessment in respect of the tax year 2002/03 and an amendment to the appellant's return and self-assessment for the year 2002/03, on the basis that the various property transactions undertaken by him amounted to ventures in the nature of trade.

Mr Hartland appealed contending that because the two properties he sold during the years under appeal (P and G) were his homes, the profits he made on their disposal did not attract either income tax as the purchases and sales were not trading transactions, or capital gains tax (“CGT”) because of the exemption from tax of disposals of principal private residences under s222 TCGA1992; and it was for those reasons he had not referred to them in his tax returns. His evidence was that when he purchased P and G he had hoped his girlfriend would move into them as well, and when he demolished G and N he lived on site in a static caravan, and his girlfriend had moved into C (but he did not). The intention was to make N their family home, and the girlfriend finally agreed to move in with him there, whereupon he began refurbishment work on C. He said he had to sell N because of the continuing investigation into his tax affairs, and C was sold at a loss. HMRC submitted that the three properties (P, G and N) were all acquired and sold, or in the case of N taken into personal ownership, as part of a property development business; both P and G had been owned by the appellant for a very short period before he put them up for sale, with offers for sale made immediately or almost immediately after the works were completed, and while the properties were vacant; and that conclusion was reinforced by the financing of the properties as loans were made on a short-term basis and upon the assumption he would sell the properties very quickly on completion of the works.

In determining whether various property transactions undertaken by the appellant amounted to ventures in the nature of trade, the tribunal should not examine the “Badges of Trade” one by one, in part because they were of little real assistance in the present case. Rather, the correct approach was to stand back from the facts, relating not only to the two years of assessment but also to the periods before and after, and ask whether the picture they painted, viewed from a reasonable distance, was of a man making improvements to his home before selling it and moving on to repeat the exercise on the one hand; or of a person setting out to earn a living by buying run-down houses, or at least houses with development potential, then improving, extending or rebuilding them, in order to make a profit to be utilised in the next venture. What mattered was not the intention at acquisition, but what the person concerned did; and what the person did could not be considered in isolation if it was part of a course of conduct. It was also clear that the picture had to be considered objectively; thus although the intentions of the person concerned might be illuminating, they did not represent the test. Applying those principles, and bearing in mind that intention was not determinative, to the facts it was clear the appellant bought his first property, W, with the intention of making it his and, hopefully, his partner's home and the work he undertook there, extensive though it was, was undertaken for personal rather than for business reasons. Thus what the appellant intended in relation to that property was reflected in what he did as a matter of fact. In other words, such profit as he made on the disposal of W was neither a trading profit nor a chargeable gain, because of s222 TCGA 1992. In addition, the appellant acquired P with the intention of making that his home, as a step up the property ladder, and in the renewed hope that his partner would join him there. By contrast, the acquisition, demolition, rebuilding and sale of G were undertaken in the course of a property redevelopment trade. The appellant could not realistically have thought that G, when he bought it, was fit for family occupation even if he had not fully appreciated that the only practical course was to demolish and reconstruct it.


On the facts he sold it almost as soon as the works were complete and there were no evidence that he ever lived in it. The next question was whether, despite his intentions when he bought it, P ceased to be the appellant's principal private residence and became a business asset to be exploited by way of trade before he sold it. Although he undertook quite extensive works on it, P remained the appellant's principal private residence throughout his period of ownership and accordingly the profit, or gain, he made when it sold it was not chargeable to tax. Accordingly, the discovery assessment for 2002/03 had to be discharged because the sale of P did not result in a taxable profit or gain, but the amendment to the appellant's self-assessment for 2003/04 was properly made because his purchase, reconstruction and sale of G were carried out in the course of trade. The appeal would therefore be allowed in part.

2.2 Property Development - Investment or Trading? Terrace Hill (Berkeley) Ltd v

HMRC (2015) UKFTT 75

In another recent case considering whether a property disposal was on trading account or capital account Terrace Hill was a special purpose vehicle formed to hold a property development group's 50% beneficial interest in a development of an office property in Mayfair. Terrace Hill contended that the property concerned was held as an investment in order that on disposal capital losses (from a capital loss scheme) could be set off against the gain on disposal.

The issue for consideration by the First-tier Tribunal was whether it was true that when the property was acquired it was intended to retain it as an investment, subject to the reality that if circumstances changed radically, the property might have to be sold.

HMRC argued that Terrace Hill had always intended to sell its interest in the property once its maximum value had been achieved, in other words once the building had been completed and fully let. In evidence the chairman claimed to be pursuing a strategy of seeking to retain developments where rental growth looked highly promising, and trying to maximise the steady income of net rental profits, so as to diminish the fluctuating results and delays in realisation of profits in the development activity. His aim in particular was to retain the completed development of the property following completion and that was supported by the company’s contemporaneous records.

Further evidence was that the property was always treated as a capital asset for accounting purposes, and capital allowances were claimed and conceded by HMRC in relation to the plant and machinery component of costs.

The Tribunal said that in the case of a property development group the starting point would be to presume that properties were normally held on trading account. In order, thus, to distance a property purchase by a development group which generally or always realised its developed properties following completion, there would need to be a marked difference in approach that would distance a particular purchase from those normal trading expectations.

The chairman’s evidence that he regarded the property from the outset as a highly attractive asset, and he wanted to retain the completed investment because it would be a high quality office property in virtually the best street in the UK, and thus a property with great potential for rental growth. His policy of gradually building up good quality investment properties had been pursued. The accounting treatment confirmed that strategy.

The Tribunal also noted the financing of the development. Representations to bankers about an early sale were considered. If the appellant had been unable to raise long-term borrowings when repayment was due to the bank, it would have had to sell the property if demanded.

Based on the facts in this particular case the Tribunal made the “finely balanced” decision that this particular property was held as an investment and as such its disposal gave rise to a capital gain and the appeal would be allowed.


2.3 Dividends or Remuneration? Was PAYE due? Jones and another v HMRC

(2014) UKFTT 1082

Mr and Mrs Jones were directors of a recruitment consultancy business (“the company”). The company paid them interim and final dividends, together with modest monthly payments of directors' fees. The annual accounts for the year ended 31 March 2007 showed directors' salaries of £10,800 and dividends of £139,000. The first set of draft accounts for the year ended 31 March 2008, which had been produced by 9 May 2008, showed directors' salaries of £10,800 and an interim dividend of £138,000. By the summer of 2008 the company began to start feeling the effects of the global financial crisis and the appellants reduced the level of dividends by 50%.

The company factored its debtors with a company (“CI”), but in January 2009 CI withdrew the company's credit facility. Attempts to obtain alternative funding were unsuccessful. The appellants were advised to consult with an insolvency practitioner with a view to putting the company into liquidation. They were also advised that there were overdrawn directors' loan accounts and that the liquidator would seek repayment; and to treat the sums originally received by way of dividends as remuneration subject to PAYE and national insurance—which the parties described as a “reclassification”. The company's second set of draft accounts for the year ended 31 March 2008, produced in February 2009, showed dividends of £45,000 and directors' salaries and national insurance contributions of £213,178. The company went into insolvent liquidation in February 2009. HMRC concluded there had been a wilful failure to deduct tax and national insurance from the appellants' emoluments in the tax years 2007/08 and 2008/09 and that the appellants knew of that failure. HMRC therefore issued a direction notice to the appellants on the basis that Condition B in reg 72(4) of the Income Tax (Pay As You Earn) Regulations 2003, SI 2003/2682 (“the 2003 Regulations”) was satisfied. HMRC also sought to recover national insurance contributions from the appellants under reg 86(1)(ii) of the Social Security (Contributions) Regulations 2001, SI2001/1004.

The appellants appealed to the First-tier Tribunal contending that in reg 72(4) of the 2003 Regulations the knowledge of the employee had to be at the time the relevant payment was received by him—ie for Condition B to be satisfied, the employee had to know at the time payment was made that the employer had wilfully failed to deduct tax; and the conditions in both pieces of legislation did not fall to be considered retrospectively. HMRC argued that the time of payment for present purposes was when the dividends were reclassified as salary; and whilst the appellants were entitled to withdraw income from the company in the most tax efficient way, reg 72 and reg 86 would apply if there was a change of mind as to how payments should be classified.

In the present case the reclassification which occurred did not truly reflect the nature of the payments at the time they were made. The payments were clearly made as interim dividends and taxable as such rather than as salary. The directors could not retrospectively alter the nature of the payments simply by deciding to treat them differently. They could not transform what had previously been received as dividends into salary unless there had been some error or misunderstanding at the time of payment. On the basis that the dividends were lawfully paid, the so-called reclassification in January 2009 would have no effect. On the facts there was no obligation on the company to deduct PAYE or to pay national insurance, either at the time of payment or at the time of reclassification. If the dividends had been unlawful then the position would have been different. The appeal would accordingly be allowed.

2.4 Farming Losses – Any Sideways Loss Relief? French and anor v HMRC

(2014) UKFTT 940

In the 1998/99 tax year the first appellant, who ran a dairy farm in partnership with his wife (the second appellant), decided to abandon dairy farming in the light of falling milk prices. He sold his herd in 2000 and he let/licenced some of his land to a neighbouring farmer (“C”).

Between 2001 and 2004 the farming activity at the farm was conducted entirely by C; the appellants simply received a rental return. In 2004 the licence to C was terminated but C continued to farm the land on a contract basis and the appellants re-commenced their farming trade. The appellants' farm continued to make a loss until the tax year 2011/12 when it made a profit. The appellants sought to set farming losses


against other income in the 2010/11 tax year. HMRC challenged the sideways offset of losses under s67 ITA 2007, which introduced an objective test—designed to deal only with farming and market gardening trades—and provided that, subject to various exemptions, the additional reliefs for losses were denied for a loss if there had been losses, calculated without regard to capital allowances, in the previous five years. HMRC calculated that it had taken the appellants seven years (from 2004 to 2011) to conduct arable farming on the land, so as to end up “anticipating profit”; the first appellant was plainly competent, so the same seven-year period was taken to calculate how long a competent farmer would take to anticipate profits on conducting arable farming activities on the farm, which was Spring 2005. Therefore as the appellants were not anticipating profits until 2011/12—which was behind the notional competent farmer in achieving profits—they could not offset losses for any of those periods on and after 2005. HMRC accepted they could not make discovery assessments before the tax year 2008/09 so the challenge was made only for that and the following two years.

On the appellants' appeal to the First-tier Tribunal two issues arose for consideration

(i) whether the appellants actually ceased the trade of farming altogether between 2001 and 2004; and (ii) if there was no break in the farming trade, with the result that the appellants incurred farming losses for 13

years, how to apply the test in the second paragraph of s68(3) ITA 2007 in that situation.

On the facts, it was clear that there had been a break in the appellants' farming trade between 2001 and 2004. During that period no farm trade was conducted on any of the land and C was farming the land let to him, not the appellants. Once it was concluded that the farming losses in 2010/11 spanned back for only seven years and not 13, it followed that s68(3) did not preclude the sideways offset of the losses. That was because HMRC had already calculated the time that the notional competent farmer, commencing the arable farming trade in 2004, would have taken to anticipate profit by the period that it took the present competent appellant to anticipate profit (seven years in both cases) and so the appellants satisfied the tests in both paragraphs of s 68(3). The appeals would be allowed.

2.5 Confirmation Of Income For Mortgage Purposes

Many mortgage lenders now request a copy of the official HMRC tax calculation (SA302) as confirmation of income. As the result of lobbying from the accounting profession there has been a change of heart and

from January 2015, self-employed individuals with a self assessment online account, can provide proof of their income by downloading copies their Tax Calculation and their Tax Year Overview from the HMRC online service, which will be the evidence they need to support a mortgage application.

There is still a conflict between planning to minimise income for tax purposes and declaring a higher level

of income to support a mortgage application.

2.6 HMRC Guidance on New Reporting by Employment Intermediaries

As legislated in Finance Act 2014 from 6 April 2015, employment agencies must return details of all workers they place with clients where they don't operate PAYE on the workers' payments. The return is a report that must be sent to HMRC once every 3 months, using HMRC's report template. The template and online service for submission of reports are now available.

The policy background is that in recent years HMRC has seen increasing evidence of growth by some intermediaries:

1. helping to create false self-employment; and 2. supplying UK workers from an offshore location

Both of these methods have been used to reduce employment taxes and avoid having to fulfil their legal employment rights and obligations.


You need to send a report to HMRC if at any time in a reporting period you:

1. are an agency 2. have a contract with a client 3. provide more than one worker's services to a client because of your contract with that client 4. provide the worker's services in the UK - or if the services are provided overseas, that the person is

resident in the UK 5. make one or more payments for the services (including payments to third parties)

If the workers you supply provide their services at sea in the oil and gas industry wholly on the UK continental shelf, you don't need to send HMRC reports.

You will need to provide the worker's details and payment details for workers where you don't operate PAYE. This includes overseas workers and payments where the worker is working in the UK or working temporarily abroad.

You don't have to include any details of workers who are your own employees.

You don't have to include any payment details where the payments have already been included as part of a PAYE Real Time Information (RTI) submission by any other organisation.

2.6.1 Implications for Personal service companies

One-person limited companies, or personal service companies, that only supply a client with 1 worker don't have to send reports to HMRC. If the worker is supplied through an intermediary they will be included in the return of the intermediary that has the contract with the end client. If a personal service company supplies more than 1 worker, including any subcontracted workers, it will be acting as an intermediary and will have to send reports for each reporting period.

2.6.2 How to send reports to HMRC

Following the end of the first reporting period from 6 April to 5 July 2015 you will have until 5 August 2015 to send your first report to HMRC. Reports will then be required 3 monthly thereafter. You must use HMRC's report template to create the reports. HMRC provide an online service for you to upload and send your report. The service uses your PAYE reference and Accounts Office reference from when you sign in to the service as part of the report. When you use the service, you have to state that the information in the report is correct before you can send it to HMRC.

2.6.3 Penalties

If your report is late, incomplete or incorrect you may be charged a penalty. Automatic penalties have been introduced for not sending a report or for sending a late report. These are given based on the number of offences in a 12-month period. These are:

£250 - first offence

£500 - second offence

£1,000 - third and later offences If there are 12 months or more between offences, you will only be charged £250 for the first offence in the new 12-month period.


Where there is continued failure to send reports or send reports late you may receive a penalty every day that you don't send a report. There is a new appeal process for these new penalties. For incomplete and incorrect reports, manual penalties may apply on a case-by-case basis. If you replace a report before the deadline of the next reporting period without being asked to, HMRC will consider this when they decide if you have to pay a penalty.

2.6.4 Information that should be included in the report

If you are responsible for sending the report to HMRC, you should include:

your full name, address and postcode

the worker's personal details

the engagement and payment details

You may receive a penalty if your reports are incomplete or incorrect.

2.6.5 Worker details

These are the personal details of the workers, including partners within a partnership and limited company directors, who personally provided their services to the client. These details must be included no matter how many intermediaries are involved in supplying the worker to the client. The intermediary sending the report must get these details from the worker or from any other intermediary that supplied the worker. You should include each worker's:

full name, address and postcode

National Insurance number - if they have one and you don't know their date of birth and gender

date of birth and gender - if they don't have a National Insurance number

2.6.6 Engagement and payment details

You must select the reason why you didn't operate PAYE on the workers payments from these options:

A: Self-employed B: Partnership C: Limited liability partnership D: Limited company including personal service companies E: Non-UK engagement F: Another party operated PAYE on the worker's payments

If more than one reason applies select the option that comes first on the list. For example, if A and E both apply, select A. You should also include the:

worker's unique taxpayer reference - if they are self-employed or a member of a partnership

start date of work with client

end date of work with client - if there is one

The start date is the first date that a worker provides their personal services to a client for which they are paid. The end date is the last date that a worker provides their services to a client for which they are paid. Where the worker's services are provided on different occasions to a single client in a reporting period the payments should be combined into a single figure.


Where the worker's services are provided on different occasions to more than one client in a reporting period, you can either:

combine the engagements into a single record with a single payment

provide a separate line and payment for each client

If a bureau is used to pay another party on the worker's behalf the name of the company or partnership should be reported, not the bureau. If the worker was engaged to do the work and their payments have not been reported to HMRC using RTI, any worker engaged through options A to E, you must also include:

total amount paid for the worker's services - this is the total payment that you contracted for the worker's services including any expenses and VAT

currency - this must be given in Great British pounds (GBP) or euros (EUR) and if the worker was paid in another currency it should be converted into Great British pounds or euros using HMRC exchange rates

whether or not VAT has been charged on the payment

the full name or trading name and address of who the intermediary paid for the worker's services - this may be the worker's company or partnership

Companies House registration number - only if the worker was engaged to do the work through a limited company (option D)

2.6.7 What This Means For A Worker

If you use an intermediary or agency to get work you aren't usually considered an employee of the client or intermediary because you don't:

have a contract with the client

do any work for the intermediary

An intermediary, or any third party that has a contract with a client that results in you doing work for the client, must treat you as their employee for Income Tax and National Insurance purposes when certain conditions are met. The intermediary is responsible for operating Pay As You Earn (PAYE) and Income Tax and National Insurance will be deducted from your payments where those conditions apply. Because of these changes, you may have to provide the intermediary with your:

name

address and postcode

National Insurance number or gender and date of birth

unique taxpayer reference (UTR) number

This allows the intermediary to complete and send legally required reports to HM Revenue and Customs about workers they don't operate PAYE for. Any payments you receive for that work where PAYE was operated must be treated as employment income for Income Tax and National Insurance purposes. If you are not usually treated as an employee for the other work you do, you'll need to keep records of the payments you received where PAYE was operated and include them on your Self Assessment return. This makes sure you receive credit for any Income Tax and National insurance deducted by the intermediary, and you only pay the correct amount due overall.

2.7 Revised SP D12 – Partnership CGT

The computation of capital gains made by members of a partnership is set out in Statement of Practice D12 which is regularly updated when the CGT rules change. However there was no revision of the statement of


practice following the introduction of entrepreneurs’ relief. Following a review by the Office of Tax Simplification the latest draft was issued in March 2015: D12: PARTNERSHIPS This statement of practice was originally issued by HMRC (previously Inland Revenue) on 17 January 1975 following discussions with the Law Society and the Allied Accountancy Bodies on the Capital Gains Tax treatment of partnerships. This statement sets out a number of points of general practice which have been agreed in respect of partnerships to which TCGA 1992 s59 applies.

The enactment of the Limited Liability Partnership Act 2000 created, from April 2001, the concept of limited liability partnerships (as bodies corporate) in UK law. In conjunction with this, new Capital Gains Tax provisions dealing with such partnerships were introduced through TCGA 1992 s59A. TCGA1992 s59A(1) complements TCGA 1992 s59 in treating any dealings in chargeable assets by a limited liability partnership as dealings by the individual members, as partners, for Capital Gains Tax purposes. Each member of a limited liability partnership to which TCGA 1992 s59A(1) applies has therefore to be regarded, like a partner in any other (non-corporate) partnership, as owning a fractional share of each of the partnership assets and not an interest in the partnership itself. This statement of practice was therefore extended to limited liability partnerships which meet the requirements of TCGA1992 s59A(1), so that capital gains of a limited liability partnership fall to be charged on its members as partners. Accordingly, in the text of the statement of practice, all references to a ‘partnership’ or ‘firm’ include reference to limited liability partnerships to which TCGA1992 s59A(1) applies, and all references to ‘partner’ include reference to a member of a limited liability partnership to which TCGA1992 s59A(1) applies. For the avoidance of doubt, this statement of practice does not apply to the members of a limited liability partnership which ceases to be ‘fiscally transparent’ by reason of its not being, or it no longer being, within TCGA 1992 s59A(1). In Budget 2013 the Government asked the Office of Tax Simplification (OTS) to carry out a review of ways to simplify the taxation of partnerships. The OTS published its interim report in January 2014 and its final report in January 2015. OTS concluded that as Statement of Practice D12 provides a reasonable result in most circumstances, it should be left essentially as it is, but that some text should be rewritten to replace out of date language and to replace some content which was obsolete. The recommendations made by OTS have been implemented in this revision of the statement of practice.

1. Valuation of a partner’s share in a partnership asset

Where it is necessary to determine the market value of a partner's share in a partnership asset for Capital Gains Tax purposes, it will be taken as a fraction of the value of the total partnership interest in the asset without any discount for the size of his share. If, for example, a partnership owned all the issued shares in a company, the value of the interest in that holding of a partner with a one-tenth share would be one-tenth of the value of the partnership's 100 per cent holding. Guidance and an example concerning section 1 are available in HMRC’s Capital Gains Manual at CG27250.

2. Disposals of assets by a partnership

Where an asset is disposed of by a partnership to an outside party, each of the partners will be treated as disposing of his fractional share of the asset. In computing gains or losses the proceeds of disposal will be allocated between the partners in the ratio of their share in asset surpluses at the time of disposal. Where this is not specifically laid down, the allocation will follow the actual destination of the surplus as shown in the partnership accounts; regard will of course have to be paid to any agreement outside the accounts.

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If the surplus is not allocated among the partners but, for example, put to a common reserve, regard will be had to the ordinary profit sharing ratio, which is likely to be indicative in the absence of a specified asset-surplus-sharing ratio. Expenditure on the acquisition of assets by a partnership will be allocated between the partners according to the same principles at the time of the acquisition. This allocation may require adjustment if there is a subsequent change in the partnership sharing ratios (see section 4). Guidance and an example concerning section 2 are available in HMRC’s Capital Gains Manual at CG27350.

3. Partnership assets divided in kind among the partners

Where a partnership distributes an asset in kind to one or more of the partners, for example on dissolution, a partner who receives the asset will not be regarded as disposing of his fractional share in it. A computation will first be necessary of the gains which would be chargeable on the individual partners if the asset had been disposed of at its current market value. Where this results in a gain being attributed to a partner not receiving the asset, the gain will be charged at the time of the distribution of the asset. Where, however, a gain is attributed to a partner receiving the asset concerned there will be no charge on distribution. Instead, the gain is effectively deferred by reducing his Capital Gains Tax cost by the amount of his gain: the cost to be carried forward will be the market value of the asset at the date of distribution less the amount of gain attributed to him. The same principles will be applied where the computation results in a loss. Guidance and an example concerning section 3 are available in HMRC’s Capital Gains Manual at CG27400: Example A A and B carry on a business in partnership and hold equal interests in partnership assets. The partnership owns a freehold property which cost £400,000. On the dissolution of the partnership the property was distributed to Partner B.

The market value of the property at the time of the distribution was £640,000.

The chargeable gain arising on the disposal by A of his fractional interest in the asset at the time of the distribution and the notional gain arising on B’s fractional interest in the asset are computed as follows:

Partner A

Partner B

Disposal proceeds based on market value

£640,000 x 50% £320,000 £320,000

Less acquisition cost

£400,000 x 50% £200,000 £200,000

Chargeable Gain £120,000

Notional Gain

£120,000

Partner A The gain accruing to Partner A, £120,000, will be chargeable at the time of the distribution. Partner B

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The notional gain accruing to Partner B is not chargeable as the effect of the distribution is that his interest in the asset has increased. His CG base cost on a future disposal of the property will be the market value of the asset at the time of the distribution reduced by the notional gain:

Market value of asset £640,000

Notional gain on distribution £120,000

CG base cost £520,000

Note that Partner B acquired a 50% interest in the asset for £200,000 on its acquisition by the partnership. At the time of the distribution he acquired a further 50% interest for an amount equal to the disposal consideration taken into account for Partner A, ie £320,000. His total acquisition cost is therefore £520,000.

4. Changes in partnership sharing ratios

An occasion of charge also arises when there is a change in partnership sharing ratios, including changes arising from a partner joining or leaving the partnership. In these circumstances a partner who reduces or gives up his share in asset surpluses will be treated as disposing of part of the whole of his share in each of the partnership assets and a partner who increases his share will be treated as making a similar acquisition. Subject to the qualifications mentioned at sections 6 and 7 below, the disposal consideration will be a fraction (equal to the fractional share changing hands) of the current balance sheet value of each chargeable asset, provided there is no direct payment of consideration outside the partnership. In certain circumstances the calculation of the disposal consideration by reference to the current balance sheet value of the asset will produce neither a gain nor a loss. This will occur where the disposal consideration is equal to the allowable acquisition costs and is likely to arise where the partners’ CG base costs are based on an amount equal to the balance sheet value of the asset. However, this outcome is unlikely to arise on a change in sharing ratios where, for example, an asset has been revalued in the partnership accounts, or where a partner transferred an asset to the partnership for an amount that is not equivalent to the CG base cost, or where the partners’ CG base costs were determined in accordance with S171 TCGA 1992, rather than on the cost of the asset to the partnership. A partner whose share in a partnership asset reduces will carry forward a smaller proportion of cost to set against a subsequent disposal of his share in the asset and a partner whose share increases will carry forward a larger proportion of cost. The general rules in TCGA92/S42 for apportioning the total acquisition cost on a part-disposal of an asset will not be applied in the case of a partner reducing his asset-surplus share. Instead, the cost of the part disposed of will be calculated on a fractional basis. Guidance and an example concerning section 4 are available in HMRC’s Capital Gains Manual at CG27500 and CG27540. Example B - No gain/no loss The sharing ratios for a partnership between A and B were:

Partner A 60%

Partner B 40%

On the admission of Partner C the partnership sharing ratios were changed to:

Partner A 50%

Partner B 30%

Partner C 20%

The current balance sheet value of the partnership’s only chargeable asset was £200,000. Partner C made direct payments of £10,000 to each of Partners A and B for his acquisition of a 20% interest in the asset.

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Partners A and B have each disposed of a 10% interest in the asset. Provided that the market value rule does not apply the disposal consideration to be taken into account in their CG computations should be calculated as follows:

Partner A B/S Value £200,000 x 10% = £20,000 + actual consideration £10,000 = £30,000

Partner B B/S Value £200,000 x 10% = £20,000 + actual consideration £10,000 = £30,000

Partner C’s acquisition cost is equal to the disposal consideration taken into account for Partners A and B, ie £30,000 + £30,000 = £60,000. Example C A and B carry on a business in partnership and hold equal interests in partnership assets. The partnership’s assets include a freehold property that is included in the balance sheet at its acquisition cost of £500,000. The CG base costs for A and B are:

A £500,000 x 50% = £250,000

B £500,000 x 50% = £250,000

The partners subsequently agree to change their interests in the property to:

A 40% and B 60%

No consideration passes from B to A for the acquisition of a further 10% interest in the property. Paragraph 4 of SP D12 applies to the calculation of the gain, A is treated as having made a part disposal of his interest in the property. The CG computation for A’s disposal of a 10% interest in the property will be:

Partner A

Disposal consideration based on balance sheet value (BSV)

£500,000 x 10% £50,000

Acquisition cost

£250,000 x 10%/50% £50,000

No gain/no loss

CG base costs to carry forward:

A £250,000 - £50,000 = £200,000

B £250,000 + £50,000 = £300,000

Note that B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.

Example D : Revaluation followed by a change in fractional sharing ratios

A and B carry on a business in partnership and hold equal interests in partnership assets.

The partnership owns a freehold property that it acquired for £400,000 but which, following a revaluation, is included in the balance sheet at £600,000.

The surplus on revaluation of the property, (£600,000 - £400,000) £200,000, was credited to the partners' capital accounts:

Partner A £200,000 x 50% = £100,000


Partner B £200,000 x 50% = £100,000

The only other partnership asset was goodwill which had no cost of acquisition and was not included in the balance sheet.

The partners’ CG base costs are:

Freehold property Goodwill

Partner A £400,000 x 50% = £200,000 Nil x 50% = Nil

Partner B £400,000 x 50% = £200,000 Nil x 50% = Nil

Disposals:

1) The partners change their fractional interests to: A 40%, B 60%

No consideration passes from B to A for his acquisition of a further 10% interest in the property and goodwill.

2) The partnership subsequently disposes of its business as a going concern for £1.2m. The disposal proceeds are apportioned as to:

Freehold property £800,000

Goodwill £200,000

Fixtures £100,000

Stock £100,000

The surpluses on sale of (£800,000 - £600,000) £200,000 for the freehold property and (£200,000 - nil) £200,000 for goodwill were credited to the partners’ capital accounts as to:

Freehold property Goodwill

Partner A £200,000 x 40% = £80,000 £200,000 x 40% = £80,000

Partner B £200,000 x 60% = £120,000 £200,000 x 60% = £120,000

1) Change in sharing ratios

Paragraph 4 of SP D12 applies to the calculation of the gain accruing to A on the disposal of a 10% interest in the asset, see CG27500.

The CG computation for A’s disposal is:

Partner A

Property Goodwill

Disposal consideration based on BSV

Property £600,000 x 10% £60,000

Goodwill Nil x 10% Nil

Acquisition costs

Property £200,000 x 10%/50% £40,000

Goodwill Nil x 10%/50% Nil

Gain £20,000 No gain/no loss


Note that A’s gain on the property is equal to the proportion of his share of the surplus on revaluation that is equivalent to the interest that has been disposed of, that is, £100,000 x 10%/50% = £20,000. At this point in time there is no disposal in respect of the remainder of his 40% interest which he still owns.

CG base costs to carry forward:

Property Goodwill

Partner A £200,000 - £40,000 = £160,000 Nil - Nil = Nil

Partner B £200,000 + £60,000 = £260,000 Nil + Nil = Nil

Note that B is treated as having acquired his additional 10% interest for an amount equal to the disposal consideration taken into account for A.

2) Disposal of the business

The CG computations for A and B will be calculated in accordance with paragraph 2 of SP D12, see CG27350, as follows:

Partner A Partner B

Freehold property

Disposal consideration £800,000 x 40% £320,000 £800,000 x 60% £480,000

Less acquisition costs £160,000 £260,000

Gains £160,000 £220,000

Note that A’s gain is equal to the remainder of his share of the surplus on revaluation of (£100,000 - £20,000) £80,000 plus the surplus on sale of £80,000. Partner B’s gain is equal to his share of the surplus on revaluation of £100,000 plus the surplus on sale of £120,000.

Goodwill Partner A Partner B

Disposal consideration £200,000 x 40% £80,000 £200,000 x 60% £120,000

Less acquisition costs Nil Nil

Gains £80,000 £120,000

Note that the gains are equal to the surpluses on sale of goodwill that were credited to the partners’ capital accounts.

5. Contribution of an asset to a partnership

When this statement of practice was published in 1975 it did not address the situation where a partner contributes an asset to a partnership by means of a capital contribution. HMRC clarified its approach to this in Revenue & Customs Brief 03/08. OTS asked HMRC to include this clarification in the statement of practice. Where an asset is transferred to a partnership by means of a capital contribution, the partner in question has made a part disposal of the asset equal to the fractional share that passes to the other partners. The market value rule applies if the transfer is between connected persons or is other than by a bargain at arm’s length. Otherwise the consideration for the part disposal will be a proportion of the total amount given by the partnership for the asset. That proportion equals the fractional share of the asset passing to the other partners. A sum credited to the partner’s capital account represents consideration for the disposal of the asset to the partnership. Although this is similar to a change in partnership sharing ratios, it is not possible to calculate the disposal consideration on a capital contribution by reference to section 4, as the asset does not have a


balance sheet value in the partnership accounts. In these circumstances HMRC accepts the apportionment of allowable costs on a fractional basis as provided for in section 4, rather than by reference to the statutory A/A+B formula. A gain arises on a contribution of an asset where the disposal consideration, calculated according to the fractional proportion of the total consideration or, in appropriate cases, a proportion of the market value of the asset, exceeds the allowable costs, based on a fraction of the partner’s capital gains base cost. Guidance and examples concerning section 5 are available in HMRC’s Capital Gains Manual at CG27900 onwards.

6. Adjustment through the accounts

Where a partnership asset is revalued a partner will be credited in his current or capital account with a sum equal to his fractional share of the increase in value. An upward revaluation of chargeable assets is not itself an occasion of charge. If, however, there were to be a subsequent reduction in the partner's asset-surplus share, the effect would be to reduce his potential liability to Capital Gains Tax on the eventual disposal of the assets, without an equivalent reduction of the credit he has received in the accounts. Consequently at the time of the reduction in sharing ratio he will be regarded as disposing of the fractional share of the partnership asset, represented by the difference between his old and his new share, for a consideration equal to that fraction of the increased value at the revaluation. The partner whose share correspondingly increases will have his acquisition cost to be carried forward for the asset increased by the same amount. The same principles will be applied in the case of a downward revaluation. Guidance and an example concerning section 6 are available in HMRC’s Capital Gains Manual at CG27500 and CG27550.

7. Payments outside the accounts

Where on a change of partnership sharing ratios, payments are made directly between two or more partners outside the framework of the partnership accounts, the payments represent consideration for the disposal of the whole or part of a partner's share in partnership assets in addition to any consideration calculated on the basis described in 4 and 6 above. Often such payments will be for goodwill not included in the balance sheet. The partner receiving the payment will have no Capital Gains Tax cost to set against it, unless he made a similar payment for his share in the asset (for example, on entering the partnership) or elects to have the market value at 31 March 1982 treated as his acquisition cost. The partner making the payment will only be allowed to deduct the amount in computing gains or losses on a subsequent disposal of his share in the asset. He will be able to claim a loss when he finally leaves the partnership, or when his share is reduced, provided that he then receives either no consideration or a lesser consideration for his share of the asset. Where the payment clearly constitutes payment for a share in assets included in the partnership accounts, the partner receiving it will be able to deduct the amount of the partnership acquisition cost represented by the fraction he disposes of. Special treatment, as outlined in section 8 below, may be necessary for transfers between persons not at arm's length. Guidance and an example concerning section 7 are available in HMRC’s Capital Gains Manual at CG27500 and CG27560.

8. Transfers between persons not at arm’s length

Where no payment is made either through or outside the accounts in connection with a change in partnership sharing ratio, a Capital Gains Tax charge will only arise if the transaction is otherwise than by way of a bargain made at arm's length and falls therefore within TCGA92/S17, extended by TCGA92/S18 for transactions between connected persons.








Under TCGA92/S286(4) transfers of partnership assets between partners are not regarded as transactions between connected persons if they are genuine commercial arrangements. This treatment will also be given to transactions between an incoming partner and the existing partners. Where the partners (including incoming partners) are connected other than by partnership (for example, father and daughter) or are otherwise not at arm's length (for example, aunt and nephew) the transfer of a share in the partnership assets may be treated as having been made at market value. Market value will not be substituted, however, if nothing would have been paid had the parties been at arm's length. Similarly if consideration of less than market value passes between partners connected other than by partnership or otherwise not at arm's length, the transfer will only be regarded as having been made for full market value if the consideration actually paid was less than that which would have been paid by parties at arm's length. Where a transfer has to be treated as if it had taken place for market value, the deemed disposal will fall to be treated in the same way as payments outside the accounts. Guidance and examples concerning section 8 are available in HMRC’s Capital Gains Manual at CG27800 and CG27840. Example E

A and B carry on a business in partnership and hold equal interests in partnership assets.

They agree to change their profit sharing ratios to: A 60%, B 40%

An enquiry establishes the fact that the arrangement in which B disposed of part of his fractional interests in partnership assets to A was a genuine commercial arrangement and that A and B are not connected persons other than by reference to TCGA92/S286 (4). Therefore the transaction can be accepted as being within the exception to TCGA92/S286 (4) and the market value rule will not apply.

CG27500 explains the rules that apply to the disposal by Partner B of part of his fractional interest in partnership assets to Partner A.

Example F K and L carry on a business in partnership and hold equal interests in partnership assets.

K sells an asset which he owns personally to L for £6,000 at a time when its market value is £8,000.

As K and L are connected persons under TCGA92/S286 (4) the market value rule applies and the asset is treated as having been disposed of by K and acquired by L for a consideration equal to its market value of £8,000.

The exception to TCGA92/S286 (4) does not apply because the asset is not a partnership asset.

Example G

M and N carry on a business in partnership and hold equal interests in partnership assets. They are not connected other than by means of the partnership relationship.

The acquisition costs and current balance sheet values of the partnership assets were:


Goodwill £100,000

When P was admitted to the partnership M and N agreed to change their profit sharing ratios to:

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M 25%

N 50%

P 25%

At the time of P’s admission the market value of the partnership assets were:


Goodwill £120,000

An enquiry establishes that:

M and P are connected persons under TCGA92/S286 (2) as M is P’s father P did not pay any consideration to M for his acquisition of a 25% interest in partnership assets When N acquired his 50% interest from M on admission to the partnership he made a direct

payment of consideration to M.

The payment by N to M on admission to the partnership indicates that M and P were not acting at arm’s length. The market value rule applies in relation to the disposal of a 25% interest by M and the acquisition of a 25% interest by P. M’s disposal proceeds and P’s acquisition costs in respect of the 25% interest in partnership assets changing hands will be calculated as follows:

Freehold property - MV £400,000 x 25% = £100,000

Goodwill - MV £120,000 x 25% = £30,000

The gains accruing to M are calculated as follows:

Partner M Freehold property Goodwill

Disposal proceeds £100,000 £30,000

Less acquisition costs

£320,000 x 25% £80,000

£100,000 x 25% £25,000

Gains £20,000 £5,000

9. Annuities provided by partnerships

A lump sum which is paid to a partner on leaving the partnership or on a reduction of his share in the partnership represents consideration for the disposal by the partner concerned of the whole or part of his share in the partnership assets and will be subject to the rules in section 7 above. The same treatment will apply when a partnership buys a purchased life annuity for a partner, the measure of the consideration being the actual costs of the annuity. Where a partnership makes annual payments to a retired partner (whether under covenant or not) the capitalised value of the annuity will only be treated as consideration for the disposal of his share in the partnership assets under TCGA92/S37(3), if it is more than can be regarded as a reasonable recognition of the past contribution of work and effort by the partner to the partnership. Provided that the former partner had been in the partnership for at least ten years, an annuity will be regarded as reasonable for this purpose if it is no more than two-thirds of his average share of the profits in the best three of the last seven years in which he was required to devote substantially the whole of this time to acting as a partner. In arriving at a partner's share of the profits the partnership profits assessed before deduction of any capital allowances or charges will be taken into account. The ten year period will include any period during which the partner was a member of another firm whose business has been merged with that of the present firm. For lesser periods the following fractions will be used instead of two-thirds:


Complete years in

partnership

Fraction

1 - 5 1/60 for each year

6 8/60

7 16/60

8 24/60

9 32/60

Where the capitalised value of an annuity is treated as consideration received by the retired partner, it will also be regarded as allowable expenditure by the remaining partners on the acquisition of their fractional shares in partnership assets from him. Guidance concerning section 9 is available in HMRC’s Capital Gains Manual at CG28400.

10. Mergers

Where the members of two or more existing partnerships come together to form a new one, the Capital Gains Tax treatment will follow the same principles as those for changes in partnership sharing ratios. If gains arise for reasons similar to those covered in 6 and 7 above, it may be possible for roll-over relief under TCGA92/S152 to be claimed by any partner continuing in the partnership, insofar as he disposes of part of his share in the assets of the old firm and acquires a share in other assets put into the ‘merged’ firm. Where, however, the consideration given for the shares in chargeable assets acquired is less than the consideration for those disposed of, relief will be restricted under TCGA92/S153. Guidance and an example concerning section 10 are available in HMRC’s Capital Gains Manual at CG27700 and CG27740.

11. Shares acquired in stages

Where a share in a partnership is acquired in stages wholly after 5 April 1965, the acquisition costs of the various chargeable assets will be calculated by pooling the expenditure relating to each asset. Where a share built up in stages was acquired wholly or partly before 6 April 1965 the rules in TCGA92/Sch2/Para18, will normally be followed to identify the acquisition cost of the share in each asset which is disposed of on the occasion of a reduction in the partnership's share; that is, the disposal will normally be identified with shares acquired on a ‘first in, first out’ basis. HMRC will be prepared to review any case in which this principle appears to produce an unreasonable result when applied to temporary changes in the shares in a partnership, for example those occurring when a partner's departure and a new partner's arrival are out of step by a few months. Guidance and an example concerning section 11 are available in HMRC’s Capital Gains Manual at CG27300.

12. Pooling Elections under TCGA92 Sch2 Para4

Where the assets disposed of are quoted securities eligible for a pooling election under paragraph 4 of TCGA92 Sch2, partners will be allowed to make separate elections in respect of shares or fixed interest securities held by the partnership as distinct from shares and securities which they hold on a personal basis. Each partner will have a separate right of election for his proportion of the partnership securities and the time limit for the purposes of Schedule 2 will run from the earlier of -

a) the first relevant disposal of shares or securities by the partnership, and b) the first reduction of the particular partner’s share in the partnership assets after 19 March 1968.






13. Partnership goodwill

This paragraph applies where the value of goodwill which a partnership generates in the conduct of its business is not recognised in its balance sheet and where, as a matter of consistent practice, no value is placed on that goodwill in dealings between the partners. On a disposal for actual consideration of a partner’s interest in the goodwill of such a partnership, that interest will be treated as the same asset (or, in the case of a part disposal, a part of the same asset) as was originally acquired by that partner when first becoming entitled to a share in the goodwill of that partnership. This treatment will also be applied to goodwill acquired for consideration by a partnership but which is not, at any time, recognised in the partnership balance sheet at a value exceeding its cost of acquisition nor otherwise taken into account in dealings between partners.

14. Entrepreneurs' relief and “roll-over” relief on transfer of a business

An individual may qualify for entrepreneurs' relief when their business becomes a partnership. A partner may also qualify for entrepreneurs' relief on a disposal of part or the whole of a partnership business. A partner may qualify for entrepreneurs’ relief (subject to the normal conditions relating e.g. to a personal company) when he or she disposes of all or part of a fractional share in shares which are held as partnership assets. Guidance concerning partnerships and entrepreneurs' relief is available in HMRC's Capital Gains Manual at CG64040. Roll-over relief is available to individuals who are partners where the whole of the partnership business is transferred to a company as a going concern in exchange for shares. Guidance concerning partnerships and roll-over relief on transfer of a business is available in HMRC's Capital Gains Manual at CG65700. Roll-over relief may also be available to partners when there is a disposal of a partnership asset and the proceeds are reinvested in another asset which is also used for trade purposes. Guidance covering this business asset roll-over relief is available in HMRC’s Capital Gains Manual at CG61150.


3. MANIFESTO TAX POLICIES OF THE MAJOR PARTIES

In this section we outline the tax policies of the main political parties as set out in their manifestos. With a hung Parliament a likely outcome the views of the minor parties may be taken on board as the “winning” party may need the assistance of some of the minor parties to form a Government. Who would have predicted how much influence the Liberal Democrats would have had in the 2010 to 2015 Coalition. Without their influence we may not have had the current £10,600 personal allowance. However as history has shown manifesto pledges do not always turn into reality after the election.

A common theme from all of the parties is that they pledge to increase tax revenues by cracking down on tax evasion and aggressive tax avoidance.

3.1 Conservative Party Tax Policies

As announced in the Budget the Conservative Party promise to increase the tax-free Personal Allowance to £12,500 and the 40p Income Tax threshold to £50,000.

The Conservatives will pass a new law so that nobody working 30 hours on the Minimum Wage pays Income Tax on what they earn. At £8 an hour that would be £240 a week or £12,480 a year. They also commit that there will be no increases in VAT, National Insurance contributions or Income Tax. In his March Budget George Osborne stated that reducing the current £500,000 Annual Investment Allowance (AIA) to just £25,000 would be far too low, however he went on to say that the amount would not be announced until later in the year in the Autumn Statement. The Manifesto states that they will set a new, significantly higher and permanent level for the AIA which will welcomed by businesses however the timing of the announcement if December 2014 will be far too late for businesses to do any proper forward planning of their capital expenditure. The Conservatives also pledge to take the family home out of tax for all but the richest by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million, with a transferable main residence allowance of £175,000 per person in addition to the existing £325,000 nil rate band. This will be paid for by reducing the tax relief on pension contributions for people earning more than £150,000.

3.2 Labour Tax Policies

Labour will reinstate the 50% tax rate for income in excess of £150,000 to help get the deficit down. They will also abolish the beneficial tax rules for non-domiciled individuals so that if UK resident they will pay UK tax on their worldwide income and gains. In a measure to counter tax evasion Labour will require Crown Dependencies to produce publicly available registries of the real owners of companies based there.

Labour also pledge not to increase the basic or higher rates of Income Tax, National Insurance or VAT. They will however reintroduce a lower 10p starting rate of tax, paid for by ending the recently introduced transferrable Married Tax Allowance. They also promise not to extend VAT to food, children’s clothes, books, newspapers or public transport fares. Labour will cut tuition fees from £9,000 to £6,000 a year, funded by restricting tax relief on pension contributions for the highest earners. Labour state that they will put small businesses first in line for tax cuts. Instead of cutting Corporation Tax again for the largest firms, they will cut, and then freeze business rates for smaller business properties.

3.3 Liberal Democrat Tax Policies


Liberal Democrats aim to rebalance the tax system away from taxing work and towards unearned wealth, Like the Conservatives they will raise the personal allowance to at least £12,500, and they also say there will be no increase in the headline rates of Income Tax, National Insurance, VAT or Corporation Tax. The Lib Dems pledge to introduce a new Mansion Tax on residential properties worth over £2 million. They also propose reforms to Capital Gains Tax and Dividend Tax relief, refocusing Entrepreneurs’ Relief and additional taxes on the banking sector. They will establish a review to consider the case for introducing a single rate of tax relief for pensions, which would be designed to be simpler and fairer and which would be set more generously than the current 20% tax relief. A rate of 33% has been suggested.

3.4 UKIP Tax Policies

UKIP plan to save £9 billion a year in direct net contributions to the European Union budget by leaving the EU. That will enable them to raise the personal allowance to at least £13,000 and raise the threshold for paying 40% income tax to £55,000. They also propose a new intermediate tax rate of 30% on incomes ranging between £43,500 and £55,000

A more radical idea is to abolish inheritance tax completely.

UKIP also pledge to remove VAT completely from repairs to listed buildings and the sale of sanitary products.

3.5 Green Party Tax Policies

The most radical tax policies are those proposed by the Green party, such as increasing the main rate of

corporation tax to 30% and the top income tax to 60%. They would also abolish the CGT annual exemption.

Like the Lib Dems they would introduce a Wealth Tax at 2% a year on those with more than £2 million capital

and use this to reduce employers NIC to 8%.

In order to stimulate tourism and the restaurant business the Green Party would reduce the rate of VAT of

restaurant food and hotel accommodation to 5%.

Another radical Green Party policy would be to legislate that the highest paid employees of a company

should not be paid more than 10 times that paid to the lowest paid worker in that company. Their proposal is

that any remuneration in excess of this multiple would be disallowed for corporation tax.

The Green Party propose a number of measures to increase the number of properties for rent and to

introduce a number of radical reforms in the private rented sector such as the abolition of tax relief for

mortgage interest relief for Buy to Let landlords.

http://www.libdems.org.uk/mansion-tax

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