• Service: Tax
  • Type: Business and industry issue, KPMG information
  • Date: 05/08/2014

Tax Notes Northern Ireland August 2014 

While the wider tax world focuses on the potential impact of the various BEPS work streams, and the several country by country reporting projects that are moving to fruition, the nuts and bolts details of filing returns, collecting tax and refunding overpayments continues in the background.

HMRC, and companies, have invested heavily in analytical tools, and online reporting, and some of the ‘benefits’ of this can be seen in recent HMRC announcements.


Tax calculations for taxpayers not in self assessment

Those who have paid too little or too much tax will shortly be sent a tax calculation form P800 and accompanying explanatory notes. These calculations will be based on the PAYE data HMRC has received from employers under RTI.


HMRC has stated that refund cheques will be sent to those who have paid too much tax, usually within 14 working days after receiving a P800.Where there has been an underpayment, this will usually be collected via the 2015-2016 annual PAYE tax code, over twelve months.

HMRC expects the issue of the tax calculations to be completed by mid-September.


Employers should be aware that employees may query why they have not paid the correct amount of tax under PAYE, even though PAYE is in reality an accrual system with annual true-ups.


HMRC letters to individuals with perceived low effective tax rates

HMRC is sending letters to around 1,000 individuals with an income of £150,000 or more who they believe pay an average effective tax rate of 22 percent or less. HMRC is encouraging those individuals to consider whether their tax returns have been accurately completed.


Recipients were selected via HMRC’s statistical analysis of filed returns, and it seems that the letter will cover tax year 2011/12, for which the enquiry window has now closed.It appears that the details of the tax return will not be checked pre-issue of a letter to determine if there is a reasonable explanation for the lower than average effective tax rate.


Guidance on taxation of workers supplied through agencies

HMRC has published guidance on the changes, effective from 6 April 2014, to the treatment of workers supplied through UK-based agencies or other intermediaries, which should be considered when workers are supplied through a third party, especially if supplied on a self-employed basis.


The changes were introduced to prevent the use of employment intermediaries to avoid NIC and income tax by ‘falsely’ presenting employment relationships as self-employment.


The guidance outlines when the new legislation applies to workers and when it does not, defining ‘supervision, direction or control’, the criteria to determine whether a worker will be treated for income tax and NICs as an employee.


The guidance addresses questions such as when a worker should de-register from self-assessment or the Construction Industry Scheme (CIS); the effect of the new rules on CIS registration for agencies and on workers working through an umbrella company; how the new rules interact with the intermediaries legislation; and the consequences of an agency treating a worker as self-employed when they should have been taxed as an employee.


Company tax return filings

The HMRC Corporation Tax online service will be updated with the new Annual Investment Allowance (AIA) changes and with the marginal relief standard fraction for FY14 by 31 July 2014.


It will be possible to file online before the service is updated if there are no claims to either marginal rate relief for FY14 or a claim to AIA that does not exceed the earlier AIA limit.

If there is an urgent need to file a company tax return before 31 July 2014, HMRC offices will offer further advice.


Interest on PPI refunds

As payouts continue to flow re PPI HMRC has issued a reminder that interest paid on PPI refunds is taxable. Payments aim to put the customer in the position they would have been in had they not taken out the PPI and may include:


  • a refund of payments made re PPI by the customer;
  • simple interest at a rate of 8% per annum to compensate the customer for being deprived of the money they had paid for the PPI.


The 8% interest will be taxable and it must be declared to HMRC or included in a self assessment tax return. Deduction of tax at source should have been made for payments on or after 1 September 2013 for building societies and on or after 1 October 2013 for other institutions.


VAT on hot takeaway food - Court of Appeal decision

This case concerns the liability of toasted sandwiches (known as Subs) with a hot filling, meatball marinara. This is a lead case for a large number of claims submitted on the basis that VAT has been over-declared on certain supplies of hot takeaway food.


A large part of the Judgment is spent considering whether the “purpose of heating the food” test in UK law was an objective or subjective test. Much of this confusion goes back to the 1987 Court of Appeal (CoA) Judgment in Pimblett & Sons Ltd (Pimblett) which has been widely interpreted as suggesting that the test is a subjective test of the supplier‘s intentions.


In Sub One, the CoA upheld the Upper Tribunal’s conclusion that in light of subsequent EU case law and principles the correct test is objective and therefore the Pimblett CoA did not adopt the correct approach.


The taxpayer’s fiscal neutrality arguments focused on the consequences of the Pimblett Judgment and subsequent Tribunal decisions. Lord Justice McCombe accepted that, as a result of the incorrect reliance on a subjective test, similar products to ‘Subs’ have been zero rated.


However whilst noting the taxpayer’s misfortune, the CoA agreed with HM Revenue & Customs that those taxpayers who have benefitted from zero rating have done so in breach of properly construed domestic legislation and therefore the principle of fiscal neutrality does not apply.


The CoA went on to find against the taxpayer on a number of other points. These included the impact that the supplies in question are goods and therefore cannot be a “supply in the course of catering”.


The Judgment adds that it does not matter if the supply is of goods or services provided that the supply is “in the course of catering.” The taxpayers also lost its appeal on further evidence and an application to amend its grounds of appeal.


UK source interest income - Second tribunal

This case (Ardmore) followed the recent decision in favour of HMRC in Andrew Colin Perrin v HMRC [2014] UKFTT 233 (TC) and considered three assessments to income tax issued by HMRC in respect of interest paid by Ardmore to offshore trusts and companies. The issue in the case was whether the interest paid was ‘arising in the UK’ within the meaning of section 874 ITA 2007.


Section 884 ITA provides that the duty to deduct tax does not exist where the payment of interest is chargeable to income tax as relevant foreign income. Section 830 ITTOIA 2005 defines relevant foreign income as income which “arises from a source outside the UK.


The issue in the Perrin case was whether P should have deducted tax, under section 874 ITA 2007, on the interest payments made to an Isle of Man recipient. The FTT held that there were a number of factors which should be considered when determining where interest arises.


It was of particular note that, despite the fact that Perrin considered the same issue, the FTT in Ardmore declined to follow the case in reaching this decision. In the Perrin case HMRC cited an unpublished Special Commissioner case of Poldi (UK) Limited v Inland Revenue Commissioners (25 November 1985) (‘Poldi’) which was subsequently relied upon in the Tribunal’s decision.


In considering the need to deal with cases fairly and justly they concluded it was not ‘proper for HMRC to cite an unpublished decision of the Special Commissioner before the FTT’ and therefore declined to follow the case. In particular the tribunal stated:


‘This clearly raises the question of fairness and whether HMRC should be permitted to rely on an unpublished (as opposed to an unreported) decision not freely available to the general taxpayer.......In our view, given that a persuasive authority, unless considered to be wrong, will as a matter of judicial comity be followed by the FTT it cannot be right or just for HMRC to have such an advantage over a taxpayer.’


This legal principle should be borne in mind as it could be relevant in discussions with HMRC, and it meant the FTT considered the issue in the Ardmore case afresh.


However, the reasoning they adopted was still substantively the same – including that there were a number of different factors which should be weighed when deciding where interest arises, including the residence of the debtor, the place of enforcement of the debt against the debtor, the residence of any guarantor, the location of any security, the situs of the debt, the proper law of the contract and the place of payment of the interest.


Following this approach the tribunal held that the source of the interest in the Ardmore case was the UK, and that UK WHT should have been withheld.It is thought that HMRC may now apply this precedent more widely in the search for additional tax revenues; particularly where the only place the debt can be substantially enforced is the UK as the only secured assets are UK situs.

Poker face?

The UK Court of Appeal case of Hakki v Secretary of State for Work and Pensions & Anor [2014] EWCA Civ 530 held that a man’s poker playing did not have sufficient organisation for it to constitute a “trade, profession or vocation’. As a result his earnings were not considered to be earnings from “gainful employment” and he did not therefore have to make maintenance payments for his children.


Although a child maintenance case, the scope of income for child maintenance purposes was accepted by the judges (because of common definitions) to be the same for income tax purposes, and is further useful guidance on when a gambler can be taxable and/or liable to NIC on their winnings.


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Ian Lockington 

Ian Lockington

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