Taxing matters
Date: 30 October 2009
Authors: Peter Vaines
Issue: Vol 159, Issue 7391
Categories: Features, Tax
Having regard to the amount of press coverage recently, you would have thought that Liechtenstein was the centre of the universe. I know it was quite a popular place to deposit money, but not all that popular; the column inches would indicate that most of the UK had secretly placed their savings there and hidden it from HMRC.
Well, to help all those people who have got concealed accounts in Liechtenstein, HMRC has published a long list of questions and answers (and another equally long list of FAQs for advisers) on the Liechtenstein disclosure facility. It is pretty much the same as ours. Come clean and you can pay the tax with only a 10% penalty—but the heavens will fall if you fail to do so and we find out. And we will surely find out because we know everything now (for a copy of the guidance see: www.hmrc.gov.uk/disclosure/liechtenstein-disclosure.htm).
The published questions and answers are sensible and helpful but they do not say very much which is new. The only new point I could find was concerned with the differential between our offshore disclosure facility which has a limitation period of 20 years, and that which applies to Liechtenstein where the limitation period is only 10 years.
There had been some suggestion that if you had concealed funds elsewhere which would be subject to a 20-year limitation period, you might be able to benefit from the limited 10-year limitation period by moving those funds to Liechtenstein before making the disclosure. HMRC does not agree and explain in detail why this is not considered to be effective.
Property valuations
HMRC has published a newsletter expressing various views on property valuations in the current uncertain climate. It seems that personal representatives are frequently asking HMRC to reduce or reopen valuations after probate because prices continue to fall. HMRC says that it will only consider a revision if the original valuation was undertaken with incomplete or incorrect information.
They go on to say that personal representatives must instruct valuers to estimate the open market value under normal market conditions with no discounts for a quick sale of the time of year—and that the valuers attention must be drawn to factors which might raise the price, such as development potential. Furthermore, in presenting their value, they suggest that it would be “preferable” to obtain three valuations from different estate agents—or one RICS valuation if a definitive figure is required. (Presumably one valuation from an estate agent who is a member of the RICS would be sufficient).
This seems to go rather too far.
The personal representative is required to take reasonable care to ascertain the value of the property, so he asks a professional estate agent. Why should he have to ask three? In the nature of things, the valuations are likely to be slightly different so what does he do then? Does he take an average (which would not correspond with any of them), or does he take the lowest, the highest or the median. Each can be criticised. What’s wrong with just one bona fide valuation?
It also seems to be a bit much to tell the valuer how to do his valuation. Of course it must satisfy Inheritance Tax Act 1984 (IHTA 1984) s 160 which defines the market value for the purposes of inheritance tax as: “The price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time.”
We know from IRC v Clay [1914] 3 KB 466, 83 LJKB 1425 that there should be no discount for a quick sale, but why should the time of year be excluded from consideration? That seems to be specifically envisaged by s 160.
I also wonder why the valuer’s attention has to be drawn to particular features of the property such as development potential. Surely the valuer would know (or ought to know) far better than the personal representative about which particular features are relevant in his valuation. This all seems to be a bit confused to me.
HMRC clearances
HMRC have announced a revision to the clearance service for businesses. This continues to look really helpful. It is a development from the guidance note issued on 11 April 2008 when HMRC introduced a non statutory clearance service to provide businesses with their view of the tax implications of significant commercial issues regardless of when the legislation was first enacted. Non business taxpayers remain subject to code of practice 10 where technical enquiries are answered only if they arise from the last four Finance Acts.
The purpose of the new clearance service is to provide certainty for businesses operating in the UK at a level where a speedy response from HMRC can reasonably be assured. They anticipate a response within 28 days on areas of material uncertainty relating to the legislation concerning the tax outcome of a real issue of commercial significance to the business. HMRC emphasises that this non statutory clearance is a written confirmation of their view of the application of tax law to a specific transaction or event which the taxpayer can rely on in most circumstances.
The guidance note sets out the procedure for making an application (which is generally all sensible and predictable) and they also clarify those areas where they will not accept such an application. They will not comment on tax planning advice; where the relevant point is not uncertain, ie where the point is covered by their published guidance—although that is not of course the same thing; where they have already opened an enquiry into the transaction or the relevant self assessment return; on issues which do not involve statutory interpretation such as asset valuation and transfer pricing or whether a particular research and development project qualifies for relief under the various tax incentives.
In particular, they confirm that they will not comment on the tax consequences of executing trust deeds or whether the settlements legislation applies.
HMRC confirms that the whole point of this system is that the taxpayer should be able to rely on any clearance they provide. It is therefore a disappointment to read that such a clearance will not necessarily be binding; they explain that whether it is binding or not will certainly be determined by the courts. They do, however, set out some circumstances in which they will not be bound—all of which are absolutely reasonable, such as where the law has changed between the clearance and the transaction taking place or where incorrect or incomplete information was included in the clearance application.
The similar non-statutory clearance procedure for inheritance tax has also been updated.
Employee benefit trusts
HMRC has also set out its view of the inheritance tax implications of contributions to employee benefit trusts by a close company (HMRC Brief 49/2009). This is both important and controversial. IHTA 1984, s 13 provides an exemption for contributions from a charge to inheritance tax if the participators in the company are excluded from any benefit from the employee benefit trust.
However, HMRC now considers that where the participators are excluded from benefit but nevertheless obtain a loan form the employee benefit trust, this represents a benefit to the participators so that the exemption of s 13 does not apply. This sounds a bit extreme.
A loan on arms length terms can hardly be a benefit—and what if the loan is made some years after the contribution was made. Do they then retrospectively decide that the exemption in s 13 did not apply after all and that the contribution should be a chargeable transfer. I guess so—although I wonder what happens if they are out of time. There would seem to be no grounds for discovery because there was nothing wrong with the exemption claimed at the time.
HMRC goes on to say that a contribution to the employee benefit trust is a chargeable transfer which can be attributed to the participators under IHTA 1984, s 94 assuming that the participators are not excluded from benefit. If participators are excluded from benefit, the exemption under s 13 would apply and the new interpretation (sorry—the current view) would not arise.
Section 12 also provides protection from a charge to inheritance tax if the contribution to the EBT is allowable in computing the profits of the company for the purposes of corporation tax.
The basic rule for EBTs is that contributions are only deductible by the company when they are paid out to employees and chargeable to tax and NIC.
There is no particular time specified in s 12. All it says is that the contribution is not a transfer of value “if it is allowable in computing [the company’s] profits or gains for the purposes of corporation tax”.
The effect of the deferral rules is that relief is given in the subsequent year rather than the current year. That does not mean the contribution is not allowable—quite the contrary, it provides that it is allowable in a later year. (I suppose you could say that the contribution is only allowable after something else has happened—and therefore it is not allowable until that time).
HMRC take the view that s 12 only applies to the extent that a deduction is allowable to the company for the tax year in which the contribution is made. On this basis, the transfer of value must be apportioned between the individual participators according to their shareholdings and charged to inheritance tax accordingly. HMRC say that this is their current view and pending a resolution of any legal challenge existing cases will be pursued by them on this basis.
When the contribution is subsequently allowed, I wonder if they will revise the treatment of the earlier chargeable transfer. Dream on.
HMRC is also a bit sniffy about the s 10 exemption (transfers not intended to confer a gratuitous benefit). It says that by its very nature an EBT is a discretionary trust and contributions will often confer a gratuitous benefit on the participations. Well yes it could—although not often. And if it does, then obviously s 10 cannot be satisfied so this does not take the argument anywhere. The whole idea of an EBT is to provide benefits to employees which is a bona fide commercial purpose—not an intention to confer gratuitous benefits—something which was made quite clear in Postlethwaite v HMRC SpC 571 in 2007.
I hope that this issue is going to be seriously reconsidered without having to wait for litigation.
Peter Vaines is a chartered accountant & barrister who heads the firm’s European tax practice, advising on all aspects of personal & corporate taxation
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