For those interested in tax statistics: HM Treasury’s “estimated costs of the principal tax expenditure and structural relief’s”.

Interesting to see that the three inheritance tax associated reliefs all show an increase.

Relief for charitable donations increased to £500 million, agricultural property relief increased to £385 million and business associated reliefs to £415 million.

More on this can be found here.

“HM Revenue & Customs (HMRC) have today published:

• new form IHT205 (2011) – Return of estate information [England, Wales and Northern Ireland]
• new IHT206 (2011) – Notes to help you fill in form IHT205 (2011)
• revised form IHT217 – Claim to transfer unused nil rate band for excepted estates

The new forms IHT205 (2011) and IHT206 (2011) Notes should be used when the person died on or after 6 April 2011. The main changes to the form are to the pension’s questions which have been simplified. You will also see the form and notes look different as they have been rebranded.

The revised IHT217 replaces the current version of the form and should be used where the person died on or after 6 April 2010.”

The Forms and Notes can be found here.

Listed below are the taxes, duties and charges that Westminster has so far refused to pass control to the Scottish Parliament.

The First-tier Tribunal has held that a deceased businessman’s trading estate management company did not qualify for inheritance tax business property relief as its activities were predominately investment related.

The business owned a plot of land with a disused factory which had been converted into a trading estate with units rented for light industry and offices. As well as letting the land, the family managed the site and provided various facilities for those on the site including electricity, fax services, free parking, a full-time manager on site and a forklift truck and use of a full-time driver.

This is from the report of the decision of the tribunal:

“The non-investment services provided by the Company include the  forklift truck service and the provision of office type facilities. We do not consider that those additional services predominate when considering the activities of the Company as a whole. Even if we were to take out the Burdens side of the business, the real nature of the business remains an investment business exploiting the land by granting tenancies and licences. Most of the income from additional services relates to re-charges for electricity, telephone and postage. The income from the other additional services is very modest compared to the licence fee income. Considering the facts by reference to the nature of the activities and the income produced by those activities puts the Business Centre well towards the investment end of the spectrum.”

The full report can be found here.

The First-tier Tax Tribunal has allowed a claim for principal private residence relief (PPR) in which a couple bought their mother’s flat subject to her right to continue occupying it.  The tribunal decided this was an interest in settled property, i.e. trust property under s.68 of the Taxation of Chargeable Gains Act 1992.

This is from the case report and outlines the background to this matter:

6. The Flat was purchased by Mr Wagstaff’s mother (“Mrs Barbara Wagstaff”), in
1990. On 6 February 1996 she sold and transferred the Flat to the Appellants for
30 £45,000. The price was based on a valuation report of 14 October 1994. The report
was not before us and we heard no evidence regarding the valuation either at the time
that it was given or in respect of the sale which took place some 15 months later.
HMRC had nevertheless accepted the price as an arm’s length price.

7. The sale was subject to the terms of an agreement of 6 February 1996 (“the
35 Agreement”) between the parties under which Mrs Barbara Wagstaff was entitled to
continue living at the flat at no cost for the remainder of her life or until her
remarriage, subject to payment of £5,000.

8. Mrs Barbara Wagstaff continued to occupy the property until 2005. In August
2005 she had knee replacement surgery, following which she returned to the Flat.
40 Within a week, however, she fell down stairs, seriously injuring the replacement joint, 3
and had to be returned to hospital. She was not released from hospital until
November 2005 when she went to live with the Appellants pending the arrangement
of more suitable long term accommodation. The Flat remained available for her use
with her furniture and belongings in situ until she moved into a new single storey,
5 stair-free home in June 2006. Thereafter the Flat remained empty until it was sold (by
way of an arm’s length third party sale) with her agreement on 16 March 2007.”

The taxpayers submitted a claim under section 225 of TCGA 1992 on the basis that their ownership of the flat was subject to a trust and the flat was settled property which qualified for PPR.   HMRC refused the taxpayers’ claim for PPR.

The full report can be found here. 

Inquiry by the Scottish Parliament’s Economy, Energy and Tourism Committee into Scotland’s Economic Future Post-2014 

Please find following my written evidence.

By way of background I am a partner in and co-founder of Legal Knowledge Scotland, immediate past Convener of the Scottish Borders Chamber of Commerce, a former trustee of Reform Scotland and co-author of its “Fiscal Powers” and “Devo plus” papers.  I have written extensively on the fiscal powers debate and in particular on how we might create a simpler, more efficient and effective Scottish tax system.

I only wish to make three points to this inquiry.

Firstly, if Scotland votes ‘NO’ it will be extremely difficult to persuade Westminster to devolve any let alone substantial powers to the Scottish Parliament.  For evidence of this simply consider what was proposed by the Calman Commission, the reaction to it by the then UK Labour and subsequent coalition governments and what was actually delivered by the Scotland Act 2012.

The chapter I wrote for the recent Hassan/Mitchell book: After Independence titled “The continuing battle for Scottish tax powers” outlines this argument in more detail.   A link to this chapter can be found here.

Secondly, even if you are able to persuade Westminster to devolve even relatively minor powers it will be at least a decade before the Scottish Parliament can make use of these powers.  In addition, it is likely that Westminster and other vested interests will use this time to water down any proposal.  For evidence of this again note the Calman timeline.  A link to an article I wrote on this issue can be found here.

My third point concerns the Scottish Government’s White Paper on independence.  Three of the tax related priorities are:  reduce Air Passenger Duty (APD) by 50%, set a “competitive” corporation tax rate and design a more efficient tax system.

Whilst I have no real issue with these priorities and in particular designing a more efficient Scottish tax system, I do feel that the Scottish Government is not being radical enough.  Personally I would have argued for abolishing two or even three of the minor taxes such as stamp duty on shares, APD and possibly even CGT.

Why am I arguing for this?  If we are serious about creating a simpler, more efficient and effective Scottish tax system we need to start removing some of the clutter.  That is best done by abolition not tinkering.   Does an independent Scotland need over 25 taxes, charges and duties?  Of course not.  Does Scotland need a separate Stamp Office, Registers of Scotland and Companies House?  Of course not.

In addition consider for a moment how an announcement such as this would be perceived throughout Europe and also further afield.  I suspect that the way Scotland is viewed by many may change or at least be reconsidered.

James Aitken, 26 January 2014

My first tax and fiscal powers blog of the year.

Let’s start with the fiscal powers debate.  I thought it was interesting but not surprising to see that Jim Gallagher has joined the “NO” campaign.  Anyone who was involved with the Calman Commission, which he played an integral part in, knows his views on devolving substantial tax and welfare powers to the Scottish Parliament.  I suspect the ‘NO’ campaign were disappointed that it was his previous comments on Scotland’s European Union membership that received the most publicity and not the fact he has joined the ‘NO’ campaign.  More on this can be found here.

Now to tax powers already held by the Scottish Parliament.

John Swinney has presented his final Budget before the independence referendum.  On business rates he announced: “£77m over two years to further enhance the competitiveness of the Scotland’s business rates regime”.  More on this can be found here and here.  The Scottish Government’s policy of a freeze on Council Tax bills continues to spark debate.  The differing views of the Scottish Government and Scottish Labour can be found here.  One other and not unexpected announcement was that the Scottish Government is ending the “alcohol surcharge”.  More on this can be found here.

Now to the future.  Let’s start with the White Paper.

The Scottish Government’s White Paper can be found here.  The tax proposals can be found on pages 117 to 123.   Three of the tax related priorities are:  reduce Air Passenger Duty (APD) by 50%, set a “competitive” corporation tax rate and design a more efficient tax system.

Whilst I have no real issue with these priorities and in particular designing a more efficient Scottish tax system, I do feel that the Scottish Government is not being radical enough.  Personally I would have argued for abolishing 2 or even 3 of the minor taxes such as stamp duty on shares, APD and possibly even CGT.

Why am I arguing for this?  Firstly, if we are serious about creating a simpler and more efficient Scottish tax system we need to start removing some of the clutter.  That is best done by abolition not tinkering.   Does an independent Scotland need over 25 taxes, charges and duties?  Of course not.  Does Scotland need a separate Stamp Office, Registers of Scotland and Companies House?  Of course not.

Secondly, not only would this free up resources, it would send a clear message.  How Scotland is viewed  on independence is very important.  A clear statement of intent is needed and that should include abolishing a number of taxes.

More on the APD proposal can be found here.

Now to the Revenue Scotland and Tax Powers Bill.  The Bill provides a legal framework for the collection of taxes devolved under the Scotland Act 2012, and gives this responsibility to a new tax authority, Revenue Scotland.  In short, the beginnings of a Scottish tax system.  More on this can be found here.

I was also interested to see that HMRC plans to develop new digital services.  This is the kind of thinking those creating a Scottish tax system need to embrace.  More on this can be found here.

Now to matters slightly further afield and to some good news for the Hollande government.  The 75% top rate of tax proposal has finally been approved.  The initial proposal to tax individual incomes was ruled unconstitutional by the Constitutional Council almost exactly one year ago.  But the government modified it to make employers liable for the 75% tax on salaries exceeding 1m euros (£830,000).  More on this can be found here.

Staying with France.  The following Ernst & Young report shows the wide ranging role of France’s Constitutional Court in regard to taxation.  For example it stopped the Hollande government from widening the scope of the general anti abuse rule from ‘exclusively’ to ‘mainly tax driven’ transactions, and blocked the mandatory disclosure of tax planning schemes. The report can be found here.

Now for a bit of sport.  The European Commission is investigating whether the Spanish Government gave unfair tax reliefs to Spanish professional football clubs, including Real Madrid and Barcelona.  More on this can be found here.

The Canada Revenue Agency has published a warning to ‘snowbirds’ that it will consider them Canadian tax-resident no matter how long they spend in the US, if they maintain residential ties in Canada and do not obtain US permanent residency.  More on this can be found here.

Another interesting proposal from the Canadian Government.   They are going to pay people who inform on major international tax evasion, with pay-offs of up to 15% of the extra tax collected. More stringent monitoring of international bank transfers is also being introduced.  More on this can be found here.

And finally to China.  Documents obtained by the so-called International Consortium of Investigative Journalists from company service providers in the British Virgin Islands suggest that relatives of some of China’s governing elite have set up offshore companies.

This is from the following article: “As neither Chinese officials nor their families are required to issue public financial disclosures, citizens in the country and abroad have been left largely in the dark about the elite’s use of offshore structures which can facilitate the avoidance of tax, or moving of money overseas. Between $1tn and $4tn in untraced assets have left China since 2000, according to estimates.”

“China’s rapid economic growth is leading to a degree of internal tension within the nation, as the proceeds of the country’s newfound prosperity are not evenly divided: the country’s 100 richest men are collectively worth over $300bn, while an estimated 300m people in the country still live on less than $2 a day. The Chinese government has made efforts to crack down citizens’ movements aimed at promoting transparency or accountability among the country’s elite.”

Twas ever thus.  More on this can be found here.

The England and Wales Court of Appeal has unanimously rejected HMRC’s assertion that a mother’s gift of a leasehold flat to her sons was a “gift with reservation of benefit” because the underlease contained covenants in her favour.

This ruling overturns the decisions of both lower tribunals.

“On 5 June 1996, Parkside Knightsbridge Limited, the superior landlord, granted Mrs Kamhi a lease, the Headlease, for a term of 100 years less one day, from 25 March 1994, of a flat in Knightsbridge, London at a premium of £250,000. The Headlease contained a term for payment of rent and a service charge of 3%. The tenant, Mrs Kamhi, covenanted to pay rent and, as additional rent, the service charge and advance service charge. There were other covenants, such as to keep the property in repair, to clean the premises and its windows, to indemnify the landlord against outgoings, to keep the flat decorated and to repay a proportion of the cost in relation to maintenance and cleaning of common areas.”

In 1997 she created a trust for her two sons and granted the trustees an underlease to the flat for their benefit for the remainder of the headlease term. The only trust property was the underlease.  Like the headlease, the underlease imposed covenants on the leaseholders to pay ground rent and service charges and to keep the flat in good condition.

“This appeal turns on the question whether those Tribunals were correct to conclude that the Underlease was not enjoyed to the entire exclusion, or virtually entire exclusion, of a benefit to the donor, by reason of positive covenants entered into by [the trust company] with Mrs Kamhi, which mirrored the covenants into which she had entered in her Head Lease.”

The case report can be found here.

In this case Mr Moore moved into a property that had previously been let out following his separation from his wife.  Several months later he purchased a property with his new partner and sold the property he had been living in since the separation.

HMRC denied CGT Principal Private Residence (PPR) relief.  PPR relief applies where a person has at any time lived in the property as their sole/main residence. The gain attributable to the last 36 months of ownership will automatically be exempt from CGT.  From April 2014, this will be reduced to 18 months.

The question was whether his occupation of the property he had sold had the necessary degree of permanence, continuity or expectation of continuity.  The tax tribunal held that it did not.

In making their decision the tribunal made particular reference to the lack of evidence, other than council tax bills, regarding the taxpayer’s occupation. Other correspondence went to both his former home and the home of his new partner.  Whilst the tribunal accepted that he had lived in the property, they felt that the lack of evidence suggested that he did not intend to live in the property permanently.

The full judgement can be found here.

HMRC are planning to launch an online inheritance tax service during the 2015-16 tax year. This will allow executors and their representatives to submit IHT accounts via the internet. Interestingly the announcement also refers to “probate” but not “confirmation”. That may mean that it simply did not occur to those making the announcement to consider the situation in Scotland, or as confirmation is primarily a devolved matter that part of the announcement does not apply to Scotland.

That said this is a positive development. More detail will hopefully follow soon and this may mean the beginning of the end for paper inheritance tax forms.

The announcement can be found here (need to scroll down to the the bottom of the page).