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EBT Schemes / Advance Payment Notices (APNs)

A query from an adviser, who had just taken on a client who had invested in an Employee Benefit Trust, or EBT, and had recently received an Advance Payment Notice, or APN. admin@j-a-s.org.uk wanted to know what the implications might be.

To the uninitiated, an APN is basically where HMRC dons a mask and demands money with menaces  - sorry,  says your tax strategy doesn’t work and you’ve got to hand over the tax/NIC on account in case it might be due if HMRC ever got round to litigating the scheme.  Its bedfellow is the Follower Notice, which works by saying your strategy is just like one which they’ve just taken to the Tribunals and won (and definitely NOT like any they’ve taken to the Tribunal and lost, because that never happens, does it? No, Sir). Whether you get an APN or an FN, you have to pay the tax in 90 days, rather than wait for your day in court. Actually, it is worse than this: HMRC can simply take exception to some form of tax strategy, issue a “DOTAS reference”, or “GAAR Counteraction Notice”, and then issue an APN. Anyway, enough of my whingeing. Back to the advice given by DavidHeaton:

“HMRC has yet to prove its point on PAYE and NICs being due on EBT arrangements, as it lost its challenge to the Rangers FC EBT & loan schemes at both FTT and UT in Murray Group Holdings. Murray has now gone into liquidation, so HMRC's appeal to the Court of Session will probably need to wait for another case.

However, if the scheme in question had a DOTAS number, HMRC is likely to issue APNs, with money payable on account whether or not HMRC is ultimately found to be right. It has been delaying the issue of APNs on EBT schemes because, although the tax legislation was passed in 2014, the parallel NIC legislation only took effect on 12 April, and it wanted to collect both alleged PAYE and NIC arrears together. It has, however, issued some APNs to recover any claimed CT relief for contributions, a point that it has established by arguing that, tax relief being one of the main purposes of entering into the scheme, the expenditure had a duality of purpose that was sufficient to disqualify any CT relief. The contributions were argued not to have been made wholly and exclusively for the purposes of the trade, and both FTT and UT have agreed so far (Google "Scotts Atlantic Management").

There is a debate about what you do in your accounts if you have used a scheme and are expecting, but haven't yet received, an APN, but that is well beyond the scope of a forum post.

If the client wants to concede rather than fight HMRC's arguments, he has missed the deadline for the EBT settlement opportunity, which required registration by 31 March, but HMRC won't turn down the offer of the appropriate amount of money. There is no longer a standardised deal on the table, but they are always open to offers in settlement (and it remains to be seen, but the amount they seek probably hasn't changed since 31 March). Some businesses have settled because they want to wipe the slate clean and move on, some need a clean slate before they can sell their business, and some are hanging on in the hope that somebody else will win the argument, but the APN regime has changed the economics of hanging on.”

For those who don’t know David, (although many will), he is an employment taxes specialist and former chairman of the ICAEW’s Tax Faculty.  When we spoke to him later on, he advised:

“The APN regime is still being challenged by way of judicial review proceedings, which are taking some time, but HMRC has not been told by the High Court to hold off from issuing more notices in the meantime.  If the APN you receive is based on the correct numbers, you have to pay up within 90 days, or risk a 5% surcharge (higher if you hold out for a long time, and you’ll be chased by Debt Management).    If the APN uses the wrong numbers, you can make representations, which is not a standard appeal with a request for postponement.  You then have 30 days from receipt of the HMRC decision on those representations before you have to pay, if that is beyond the original 90 day deadline.  The tax and NICs paid under the APN should be available for set-off in any subsequent settlement, or refunded in the distant future if HMRC loses its case.”

 Self Assessment - Income Contingent Student Loan Question

A surprisingly popular topic, notably not only for the number of people who read it but also because it is one in which Lambs appears not to have fumbled the ball. Makes a change.  The querist was a Self Assessment taxpayer with an Income-Contingent Student Loan, which usually means that a Loan repayment is also required on top of the Self Assessment tax due on 31 January. The querist had, however, already paid off his Loan, so didn’t want to have to follow the calculations on the return and make a further payment.

Lambs directed  Anders to HMRC’s Collection of Student Loans Manual, and specifically,

CSLM19040 - SL Repayments: Borrower Within SA: SA - Final Year of Loan

It turns out that there are facilities for the Student Loans Company to warn HMRC that repayment is imminent, and that repayments should NOT be collected once a “stop” notice has been issued. Borrowers can ask HMRC to liaise with the Student Loans Company by ticking the box on the tax return.

Company Withholding Tax Issues

Another popular thread related to a query about how to reclaim Withholding Tax levied by an overseas country to a UK-resident business. (This is normally effected by an overseas client’s withholding some of the invoice amount, when the UK business raises a bill). Whether or not there is a Double Taxation Agreement between that country and the UK is pivotal, as Maths explained:

“Many countries levy domestic withholding taxes on payments to non-residents; however, under some DTAs the countries concerned may not have the right to levy such taxes.

You thus first need to read the DTAs and establish, given the nature of the work carried out, whether or not the right to levy a w/tax subsists under the DTA.

If they do not, then you will need to reclaim it back from them. The time period varies from country to country; there is no average time period. It can be many months.

If they do have the right under the DTA to levy the withholding tax then you cannot reclaim it from them (or the UK) but will simply be allowed to offset it against the company's corporation tax liability.

Either way the w/tax represents adverse cash flow.”

Maths’ advice very helpfully clarifies that a UK taxpayer cannot just assume that it will simply be a matter of setting off any overseas tax paid against the corresponding UK tax liability.

Remarkably, the final post was by a firm of Egyptian Tax Consultants, offering to assist with reclaiming the tax directly from the Egyptian tax authorities. I am pleasantly surprised that TW has such international appeal.

Purchase in Wife's Name, Income in Mine

Youngplug raised the following query, which I think is worth setting out in full because I suspect it will apply to a good number of property investors:

“We currently hold a number of properties but I am now struggling to raise finance as my income in minimal and a lot of lenders require at least £20k income before they will lend even for buy to let purchases. We are therefore trying to establish if we can buy our next property in my wife's name (who is a higher rate tax payer) and mortgage in her name but I receive all of the property income (and pay tax on at basic rate). Can anyone help please?”

Section44 pointed out that HMRC could apply what is commonly referred to as the Settlements Legislation, at what is now ITTOIA 2005 s 624, although it will often still be referred to as s660 by those who still live in the previous millennium. (I am one such).

Ian McTernan CTA suggested what I thought was a rather nice approach, involving the setting up of a corporate structure. This might seem a bit esoteric, but Ian was using his insider knowledge that the £20k income rule generally applies only to landlords with more than 10 properties. A corporate structure can make a lot of sense for someone who has a sizeable portfolio and is (by implication) in it for the long haul.

Maths also had a solution :

“Is it not possible for you and wife to apply for a joint mortgage even though she is the one in whom the mortgagee will be primarily interested?

You are then both legal owners.

You are both then able to execute a declaration of trust under which, say, you own 99% and she 1%.

You then get 99% of the rents; she gets 1%.”

It is worth pointing out that the declaration of trust has effect for both income and capital, otherwise it might simply fall foul of the Settlements Legislation pointed out earlier by Section 44. So, what happens if the 99:1 split is not ideal from a CGT perspective?

The then-Chancellor Mr. Lamont said, on the introduction of independent taxation between spouses, “[it was] bound to mean that some couples would transfer assets between themselves so that their total tax will reduce; this was an inevitable and acceptable consequence of taxing husbands and wives separately “. Notably, HMRC does accept that the beneficial interests in property can be moved between spouses (who are living together) more than once, without significant tax consequence – see, for instance, their Capital Gains Manual at CG22220:

“More than One Transfer

TCGA92/S58 [inter-spousal transfer rules]can apply through several transfers between husbands and wives or between civil partners even if the asset is eventually transferred to a spouse or to a civil partner who was not one of the original married couple or not one of the civil partners within the original civil partnership and has never been married to or a civil partner of either of them. This is because you only need to consider the circumstances at the date of each transfer.”

Does Being Named on Deeds = 2nd Home?

This query raises two important points from a tax perspective:

1. Tax normally follows the beneficial or equitable interest, rather than simply the legal interest, and

2. Owning a house does not make it your home

So, while the querist’s name was on the title deeds, etc., what mattered was whether or not he had a beneficial interest in the property. The arrangement of legal title is indicative but does not necessarily need to be followed, as other factors also come into play. (For more information on these important issues, please see Capital Gains Tax and Beneficial Ownership) MrSpartacus had the benefit of some excellent contributions from several TW regulars but Taxplanet offered a neat summary:

“CGT is concerned with beneficial ownership and not legal title but the legal presumption is always that beneficial ownership follows legal title unless there are documents or other information, etc., to show that it is not the case. In the absence of any other document or information therefore it would be assumed that if there were three joint owners on the title each would own an undivided one third share in the property.

If however as you say you contributed a half share of the purchase price of the second property and your parents between them provided the other half, and this can be proved, I would have thought there was a strong presumption in law that you owned a half share in the property and that your parents owned a quarter each. If that is the case the Personal Representatives of your father's estate are only free to dispose of a quarter share in the property to your siblings when your mothers right to occupy comes to an end (which it may well have done now if she has left the property).

I would suggest that you instruct a solicitor to examine the financing of the purchase and your father's will to provide advice you on what the extent of your interest in the property is whether a half or one third.”

First and Last Time Capital Gains. Rented 1st Home

Almost finally, a query which hinged on whether or not a property could qualify as a “main residence” eligible for the relevant Capital Gains Tax exemptions, if it had only been lived in by the owner for a short period at the outset.

More experienced readers will be familiar with the mantra that it’s “quality, not quantity (duration)” of occupation which determines if something may qualify as one’s residence. Of course only transient occupation will not readily lend itself to the notion that residence must have some tangible substance, or “permanence”.  (Although a counter argument is that, in the absence of any other obvious residence, where one resides at any given time must follow occupation, almost no matter how fleeting. But I digress.)  

PeterD deserves special mention for his perseverance with this query and repeatedly crunching the numbers  – truly above and beyond, I think.  KingMaker referred to a gem of a case wherein a taxpayer was successful in his PPR claim despite having occupied the property for only a few weeks. From memory, the tribunal found contemporaneous correspondence from the taxpayer’s solicitor advising the mortgagee that the property was expected [also] to be occupied by a lady who was the taxpayer’s fiancée at the time of the occupation (but alas, not for much longer) to be persuasive evidence of an intention to occupy the property as the taxpayer’s main residence. The case is Morgan v HMRC2013.

Finally, a quick mention of I Need Your Advice, wherein an accountant was pondering whether or not to take the plunge and set up entirely on his or her own. This was another very popular post, viewed around 1,500 times. I am only glad that it did not come to Lambs’ attention, given his past attempts at career advice. Otherwise there’d probably now be an accountant scratching his head, wondering how on Earth he’d ended up owning a chip shop in Bangor.