Tax Update

Accountancy's monthly round-up of the latest tax developments. This monthly update is compiled by Francesca Lagerberg of Smith & Williamson.
E-filing and Carter

There appears to be a sign of progress in the ongoing discussions on self-assessment filing deadlines. Readers will recall that Lord Carter of Coles produced a report in March 2006, proposing that the filing deadlines for self-assessment returns should be brought forward in the year 2008, so that hard copies of returns had to be filed by 30 September and electronic copies by the end of November. This compares very unfavourably with the current deadline date of 31 January following the tax year-end.

Speaking at a conference at the ICAEW, Lord Carter announced he was re-entering the discussion and going to come back to consider the representations that have been made by the tax representative bodies, which include the ICAEW. He noted that after considering all the facts, he might recommend a change to his proposals on deadlines. This is a very welcome response to the strong representations that have been made.

DOTAS regulations released

The draft new Disclosure of Tax Avoidance Scheme (DOTAS) regulations have been issued and can be found on These are now expected to take effect from August 2006. Prescribed arrangements are no longer restricted to financial and employment products and therefore broadly all areas of income tax, CGT, corporation tax etc.

Prescribed arrangements are those that fall within specified headings, termed 'hallmarks' of avoidance. Inhouse schemes will need to be disclosed within 30 days rather than on the first relevant tax return.

Revenue eyes up company cars

Revenue & Customs clearly has its sights set on how employers offer company cars to employees. At the time of the Budget in March 2006, the Red Book noted at para 7.79: 'In light of the findings from the company car tax evaluation that show a rise in the number of employee car ownership schemes (ECOS), Revenue & Customs will review the taxation of ECOS and benefits employees derive from them, with a view to possible changes.'

It is thought around 150,000 employees are within some type of ECOS scheme. ECOS, at its most basic, is a scheme facilitated by employers that enables an employee to acquire a car, often within a specified finance framework.

A review has now been officially begun by the Revenue with a report due back in this autumn's preBudget report. Full details are in a Revenue letter dated 8 May 2006, which was published on

Source: Revenue & Customs notice dated 12 May 2006.

New Management Act project

A new part of the Revenue & Customs website has been opened outlining the New Management Act (NMA) project team. This is looking at new legislation governing the administration of VAT, income tax self-assessment (including capital gains tax), corporation tax self-assessment, pay as you earn and national insurance contributions as operated by employers and national insurance contributions paid by the self-employed (Class 2 and 4 contributions).

The project is meant to be a means of amalgamating the existing administrative legislation found in TMA 1970 and the Customs and Excise Management Act. However, clearly the project wants to go further than this and it is tied in to a review of the Revenue's powers.

For full details go to

Tax cases

Cadbury Schweppes result

The advocate-general has issued his opinion in the controlled foreign company (CFC) case of Cadbury Schweppes (C-196/04). The main point at issue is whether UK law is compatible with European law. He has recommended that the case be remitted back to the UK courts to determine whether the UK CFC regime applies only to 'wholly artificial arrangements'. If it does not, the UK will be in breach of European law. His opinion does not have to be followed by the European Court of Justice (ECJ) - which will decide the case in several months' time - but usually he is highly persuasive.

Cadbury Schweppes plc set up two Irish subsidiaries, which benefited from highly advantageous tax rates. The question that was referred to the ECJ was: 'Do Arts 43 and 48 (Freedom of Establishment), 49 (Services) and 56 (Free Movement of Capital) of the EC Treaty preclude national tax legislation such as that at issue in the main proceedings, which provides in specified circumstances for the imposition of a charge upon a company resident in that member state (the UK) in respect of the profits of a subsidiary company resident in another member state (Ireland) subject to a lower level of taxation?'

The advocate-general believed that the establishment by an EU parent company of a subsidiary in another member state, to enjoy a more favourable tax regime, was not in itself an abuse of freedom of establishment. He went on to add that the UK CFC legislation does hinder the freedom of establishment. However, whether or not a member state can justify application of its CFC legislation to a particular taxpayer should be evaluated by reference to whether or not the CFC regime only catches 'wholly artificial arrangements' as opposed to real economic activity locally.

Relevant factors in determining the above included:

1.  Does the subsidiary have premises, staff and equipment necessary to carry out the services provided to the parent company which results in the reduction of origin state tax?

2.  Are those services of a genuine nature, having regard to the competence of the subsidiary staff and the level of decision-making in carrying out those activities?

3.  Do the subsidiary's activities add economic value? This has to be evaluated in the light of the parent company's activity.

Not unsurprisingly it is not possible from the advocate-general's opinion to categorically suggest that the UK CFC rules are incompatible with European law but it does point towards the need for a review, whatever the final outcome of the ECJ case is.

Offshore account information

The Financial Times ran a story stating that Barclays Bank was the financial institution that will be required to hand over details relating to thousands of its customers' offshore bank accounts as a result of the landmark decision in Revenue & Customs Commissioners v Financial Institution (No 2) (SpC 536). It is expected that this decision will lead to Revenue & Customs pursuing similar rulings concerning other banks.

This case clearly provides the Revenue with a considerable amount of data about offshore accounts that may contain funds which should have been, but have not been, disclosed on tax returns.

The Revenue indicated that there was a total potential tax yield of £1.5bn of unpaid tax as a result of the decision. It estimated that more than £300m would be recovered as a result of information to be released by Barclays concerning offshore accounts based mostly in the Channel Islands and the Isle of Man.

Shepherd v Inland Revenue Commissioners

Chancery Division, Lewison J, 12 May 2006

This is a case that received a lot of publicity when it went before the special commissioners as it shows that the concessions found in Revenue & Customs' leaflet on residence issues (IR20) are not always guaranteed. It has now been heard in the High Court, which has upheld the special commissioners' decision.

Until his retirement in April 2000, the taxpayer was a long-haul pilot for British Airways. In anticipation of his retirement, he made plans to set up in Cyprus. In May 1998, he applied to the Cypriot authorities for permanent residence and an immigration permit. In October 1998, he signed a tenancy agreement in respect of a furnished flat in Cyprus, which was renewed in February 1999 to expire on 24 April 2000. In February 2000, he was granted an immigration permit by the Cypriot authorities provided he acquired residency within a year from that date. Between June 2000 and October 2002 the taxpayer was on a sailing cruise. A question arose as to his tax status in the year ending 5 April 2000. The commissioner found that, on the facts, he was ordinarily resident in the UK, within the meaning of s334, ICTA 1988 and had not been in the UK for temporary purposes since October 1998. He was therefore liable to pay income tax. The taxpayer appealed against that decision.

Decision: The High Court found that the appeal by the taxpayer should be dismissed. For the appeal to succeed it had to be shown that the commissioner had misdirected herself in law or had reached a decision which no reasonable commissioner, properly directed in law, could have reached. The taxpayer had not discharged that burden. The commissioner's self-direction had accurately set out the legal test she was required to apply. Further, she had reached a conclusion that she had been entitled to reach on the facts. Accordingly, there had been no error of law.

Francesca Lagerberg is national tax director at Smith & Williamson and chairman of the ICAEW's Tax Faculty.
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