Inland Revenue Tax Bulletin - Issue 47

Contents

• IR35: Frequently Asked Questions
• Inland Revenue - Internet Services (Article no longer current)
• Revenue Accountants
• Profit Related Pay (PRP) And Financial Reporting Standard 11 (No longer relevant)
• Tax Law Rewrite: First Rewrite Bill

Interpretations

• Section 51 CAA 1990 - Fixtures In Buildings - Licence To Occupy Land (Superseded by CA26100)

Miscellaneous

• Revenue Prosecutions
• Thieves Bag Cheques Bound For Accountant
• Update on: Double Taxation Agreements and Double Contribution Conventions (No longer relevant)
• Extra Statutory Concessions and Statements of Practice

Provision Of Personal Services Through Intermediaries: Frequently Asked Questions

The new rules which apply to workers who supply their services to clients through intermediaries such as service companies or partnerships came into effect on 6 April 2000. Details about how to decide when the new rules apply were published in Tax Bulletin Issue 45 (February 2000).

All our published information about this measure has been included on our website at: www.inlandrevenue.gov.uk/ir35, but some of the more frequently asked questions are being duplicated here for ease of reference.

Further information can also be obtained from our new leaflet, IR175 ‘Supplying services through a limited company or partnership’, available from Inland Revenue Enquiry Centres, Tax Offices, Inland Revenue National Insurance Contribution Offices, or our website.

General Questions

What is IR 35 about?

Budget day 1999 news release IR35 announced the Chancellor’s intention to tackle tax and NICs avoidance through the use of intermediaries such as service companies or partnerships.

Intermediaries such as service companies can be set up to provide the services of a single worker to a client in circumstances where, if it were not for the service company, the worker would be an employee of the client. The use of service companies in this way allows the client to make payments to the company rather than the individual, without deducting PAYE or NICs.

The worker can then take the money out of the service company in the form of dividends instead of salary. Dividends are not liable to NICs so the worker will pay less in NICs than either a conventional employee or a self-employed person.

The Chancellor believes that avoidance of PAYE and NICs in this way needs to be tackled in the interests of fairness.

Who will be affected by the proposals?

Anyone supplying their services through an intermediary such as a service company or partnership will need to think about the new rules.

But only those contracts which would have been contracts of employment with the client if the worker had worked directly to them instead of through an intermediary will be affected.

The most usual sorts of intermediary are service companies or partnerships which are normally under the control of the worker. The worker can then take the money out of the service company in the form of dividends instead of salary. Dividends are not liable to NICs so the worker will pay less in NICs than either a conventional employee or a self-employed person.

If there is more than one intermediary between the client and the worker, any intermediary which makes payments direct to the worker may be affected. However, the intermediary with the direct link with the worker will normally be the intermediary responsible for complying with the legislation.

Individuals not in business and contracting with an intermediary on a personal basis (e.g. a householder engaging a plumber to fix the kitchen sink) will be specifically excluded from these new rules.

Please see Inland Revenue Press Release of 23/9/99 for further details.

How are ‘service companies’ defined?

The legislation may affect any kind of intermediary so no particular intermediary will be defined in the legislation.

What are the existing rules used to determine the boundary between employment and self-employment (the ‘D/E tests’)?

The rules are based on a long history of case law. The same rules apply for both tax and NICs purposes. An overview of those rules is available in the Inland Revenue February 2000 Tax Bulletin.

Some professions (e.g. nurses working through nursing banks) have case law to define their employment status, but the IT and engineering industries have none.

Case law on employment status does not apply only in the industries where particular cases have been taken: it establishes principles which apply in all industries. Those principles are applied in every case, to nurses in the same way as to IT professionals. So a nurse has no more certainty, and no less, than any other worker. The principles are explained in the Tax Bulletin Issue 45 (February 2000).

In deciding whether I would have been an employee of my client, will you only look at the contract I have signed, or the contract between the client and an agency?

The Inland Revenue will take account of all relevant contracts in order to discover whether the relationship between a worker and a client would have been one of employment, if there had been no intermediary. This would include any contracts between the client and an agency, and between the agency and the worker’s service company.

How will the Revenue determine the facts after the contract has finished? Will you go back and look at past contracts?

The Revenue will review the facts in the same way as it does for all employment status work. This will include going back and looking at past contracts if appropriate.

You say the Revenue will give an opinion on signed contracts but I do not have a written contract as the terms were agreed orally. What supporting documentation do I need to provide in order to receive an opinion from the Revenue?

You will need to provide whatever supporting evidence you consider will be helpful in demonstrating the terms and conditions under which you work. You should write to the Inland Revenue, in accordance with the existing guidance on obtaining opinions on contracts, setting out full details of the terms and conditions, which you have agreed with the client and the services which you are providing.

You should also obtain a letter from the client confirming that the terms and conditions are as agreed. If necessary the Inspector may need to speak to both you and your client in order to properly understand the working arrangements and to formulate an opinion on the contract.

I hear that the Revenue have approved a model contract - how could this happen if each case is decided on its merits?

The Inland Revenue has not approved a model contract.

A version of a model contract was sent to us for an opinion, according to the arrangements for giving advice on existing contracts announced in the Inland Revenue Press Notice on 7 February. An opinion was then given in relation to one person’s particular circumstances.

Although we are unable to comment on the circumstances of individual cases we should confirm that a decision on employment status will depend on the circumstances of each case. We can also confirm that new rules will not apply in cases where the relationship with the client does not fall within the accepted definition of employment.

My contract specifies that I am allowed to hire a substitute. Will the Inland Revenue take this at face value? If not will I need to provide evidence to prove that this right is genuine?

The Inland Revenue will want to ensure that the right to send a substitute is a genuine right before it can be taken into account in deciding employment status.

A right of substitution is only likely to exist where the client does not mind, from one day to the next for the duration of the contract, who carries out the work, provided that whoever does so is suitably qualified and experienced.

Where the service company’s contract is not with the client but with an agency, and there is a claimed right of substitution, the Inland Revenue would normally require a copy of the written contract between the agency and the client.

If you are unable to get access to that contract then you should ask the agency to send a copy to the Inland Revenue direct. If this is not possible you may be asked to provide alternative evidence. This could take the form of a letter from the client which confirms that it has agreed to your service company providing a substitute.

What will happen if someone fails to follow the new rules?

Where the Inland Revenue discover the new rules have not been followed, they will follow the normal approach to cases of PAYE/NICs failure set out in Inland Revenue leaflet IR 109 - ‘Employer compliance reviews and negotiations’. The Revenue will seek to collect any unpaid tax or NICs, and any interest due. In addition penalties may be sought in cases of negligent or fraudulent conduct.

If I work through my own service company on ‘relevant’ engagements will my client have to provide me with employment rights such as sick pay, holiday pay etc?

No. Under this legislation, the client will not become your employer. What the legislation does is to treat your service company as making a payment to you chargeable to income tax under Schedule E and on which national insurance contributions are payable. All employer responsibilities fall on the service company as they have always done.

If I work through my own service company on relevant engagements will I be entitled to unemployment benefit?

People who work through their own service companies are unable to claim benefits between contracts if they are still employees of their own service companies.

Individuals who are no longer employed by their service company may claim benefits on the same basis as any other employee.

Why do I have to pay both employer’s and employee’s NICs when a conventional employee does not have to?

Service companies are already liable to pay employer’s NICs on salary paid to their employees. The legislation does not change that.

A service company and its worker/director are two separate legal entities with separate legal responsibilities. Where the worker is employed by the service company the employer responsibilities rest with the service company and not the client. This is why the service company’s client does not have to pay employer’s NIC on the payment it makes for the worker’s services and the service company does.

If my company is incorporated or resident abroad will the rules affect me?

If you would have been treated as an employee of the client had you provided services under a contract between yourself and that client, rather than under a contract between your company and the client, then the rules will apply to you wherever your company is incorporated or resident.

Can I avoid the legislation by using an offshore service company?

No. If you would have been liable to UK tax and NICs if you had been employed directly by the client, there will be a liability for UK tax and NICs under the new legislation, whether or not your service company is located in the UK.

If an offshore service company fails to deduct and account for PAYE tax and NICs due under the legislation, liability to pay tax and NICs can be transferred to the worker. Action to recover employer’s NICs not paid by an offshore service company could also include action against any assets of that company located in the UK.

The Inland Revenue has powers to obtain details of payments to offshore companies from the records of clients and agencies.

Computational Questions

When will the first ‘deemed’ payments have to be calculated?

For an ongoing business it is likely that the first deemed payments will have to be calculated by 5 April 2001.

If a business ceases before that date a deemed payment may need to be calculated sooner.

Does the service company have to pay a salary on 5 April?

No. The legislation will not force the service company to pay salary at any time. It will require a calculation of tax and NICs to be done on 5 April. If the service company has already paid enough salary to the worker during the year, no further tax or NICs will be payable on 5 April.

Nothing in the legislation will prevent a service company from paying money to the worker or others in the form of dividends, or retaining cash in the company. It will simply mean that an extra payment of PAYE tax and NICs will be calculated on 5 April. To calculate that payment an amount of salary will be deemed to have been paid on that date, whether or not any payment is actually made.

What happens if I cannot calculate the tax and NICs due on 5 April in time to pay it to the Inland Revenue by the normal date of 19 April?

Most of the information needed to calculate the deemed payment should be available before 5 April, and it should be possible to make a good estimate of the tax and NICs due at that point. It will be important to keep records of relevant income and expenditure so that you can do this.

If you are not able to calculate the amount of tax and NICs due on the deemed payment by 19 April, we will accept a payment at that date of a lower amount on account of the tax and NICs due, as long as the Revenue is notified on the Employer’s Annual Return that the amount is provisional. This should mean that the worker need not necessarily consult his accountant before making the payment on 19 April.

You should submit your Employer’s Annual Return (Form P35) by 19 May. If you are able at that time to finalise the calculation, you should show the correct figure and pay the difference or request a repayment. Otherwise, you should make it clear that the figure is still provisional.

You should seek to finalise matters as soon as possible thereafter, and send in a supplementary return with a final payment, or request for repayment.

Interest will be charged, calculated from 19 April when the original payment was due, but no penalties will be sought for late filing if:

(i) an Employer’s Annual Return is received by 19 May, showing remuneration paid during the year, plus an amount on account of the deemed payment, with tax and NICs correctly calculated on the aggregate figure, and,

(ii) a supplementary return including the correct final figure for the deemed payment is sent in to the Revenue by 31 January following the end of the tax year.

What is the position where, in addition to making payments to the limited company/agency, a client makes payments to or in respect of the consultant direct? For example, where the client reimburses travelling expenses to the consultant direct? Could the client be held liable for PAYE?

If a client makes payments to a worker in connection with duties being performed, either for direct reward, as a round sum expense allowance, or a specific reimbursement of travel which was not business travel, and the worker is an employee of another, the payments are assessable on the worker and the client should deduct tax through PAYE from payments to the worker. If a client provides non-cash benefits in connection with the employment these are also assessable on the worker. If the client makes payments of this kind to a worker in respect of a contract with a partnership, the client will not have to operate PAYE, but the amounts should be included in the calculation of the deemed payment.

Questions About Expenses

Will travel expenses be allowed?

The rules that currently apply to employees of service companies which allow them to claim a deduction for travel from their home to place of work will be used to determine the travel expenses that can be deducted in calculating the salary on which tax and NICs must be paid. For example:

• a computer contractor provides his or her services through a limited company (which he or she owns);
• he or she has a series of contracts with different clients around the country;
• he or she regularly travels from home to work at the premises of the company’s clients.

Provided the contractor does not expect to spend more than 40% of his or her working time at any one site he or she is entitled to a deduction for all journeys from home to the client’s premises. If he or she does spend more than 40% of his time at a single site, but the engagement is both expected to, and actually does, last for no more than 2 years, a deduction for travel costs will also be available. The examples set out in Tax Bulletin Issue 33 (February 1998), along with the more extensive coverage provided in Booklet 490 (Employee Travel, A Tax and NIC’s Guide for Employers), provide further guidance on the application of the travel rules.

Workers cannot obtain relief for their travel and subsistence where the period at the temporary workplace comprises ‘all or almost all of the period for which the employee is likely to hold the employment’. There have been concerns that this rule will be used to prevent the personal service company worker obtaining tax relief. However, the ‘employment’ of the worker is with his or her Personal Service Company, not with the client; the new rules do not change this. They simply deem the income from relevant engagements to be taxable under Schedule E; they do not deem the worker to be an employee of the client.

Thus the ‘period for which the worker is likely to hold the employment’ refers to employment with the service company, not the engagement with the client. Thus the treatment of travel and subsistence for workers will be no different under the new rules than it is today.

We are grateful to Anne Redston of the CIOT for suggesting amendments to this answer to make it clearer.

How will company car expenses be treated?

In calculating the deemed payment on which PAYE tax and NICs must be paid, expenses which would be allowable under section 198 ICTA 1988 can be deducted. This will include travelling expenses, and if a car owned by the company is used for business travel then a deduction can be made for the costs of that business travel in the same way as if the worker had used his own car. For example, it would be possible to use the Inland Revenue’s authorised mileage rates, which include an element for depreciation. Expenses incurred in the course of private use of the car cannot be deducted in calculating the deemed payment.

A car provided by the service company for the worker’s private use will give rise to a car benefit charge on which the worker will be taxed in the normal way. The amount of the car benefit charge can be deducted in calculating the deemed payment.

The service company will be able to set any costs of providing the car, including capital allowances, against its taxable profits.

Class 1A NICs paid on the company car benefit will be deductible in the calculation of the deemed payment, alongside other employer’s NICs.

What sort of capital allowances can be deducted when working out the deemed payment?

A deduction will only be given for capital allowances in working out the deemed payment where the plant or machinery is necessarily provided for use in the performance of the duties of the relevant engagement. This is a strict test and means that relief will only be given where the duties of the engagement meant that the company had to provide the equipment in question. If the company purchases the equipment out of choice then no deduction will be given. For example, where an IT contractor is required to use the client’s computer equipment then no relief will be due for expenditure on computers owned by the service company. Neither will any relief be due where the client makes all the equipment necessary to do a job available but the worker uses his or her own computers, out of choice.

Where cars are concerned the test is less rigorous since there is no "necessarily" test. As an alternative to claiming capital allowances relief will be given using the Inland Revenue Authorised Mileage Rates.

Where during the tax year there is mixed qualifying and non-qualifying use then any capital allowance claim should be apportioned on a just and reasonable basis. Apportionment is normally by reference to the actual use in the year. Non-qualifying use would be where the asset in question is used for private use, on contracts not covered by the IR35 rules and on IR35 contracts where the Schedule E rules are not satisfied.

How do I apportion expenses between engagements that are affected by the new rules and those which are not?

Where an engagement falls within the new rules the proposed legislation will allow for two types of deduction to be made in calculating the salary on which tax and NICs must be paid.

First, a deduction may be given for expenses paid by the service company which you would have been allowed to claim, under the normal Schedule E rules, had you paid them as part of an employment. These are, broadly, certain travel expenses, other expenses wholly, exclusively and necessarily incurred in the performance of the duties of the relevant engagement; and certain specific items such as some professional subscriptions and premiums for professional indemnity insurance. You will need to keep records to identify expenses which qualify. More details are in Inland Revenue booklets 480 (Expenses and Benefits, Guide Tax Guide) and 490 (Employee Travel, A Tax and NIC’s Guide for Employers).

Secondly, the company will also be allowed to deduct a flat rate amount of 5% of receipts from relevant engagements, in calculating the minimum salary on which tax and NICs must be paid. This will be allowed automatically, and need not be set against specific expenses.

How do I apportion the expenses when working out the deemed payment where a contract straddles the end of the tax year?

When working out the deemed payment, relief should be given for all allowable expenses met by the intermediary in the tax year, in respect of relevant engagements, as set out at Step 3. Relief for the expense should be given by reference to the date when the intermediary meets the liability. This is the date when the bill is paid. There should therefore be no need to apportion any expenses.

For example, an intermediary has a relevant engagement that runs from 1 January to 30 June 2001, during which the worker is required to work at a temporary workplace. In the course of this engagement the worker stays in bed and breakfast accommodation. The bill is settled on a monthly basis in arrears, with 14 days to pay. At the end of March a bill for £400 is issued which the intermediary pays on 12 April. The liability was met in the tax year 2001-2002. Therefore, relief for the expense will be given when working out the deemed payment payable.

Service company workers will be worse off than ordinary employees under the legislation because they will only be able to claim 5% of their expenses.

This is not correct. Service companies will be able to claim a flat rate deduction of 5% of the gross fees receivable for any relevant engagements. This 5% deduction is not available to employees but will be allowed for service companies to enable them to meet the additional costs of providing their services in this particular way.

In calculating the salary on which they are obliged to deduct Schedule E tax and NICs, workers will also be able to deduct all expenses that would normally be available to direct employees.

What sort of expenses will be covered by the 5%?

There is no restriction on the use of the allowance. There will be no requirement to demonstrate expenditure: the 5% deduction will be allowed in all cases.

Example Calculation

What tax and NICs liabilities arise (tax year 2000-01)?

Mr and Mrs A work through a service company in which they own all the shares. They each carry out some engagements during the year which fall within the new rules (‘relevant engagements’) and some which do not.

Assume the service company receives £20,000 in respect of relevant engagements for Mr A and £40,000 in respect of relevant engagements for Mrs A and that there is a further £40,000 income from other business activities which do not fall within the new rules.

Assume the service company also incurs the following expenses during the course of the year:

Expense	Mr A	Mrs A	Notes
Salaries	£20,000	£20,000	Paid in year. PAYE and NICs deducted and accounted for under normal provisions.
Employer’s NICs	£1,905	£1,905	Paid in year. NICs calculated on an annual earnings period, as for directors. Assumes that the employer’s threshold (£4,385) has been set against these earnings, and 12.2% paid on remainder.
Employer’s pension contributions	£4,000	£4,000	To an approved scheme.
Travel costs related to relevant engagements	£2,000	£500	All would be deductible under normal provisions relating to employees.
Other expenses	£10,000 business expenses, all allowable for Corporation Tax purposes.

Under the new proposals, at the end of the tax year, the service company will have to calculate the amount of PAYE and NICs due on Mr and Mrs A’s earnings. If they have not paid enough PAYE and NICs during the year, then PAYE and NICs will be payable on a ‘deemed payment’ on the last day of the tax year.

Calculation of deemed payment

	Mr A	Mrs A
Income from relevant contracts	20,000	40,000
Less
Expenses	2,000	500
Employer’s NICs paid in year	1,905	1,905
Pension contributions	4,000	4,000
Flat rate 5% of gross relevant contract income for general running expenses of intermediary	1,000	2,000
	11,095	31,595
Deduct
Salary paid in year	20,000	20,000
	No deemed payment	11,595
Employer’s NICs on deemed payment		1,261
Deemed payment		10,334
Company accounts
Turnover		100,000
Less
Salaries	40,000
Employer’s NICs on salaries	3,810
Pension contributions	8,000
Expenses	12,500
		64,310
Accounting Profit		35,690
Deemed Payment	10,334
Employer’s NICs on dp	1,261
		11,595
Profits for Corporation Tax purposes		24,095

Summary

Mr A brought in £20,000 from relevant contracts during the course of the year. The service company paid the whole of that amount onto him in salary and deducted and accounted for full PAYE and NICs. No further action is required.

Mrs A brought in £40,000 from relevant contracts during the course of the year and the service company paid £20 000 onto her in salary and deducted and accounted for PAYE and NICs on that salary. This left £20,000 from her relevant contracts on which PAYE and NICs were not been deducted and accounted for during the course of the year. Under the new rules this £20 000, less the deductions allowed, will be deemed to be paid to Mrs A as salary at the year end (on 5 April).

On 3 April we launched our Self Assessment (SA) Internet registration service. In the first eight weeks after launching this service, over 48,000 individuals have successfully registered on-line. Also a staggering 212,000 people have looked at the landing page of the Internet service for Self Assessment.

www.inlandrevenue.gov.uk/sa

And at the end of June the free IR software to allow most individual taxpayers to complete their return electronically and send it over the internet was released.

In addition to the Revenue software for down-load from the website, taxpayers can use commercial software instead. Initially the Revenue software will only be able to support the following:

SA100 - The Tax Return

And the following supplementary pages:

SA101 - Employment pages

SA103 - Self-Employment pages.

Later the IR Software may be able to provide other supplementary pages. However, some of the commercially available software mentioned above will be able to support most of the pages of the return from the outset.

How will the service work?

• The user will visit the Revenue’s website:
  www.inlandrevenue.gov.uk/sa
  Using their Unique Taxpayer Reference, postcode and/or National Insurance Number they will register on-line and provide a password of their choice;
• The Revenue will then send a randomly generated secret User Identification (ID) to the taxpayer’s home address for them to use with their own choice of password;
• The User can either down-load the Revenue’s software from the website for completion off-line or use commercial software;
• The user then logs on to our secure site with their User ID and password to up-load the completed form to the Revenue;
• On up-load to the website, each return is encrypted for confidentiality in transit;
• The user will receive an immediate on-line acknowledgement of receipt or notice of rejection.

And what’s next?

A service for employers’ PAYE forms and returns will follow later in 2000-01 and we are also looking at a wide range of other transactions and services we can put on-line over the next few years.

We have successfully bid with our colleagues at Customs and Excise for an additional £30M to build a shared infrastructure for registration, authentication and other common services which both the Departments and others can use in the future to provide more joined-up services. Further details can be obtained by visiting: www.cabinet-office.gov.uk

Discounts

The Chancellor recently announced that individual Self Assessment taxpayers who send their return over the Internet and pay electronically will receive a one-off discount of £10. And from next year small businesses that send their VAT return or PAYE end of year return over the Internet, and pay any tax due electronically, will receive a one-off discount of £50 (or £100 for both PAYE and VAT). In the Budget the Chancellor announced an additional £50 discount for those employers if they also pay tax credits through the payroll and he extended the PAYE and tax credit discounts to employers who use an ‘Internet Payroll Service’.

The announcement of discounts understandably results in a number of questions being raised. To help customers, details of the most common questions and answers can be viewed by accessing the e-business pages of the Inland Revenue’s website.

Electronic Payment Methods

The Revenue already offers a range of ways businesses and taxpayers can pay tax electronically. Businesses can pay by Direct Credit (BACS or CHAPS). Individual taxpayers may prefer to pay by Debit Card or to initiate a Direct Credit (BACS) transfer through other means such as Internet or telephone banking. There are also plans to provide payment facilities over the Internet, for example by Debit Card and Direct Debit. Taxpayers and businesses interested in paying electronically can contact their Accounts Office for advice on the options open to them.

More information on payments will also be available in the Special Edition of ‘Working Together’ due to be published next month and on our website: www.inlandrevenue.gov.uk/howtopay/index.htm

Relationship With Commercial Software Developers

The Revenue is keen to encourage software developers to implement Internet service capabilities for both Self Assessment and PAYE/NICs forms and returns, so that they can be incorporated or linked to products such as payroll software and personal finance packages. Forms and returns received electronically will be validated at the Revenue’s electronic gateway and those that do not pass the validation checks will be rejected.

To help software developers create successful products we are supporting and participating in a group set up by the Business & Accounting Software Developers Association (BASDA) to define eXtensible Markup Language (XML) schemas for Revenue forms and returns.

Keeping Everyone Informed

For further information on Internet services, please visit the e-business pages of the IR Website www.inlandrevenue.gov.uk/ebu/index.htm or you can contact the Electronic Business Unit (EBU) at:

Crown House

Victoria Street

Shipley

West Yorkshire

BD17 7TW

Helpline: 0845 60 55 999

(Hours of opening - 08:00 to 22:00

Weekdays, 10:00 to 18:00 Weekends)

Email: helpdesk@ir-efile.gov.uk

Minicom: 01274 534600

Fax: 01274 534514

The Inland Revenue has recruited a large number of accountants who are based at many locations around the country - primarily in District Offices and Large Business Offices. In this article we answer some of the questions raised by practitioners about the role of such accountants and what advantages there can be to both the Revenue and practitioners in having accountants in the Department.

Why has the Revenue recruited over forty accountants in the last 2 years?

Traditionally the role of accountants within the investigative side of the Inland Revenue has been limited to Special Compliance Office - involved in the detection and investigation of suspected serious tax fraud. It was with the advent of the Spend to Save package, introduced in the November 1996 Budget, that accountant numbers were expanded into the Revenue’s wider network of local District offices and Large Business offices. The developments in recent years in tax case law and legislation, bringing tax treatment more into line with accounting treatment, evidences the need for the Revenue to have its own professionally qualified accountants, well versed in the technicalities of accounting, to advise Inspectors.

What qualifications and experience do the Revenue accountants have?

The accountants are members of ICAEW, ICAS, ICAI and ACCA. They have a wealth of commercial experience in accounting and auditing and have worked in a wide range of firms ranging from small practices to the top five.

Where are they based and what do they do?

Revenue accountants are an integral part of the Revenue’s compliance teams, working alongside Inspectors to bring their commercial and accounting experience to the everyday work of these teams within the Revenue’s network of offices. As well as advising on the pure technical aspects of accounting and auditing, support is also provided to Inspectors in the reviewing of accounting records and in meetings with taxpayers and their advisors.

How will practitioners benefit from the increasing number of Revenue accountants?

If an enquiry into a taxpayers affairs involves accounting aspects the involvement of a Revenue accountant can save time. The accounting aspects can be discussed in the knowledge that the Revenue accountant has had practical experience of those accounting areas. Revenue accountants will also be able to empathise with the practitioners in that they will know what kind of information is required to meet auditing, accounting and legal requirements and how this is obtained in practice.

What impressions have the Revenue accountants formed?

In the majority of cases the Revenue accountants are satisfied with the standard of accounts, audit and tax work that they see when reviewing accounts. However, on perhaps too many occasions they have been rather surprised and not a little disappointed at the poor quality of the work which they see. They are not expecting perfection. Having been in practice they themselves, understand the pressures which practitioners sometimes work under.

What will they do when they come across repeated instances of' poor work'?

They will be working in line with a procedure agreed with the main professional bodies of tax practitioners in an innovative exercise to improve the quality of their members’ tax work and so the service they give to their clients in preparing their self assessment tax returns. On a trial basis, where practitioners make persistent errors in their clients’ returns, and the problems cannot be resolved by direct discussion, the name of the member and details of the matter of concern will be passed to the professional bodies to consider what help and support the member needs to improve their standards.

Under Schedule 8 to the Income and Corporation Taxes Act (ICTA)1988 a registered Profit-Related Pay (PRP) scheme must provide for the preparation of a profit and loss account. This profit and loss account must be drawn up in accordance with Schedule 4 to the Companies Act 1985 for each profit period of the employment unit to be covered by the scheme.

FRS11

The introduction of Financial Reporting Standard 11 (FRS11), issued by the Accounting Standards Board in July 1998, requires companies to recognise impairment losses on fixed assets and goodwill held on their balance sheet at a value not exceeding their recoverable amount. FRS11 applies to the profit and loss accounts for periods ending on or after 23 December 1998.

FRS11 codified existing best practice and gives significantly more guidance on the approach to adopt to ensure that fixed assets and goodwill are not valued in accounts at a figure greater than their recoverable amount.

Here is an example of the impact of FRS11. Before FRS11 it was common practice for a company, when considering the value of, say, a property it owns, not to write down a loss caused by depreciation. This is done because, by the time the property is disposed of, inflation would have wiped out any potential loss. This same approach would have been adopted year on year. But after FRS11, companies can no longer take this approach, resulting in some having to write down assets to reflect losses. This in turn will reduce profit and consequently will reduce PRP payable to employees. In this example, there would be no need for any statutory recalculations of the accounts for earlier years. It would however be necessary to apply the standard to the accounts for periods ending after 23 December 1998, and charge any loss occurring to the profit and loss account.

Impact of FRS11 in Preparing PRP Accounts

Paragraph 20(1) Schedule 8 ICTA 1988 provides that, in preparing a profit and loss account, no changes are made from the accounting policies used in preparing accounts for any earlier period relevant for the purposes of Schedule 8 or in the method of applying those policies, if the effect of those, either singly or taken together, would be that the amount of profit or loss differed by more than 5% from what would have been the result if no changes were made.

Paragraph 19 lists the adjustments that can be made in drawing up a profit and loss account for PRP purposes. Impairment losses recognised in accordance with FRS11 are not a permitted adjustment, so mitigation of the effect of FRS11 is not possible through the existing rules.

Also there is the over-riding requirement in Paragraph 19(2) Schedule 8 ICTA 1988 that the profit and loss account must give a ‘true and fair’ view of the profit or loss of the employment unit for the period to which it relates.

Revenue Practise

The introduction of FRS11 means that for the ‘true and fair’ requirement to be met, any PRP profit period ending on or after 23 December 1998 should be calculated on the ‘new’ FRS11 basis. A problem arises because FRS11 specifically proscribes accounts for earlier year(s) which have been completed from being restated onto the ‘new’ basis even though the losses in many cases will have accrued over previous years. However for PRP purposes there is a change in methodology between pre and post FRS11. The Inland Revenue recognises that to require companies to recalculate the profit and loss account purely for PRP purposes, when any statutory accountancy requirement for re-statement is specifically avoided, would be both disproportionately burdensome and an unacceptable approach to dealing with the impact of FRS11.

Therefore, in cases where the application of FRS11 and its required treatment of fixed assets and goodwill causes an anomaly, it is Revenue practice, for the specific purposes of the PRP legislation, to allow the losses caused by the imposition of FRS11 to be left out of account. This Revenue practice applies to PRP profit and loss accounts for any accounting periods after which FRS11 was issued and in which it was formally adopted by companies. This would include periods ending before the adoption of FRS11 became mandatory. It will remain Revenue practice until the end of the phasing-out period for the tax relief for PRP. No relief is available for profit periods beginning on or after 1 January 2000.

The Tax Law Rewrite Project will publish its first draft Bill in July. This Bill will be on Capital Allowances and, subject to Parliamentary pressures, is expected to come into force in April 2001.

This will be the first real legislation produced by the project and, in due course, it will be followed by a series of further rewrite Bills on income tax.

Each of these bills will:

• provide a new, more logical structure for the legislation;
• use shorter clauses;
• be written in plainer ‘modern’ language as far as possible;
• group similar or related rules together, as far as possible; and
• contain better signposts to other provisions which might be relevant.

Overall, the aim is to make the legislation clearer and easier for everyone who uses it - staff and customers.

In general these Bills are not intended to change the effect of current legislation in any significant way. But they will include a number of minor changes to the law (e.g. to legislate an Extra Statutory Concessions (ESC)). And we will take the opportunity to discard any provisions which are now obsolete. These will be explained in detail when the Bill is introduced later this year. Some other changes to simplify and modernise the legislation are in the Finance Bill 2000.

The Project Team is working closely with Revenue colleagues to establish the implications of the proposed Bill on the Department’s work. For example, the Capital Allowances manual will be updated so a new edition is ready for the new Capital Allowances Act in April 2001. It will be designed for the Internet. And statutory references to the Capital Allowances Act 1990 will need updating in all our publications. We are also consulting widely with professional and representative bodies, publishers and software suppliers.

The draft Bill will be available on the internet and hard copies will also be available. If you would like any further information about the Bill and its implications, or about the project generally, please write to:

David Mutton,

Room 831

Bush House

South West Wing

The Strand

London

WC2B 4RD

or e-mail him at: david.mutton@ir.gsi.gov.uk.

You can also visit our pages on the Revenue website, www.inlandrevenue.gov.uk/rewrite

Interpretations

The provisions of Chapter VI Part II CAA 1990 link the ability to claim capital allowances on machinery & plant that are fixtures, to a qualifying interest in the land to which the fixtures are attached. S51(3)(e) CAA 1990 provides that a licence to occupy land is such a qualifying interest. We have received a number of enquiries on what constitutes a licence to occupy, particularly where equipment is installed in a building under the terms of a wider agreement for the provision of services. The purpose of this article is to clarify when a licence to occupy exists for the purposes of S51.

Our view is that a licence to occupy land within S51(3)(e) will only arise where the claimant has an exclusive licence to occupy the land in question. A licence to occupy is a permission to enter and remain on land for such a purpose as enables the licensee to exert control over the land. It is this level of control that suggests that a licence to occupy must be an exclusive licence.

The idea of exclusive occupancy is also supported in part by ratings law that says that there can only be one occupier of land. It follows that where a person can enter onto land for a subordinate purpose, such licence of entry would be something less than a licence to occupy. This interpretation gains support from Melluish v BMI (No 3) Ltd (68 TC 1), where a right of entry into a building for the purpose of repossessing equipment was held not to amount to a licence to occupy land. The Special Commissioners decision in J C Decaux (UK) Ltd v Francis (SpC 84), where a right to enter land for the purpose of carrying out contractual obligations to repair and maintain equipment fell short of a licence to occupy, also supports this view.

Whether or not there is a licence to occupy will depend on the precise contractual terms between the parties where a licence is purported to exist. Where the provision of the fixtures is part of a larger contract incorporating such services as cleaning, maintenance, catering, security, etc., to another occupier of the building the service provider may not have the necessary exclusive rights of occupancy for the contract to amount to a licence to occupy.

For example, if a local authority grants a lease of land to a contractor who builds a school and then sub-leases the completed building to the school governors, the contractor will have the necessary qualifying interest in the land. If access to the site is by way of a licence, the subsequent occupation by the school governors may leave the contractor with an inadequate interest for the purpose of claiming capital allowances on the fixtures.

Miscellaneous

The Inland Revenue has a policy of selective prosecution involving the most serious cases across the whole range of the tax system. The Board see this as an important part of its strategy to deter tax fraud and evasion. As part of the wider publicity for this strategy, details of Revenue prosecutions are published in Tax Bulletin.

Melvin Crump

Mr Crump the controlling director of McMel & Co Ltd, a UK registered company (which specialises in producing cherished car registration plates) was jailed for 2 years on the 17 December at Basildon Crown Court. He pleaded guilty to 5 counts of cheating the public revenue.

In the early 1980’s, Crump with a now deceased partner, formed a Jersey registered company called St. Brelade Organisation Ltd (SBO). SBO was used by Crump to purchase properties in the UK that were subsequently rented out.

The rental income was paid into off shore bank accounts in Jersey operated and controlled by Crump. The value of the property portfolio held by the offshore company rose in excess of £600,000. Various properties were subsequently sold and substantial gains made.

Neither the income nor gains were reported as required by law to the Revenue.

The loss to the public is estimated to be in excess of £600,000.

Murad Dalah

Mr Murad Dalah of London was sentenced to 21 months at Middlesex Guildhall Crown Court for tax cheat.

Dalah, the director of Tops Cloths (retailer of cloths, textiles and menswear) pleaded guilty to a total of ten counts of false accounting with a total tax loss of £750,000.

He received 21 months imprisonment for each of the 10 accounts of false accounting to run concurrently all suspended for two years. In addition, he was fined £10,000 for each count totalling to £100,000 plus £3,540 costs with two years imprisonment for default of payment with three months.

The fraud occurred when he and his nephew ordered the daily takings record of the shop to be rewritten to show lower amounts. The shop and other premises were raided on 21 January 1988 and the day after Dalah fled the United Kingdom. Malborough Street Magistrates Court issued an arrest warrant on 21 March 1990. Dalah returned to this country in September 1999 and pleaded guilty.

We occasionally receive reports of taxpayers’ cheques being stolen in the post on their way to the Inland Revenue. We work closely with Royal Mail to combat these thefts. Our success in protecting mail bound for the Revenue seems to have led the thieves to look elsewhere.

We were recently notified of a case where a cheque was stolen in transit from the taxpayer to her accountant. The police became involved. They told the accountant concerned that thieves are targeting accountancy firms when they expect clients to be sending in cheques, for example, around mid July, in advance of the SA deadline. The thieves know that the cheques would not normally be forwarded to the Revenue until the end of July and so this gives them extra time before the theft is discovered.

With the July SA payment date around the corner, perhaps now is the time to start encouraging clients to move over to one of the more modern and secure forms of electronic payment, direct to the Accounts Offices:

• by Internet or telephone banking (see the reverse of the SA statement for details)
• by BACS and CHAPS. Further details can be obtained from the Accounts Offices:

Shipley:

Tel: 01274-539579

 

Cumbernauld:

Tel: 01236-783717.

Alternatively, taxpayers who have a Switch, Solo or Visa Delta debit card can pay their SA tax by telephoning 0845 305 1000 any time between 8.00 a.m. and 10.00 p.m.

If none of the above methods is suitable, we recommend that payment is made by Bank Giro or at the Post Office rather than by post. But if payment is to be made by post, please encourage clients to follow the advice given on the reverse of their SA statements.

To find out more visit the payment section of the Inland Revenue website at: www.inlandrevenue.gov.uk

(No longer relevant)
An Update on Double Taxation Agreements and Double Contribution Conventions

Annual Review

In order to set its treaty priorities each year, the Inland Revenue consults top UK companies, the main representative bodies and other Government departments. Representations from other interested parties also feed into the review.

The comments received give valuable information on problems with existing treaties and possible gaps in the UK’s treaty network.

The Paymaster General, Dawn Primarolo, MP, has recently agreed the negotiating programme for the year to 31st March 2001. This year, for the first time, the programme also includes double (social security) contribution conventions.

Full details are given in the Inland Revenue Press Release issued on 2 May 2000 and a summary is given below, updated to reflect the position at 31 May 2000.

Recent Developments

Double Taxation Agreements (DTAs)

USA

Four rounds of talks have been held on a new agreement. Considerable progress has been made and negotiations are continuing.

South Africa

Two rounds of talks have taken place about a new agreement.

Kuwait

The House of Commons and the Privy Council have approved the new agreement.

The treaty will enter into force once confirmation is received from Kuwait that their official procedures have been completed.

Lithuania, France, Norway

Work has continued towards finalising new agreements with these countries.

Double Contribution Conventions (DCCs)

Japan

A new DCC was signed with Japan. It is expected to enter into force this year and take effect from 2001.

Korea

All parliamentary processes in respect of a new DCC with Korea have been completed. The convention will enter into force on 1 August 2000.

Slovak Republic (Slovakia)

Talks were held with Slovakia in February 2000 and it is hoped the convention can be signed this year.

DTA negotiating programme

• The top priority is the continuing negotiations with the United States.
• It is hoped to complete work on new treaties with Germany, South Africa, France and Norway.
• It is hoped to finalise Protocols to the existing agreements with Canada and the Netherlands.
• It is planned to continue negotiations with Lithuania, Jordan, Namibia and Chile.
• Several other new or updated treaties will also be considered, when circumstances allow. The timing of any such negotiations is dependent on other commitments.

  The business community has told us that they are particularly interested in treaties with the following countries -

  Australia;

  Bahrain;

  Georgia;

  Guinea;

  Hong Kong; (limited agreement on Shipping)

  Iran;

  Qatar;

  Slovenia; and

  Taiwan.

• Developments on negotiations with the countries listed above will be announced through Inland Revenue News Releases.

DCC negotiating programme

• The Inland Revenue took over policy responsibility for double contribution conventions from the Department of Social Security on 1 April 1999.
• There are currently 14 bilateral social security conventions in force which include contribution provisions.
• The priority for the coming year is to continue work on the DCCs with Japan, Korea and Slovakia to ensure they take effect as soon as possible.
• It is also planned to resume negotiations on new conventions with Poland and Chile.

Representations

General representations concerning new DTAs or DCCs, or suggestions about changes to existing agreements, are welcome and should be addressed to:

Mrs Jas Sahni

Inland Revenue

International Division

Victory House

30-34 Kingsway

London

WC2B 6ES

Queries regarding the effects of a double taxation agreement on a particular taxpayer’s tax liability should always be referred to the Inland Revenue office responsible for dealing with their tax affairs.

Further Information

Further information on double taxation and related issues can be obtained via the Internet on the Inland Revenue website: www.inlandrevenue.gov.uk

Copies of double taxation agreements published from 1997 onwards can be found on the Stationery Office’s website: www.ukstate.com

Copies of older agreements can be obtained from the Stationery Office Telephone 0870 600 5522. The Statutory Instrument number should be quoted (see list below).

Further information on double contribution conventions can be obtained from:

Inland Revenue

National Insurance Contributions Office

International Services

Longbenton

Newcastle Upon Tyne

NE98 1ZZ

Double taxation issues arising in connection with estates, inheritances and gifts should be addressed to:

Angela Cole

Inland Revenue

Capital and Savings Division

Room 121

3rd Floor

New Wing

Somerset House

London

WC2R 1LB

A full list of the UK’s double taxation agreements is given below

a) Comprehensive double taxation agreements as at 1 April 2000

Country	Year/Statutory instrument number
Antigua and Barbuda	1947 No.2865
Argentina	1997 No.1777
Australia	1968 No.305
Austria	1970 No.1947
Azerbaijan	1995 No.762
Bangladesh	1980 No.708
Barbados	1970 No.952
Belarus (1)	1986 No.224
Belgium	1987 No.2053
Belize	1947 No.2866
Bolivia	1995 No.2707
Botswana	1978 No.183
Brunei	1950 No.1977
Bulgaria	1987 No.2054
Canada	1980 No.709
China	1984 No.1826
Croatia (2)	1981 No.1815
Cyprus	1975 No.425
Czech Republic	1991 No.2876
Denmark	1980 No.1960
Egypt	1980 No.1091
Estonia	1994 No.3207
Falkland Islands	1997 No.2985
Fiji	1976 No.1342
Finland	1970 No.153
France	1968 No.1869
Gambia	1980 No.1963
Germany	1967 No.25
Ghana	1993 No.1800
Greece	1954 No.142
Grenada	1949 No.361
Guernsey	1952 No.1215
Guyana	1992 No.3207
Hungary	1978 No.1056
Iceland	1991 No.2879
India	1993 No.1801
Indonesia	1994 No.769
Ireland (Republic of)	1976 No.2151
Isle of Man	1955 No.1205
Israel	1963 No.616
Italy	1990 No.2590
Ivory Coast (Côte d’Ivoire)	1987 No.169
Jamaica	1973 No.1329
Japan	1970 No.1948
Jersey	1952 No.1216
Kazakhstan	1994 No.3211
Kenya	1977 No.1299
Kiribati	1950 No.750
Korea (Republic of)	1996 No.3168
Latvia	1996 No.3167
Lesotho	1997 No.2986
Luxembourg	1968 No.1100
Macedonia (2)	1981 No.1815
Malawi	1956 No.619
Malaysia	1997 No.2987
Malta	1995 No.763
Mauritius	1981 No.1121
Mexico	1994 No.3212
Mongolia	1996 No.2598
Montserrat	1947 No.2869
Morocco	1991 No.2881
Myanmar (Burma)	1952 No.751
Namibia	1962 No.2352
Netherlands	1980 No.1961
New Zealand	1984 No.365
Nigeria	1987 No.2057
Norway	1985 No.1998
Oman	1998 No.2568
Pakistan	1987 No.2058
Papua New Guinea	1991 No.2882
Philippines	1978 No.184
Poland	1978 No.282
Portugal	1969 No.599
Romania	1977 No.57
Russian Federation	1994 No.3213
St Kitts and Nevis	1947 No.2872
Sierra Leone	1947 No.2873
Singapore	1997 No.2988
Slovak Republic (Slovakia)	1991 No.2876
Slovenia (2)	1981 No.1815
Solomon Islands	1950 No.748
South Africa	1969 No.864
Spain	1976 No.1919
Sri Lanka	1980 No.713
Sudan	1977 No.1719
Swaziland	1969 No.380
Sweden	1984 No.366
Switzerland	1978 No.1408
Thailand	1981 No.1546
Trinidad and Tobago	1983 No.1903
Tunisia	1984 No.133
Turkey	1988 No.932
Tuvalu	1950 No.750
Uganda	1993 No.1802
Ukraine	1993 No.1803
United States of America	1980 No.568
Uzbekistan	1994 No.770
Venezuela	1996 No.2599
Vietnam	1994 No.3216
Yugoslavia (Federal Republic) (2)	1981 No.1815
Zambia	1972 No.1721
Zimbabwe	1982 No.1842

Notes

Many of the above agreements have been amended by Protocols, which are published separately with a new SI number. Any Protocol should be read in conjunction with the original agreement.

(1) The UK’s 1986 agreement with the Soviet Union (SI 1986 No. 224) is currently to be regarded as in force between the UK and the former Soviet Republic marked. The position with regard to former Soviet Republics not listed is less clear, but the UK will in all cases apply the provisions of the agreement on the basis that it is still in force (until such time as new agreements take effect with particular countries).

(2) The UK’s agreement with Yugoslavia (SI 1981 No. 1815) is to be regarded as in force between the UK and the former Yugoslav states marked. The position with regard to the remainder of what was Yugoslavia is undetermined.

(3) The 1995 agreement with Belarus (SI 1995 No. 2706) and the 1999 agreement with Kuwait (SI 1999 No. 2036) have not yet entered into force.

b) Limited Agreements, covering taxes on income from international transport

Algeria (Air Transport)

Belarus (Air Transport) (1)

Brazil (Shipping and Air Transport)

Cameroon (Air Transport)

China (Air Transport) (1)

Ethiopia (Air Transport)

Hong Kong (Air Transport)

Iran (Air Transport)

Jordan (Shipping and Air Transport)

Kuwait (Air Transport)

Lebanon (Shipping and Air Transport)

Saudi Arabia (Air Transport)

Zaire (Shipping and Air Transport)

Notes

(1) Indicates Air Transport agreements which were not terminated by later Comprehensive agreements and remain in force alongside them.

c) Agreements covering estates, inheritances and gifts

The following Agreements were signed after the introduction of capital transfer tax in 1975, and continue to apply to inheritance tax.

Country	Year/Statutory instrument number
Republic of Ireland	1978 No.1107
South Africa	1979 No.576
USA	1979 No.1454
Netherlands	1980 No.706
(amending protocol)	1996 No.730
Sweden	1981 No.840
(amending protocol)	1989 No.986
Switzerland	1994 No.3214

Treaties with France, Italy, India and Pakistan were in place for Estate Duty before its replacement in 1975 and have different rules to eliminate to double taxation.

Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between 1 April 2000 to 31 May 2000.

Extra Statutory Concessions

Number	Title	Date of Issue
C4	Trading activities for charitable purposes (amended)	31 March 2000

You can get copies of SPs and ESCs from the Inland Revenue Visitors Information Centre, Ground Floor, South West Wing, Bush House, Strand London WC2B 4RD or by ringing the Inland Revenue Enquiry line on 020 7438 6420.

Content

The content of Tax Bulletin gives the views of our technical specialists on particular issues. The information published is reported because it may be of interest to tax practitioners. Publication will be six times a year, and include a cumulative index issued on an annual basis.

• You can expect that interpretations of the law contained in the Bulletin will normally be applied in relevant cases, but this is subject to a number of qualifications.
• Particular cases may turn on their own facts, or context, and because every possible situation cannot be covered, there may be circumstances in which the interpretation given here will not apply.
• There may also be circumstances in which the Board would find it necessary to argue for a different interpretation in appeal proceedings.
• The Bulletin does not replace formal Statements of Practice.
• The Board’s view of the law may change in the future. Readers will be notified of any changes in future editions.

Nothing in this Bulletin affects a taxpayer’s right of appeal on any point.

Letters on any article appearing in Tax Bulletin should be sent to the Editor, Sarah Guerra, Room 402, 22 Kingsway, London WC2B 6NR. We are sorry though that neither she nor our contributors will normally be able to enter into correspondence about Tax Bulletin or its contents.

Subscription

The subscription for 2000 is £22. If you would like to subscribe to Tax Bulletin please send your name and address together with your cheque to Inland Revenue, Finance Division, Barrington Road, Worthing, West Sussex BN12 4XH. Cheques should be crossed and made payable to "Inland Revenue".

If you would like information regarding Tax Bulletin subscription or distribution please contact Miss S. Williams, Room 530, 22 Kingsway, London WC2B 6NR. Telephone: 020 7438 7700. For more general information regarding Tax Bulletin, please contact Ms Nahid Shariff, Assistant Editor, on 020 7438 7842 or at the address below.

Copyright

Tax Bulletin is covered by Crown Copyright. There is no objection to firms copying the Bulletin for their own use. Anyone wishing to republish Tax Bulletin or extracts more widely should write for permission to Ms Nahid Shariff, Assistant Editor, Room 408, 22 Kingsway, London, WC2B 6NR.

TAX BULLETIN PROVIDED IN WEB READY FORMAT COURTESY OF TAX ANALYSTS AND TAXBASE

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