Inland Revenue Tax Bulletin - Issue 48

Editorial

Well this is my 3rd edition of TB as Editor. I'm slowly getting into the swing of things. The Revenue is constantly evolving, recently we have seen a new board member, restructuring of Head Office and proposed reorganisation in the Network (which I intend to cover in more detail in later editions). In this climate I have been looking at the content and format of Tax Bulletin, and at other Revenue publications. I am keen to keep Tax Bulletin up to date and relevant to our readers. What better way of finding out what you want than by asking you. There is a customer survey questionnaire enclosed. Please take a few minutes to complete and return it, your feedback will be invaluable, and there really is no excuse, as we have even included a SAE. Another development is a dedicated TB email address Tax.Bulletin@ir.gsi.gov.uk you can mail your questionnaires and comments electronically if you wish. I am interested in hearing about what topics you would like us to cover, as well as what you think about current and past articles. I look forward to reading your comments. Also in this issue we are trying out a new layout which hopefully you will find easier on the eye, please let us know what you think.

Contents

• NICs: Aggregation of Earnings and “Not Reasonably Practicable” Test
• Amending an ITSA after an Enquiry S28A and 28B TMA 1970 (Article deleted since index 2004)
• Double Taxation Relief: - FA 2000 changes (Article no longer current)

Interpretations

• Trust Implications of Flat Management Companies, Service Charge Funds and Sinking Funds
• Carry Back Claims Under SA
• Employment Status of Construction Workers in the Film & TV Industries

Miscellaneous

• Schedule A: Withdrawal of ESC B4 (Superseded by PIM2020)
• Revenue Prosecutions
• Extra-Statutory Concessions and Statements of Practice

National Insurance Contributions: Aggregation Of Earnings And "Not Reasonably Practicable" Test

Aggregation of earnings for National Insurance Contributions (NICs) purposes is an issue that is causing employers some problems, particularly in the Health and Local Government sectors. Our published advice in booklet CWG2 to employers about the issue is not comprehensive and it has been argued that the phrase “not reasonably practicable” is capable of more than one interpretation. The following article is a more detailed summary of our view on aggregation of earnings and the “not reasonably practicable” exception.

The starting point is that an employer has a duty to aggregate earnings when the employed earner has separate employments with the same employer Paragraph 1 (1)( a) of Schedule 1 to the Social Security Contributions and Benefits Act 1992 (SSCBA 1992). Without the duty to aggregate, an incorrect liability might be paid and the individual's contributory benefit rights harmed because of separate earnings payments. The latter point is especially important if the person is low paid and the separate wages or salary are under the Lower Earnings Limit (LEL). However regulation 11 of the Social Security (Contributions) Regulations 1979 (SS( C) R 1979) (SI 1979/ 591) states that the earnings shall not be aggregated if such aggregation is not reasonably practicable. In order to satisfy the regulation, the earnings must be separately calculated and the impracticability arises because the earnings are separately calculated.

There is no definition of the phrase “not reasonably practicable” in NICs legislation. We are reliant on ordinary meaning and case law, the latter arising from Health & Safety legislation. The following views also take into account an unreported determination by the Secretary of State for Social Security on whether the earnings of `Bank Nurses' should be aggregated.

If there is disagreement between the employer and the Inland Revenue it will be a question for the Commissioners to determine. The onus is on the employer to show that aggregation is not reasonably practicable because it is the employer making the judgement. It is not a once and for all decision because the duty to aggregate is an ongoing duty. Also, factors may change - such as the composition of the labour force - sufficiently to affect the judgement. The employer will need to take into account the costs, resources, and the effects on running the business. Cost is a material pointer but not decisive. The context is important so the employer will also need to be aware of the effect on the National Insurance Fund (NIF) and the benefit or pension entitlement of the employee.

The reported judgements have to be filtered on the basis of their specific legislation but Mailier v Austin Rover Group [1989] (2 All ER 1087) agreed on 3 principles:

• “reasonably practicable” is narrower than “physically possible”
• risk has to be measured against the cost of removing it, and
• account has to be taken of the likelihood of the risk arising.

Taking the principles in order:

• It is always possible to aggregate but that is not the test. And the “separately calculated” provision is not failed merely because it is the same employer or payroll system.
• Costs to the employer are not just financial. Time, effort and the effect on the business have to be considered because the weight of the cost of compliance should not be disproportionate to the loss of National Insurance Contributions and benefit entitlement.
• Mailier and other cases are generally considering whether there is a duty to guard against unknown and unexpected events. It is our view that employers have a very limited argument on the 3rd bullet point because aggregation is a known and recurring event. However that is not enough to negate any informed judgement by an employer that aggregation is not reasonably practicable.

The cases consider the balance between risk on one hand and the sacrifices necessary for averting the risk on the other hand. Basically, an employer needs to balance his employee's interests against his own costs. It is very important that the consequences for the primary contributor are considered, especially the low paid, because of the potential loss of benefits and pension rights.

The employer can only make an informed decision if all the facts are established because “reasonably practicable” is related to the individual circumstances. The evidence is that employers with computerised payrolls are the ones who find difficulty in complying with the need to aggregate. However the existence of such a payroll is not enough evidence that aggregation is not practicable. Manual or other fixes will have to be considered and costed especially when there will be similar risks in future years if aggregation is not done and the employer will have to revisit the issue.

Inland Revenue compliance staff will take account of the following points when comparing the costs of aggregation against the risks to contributors:

• Is it a fact, rather than an assumption, that payroll software cannot aggregate earnings?
• Is the payroll software an outside package, tailored package, provided by an internal IT section or able to be upgraded by internal resources?
• Has the payroll system been changed?
• If so, why was an aggregation requirement not part of the new specification?
• Does the provider of an outside or tailored package give an update service that includes aggregation?
• Is it possible to upgrade or would the employer have to buy a new system?
• What are the costs of upgrading the software?
• Is there a dedicated internal IT team that might be able to provide it cheaply subject to competing claims for their services?
• If the work has to be carried out manually what are the costs?
• Does the employer already have a manual support resource for payroll glitches, urgent payments and so on?
• Would new staff be required?
• What is entailed in staff years in manually calculating the NICs, which takes into account that experience will reduce the need for the initial, possibly untrained, resource?
• How many employees are potentially affected?
• What is the total number of employees on the payroll?
• Do employees have similar pay periods?
• Is aggregation a continuing requirement or a one- off consideration because of a particular project or task?
• What are the amounts of NICs at stake and the effect on NIF and primary contributors?
• How does this compare to the costs of compliance?
• Has there been a material change in the labour force since the decision not to aggregate was taken? Or a material change in the state benefits that aggregation could bring (State Second Pension may be relevant here).

The list is not exhaustive. We are not expecting employers to spend a lot of resources in detailed costings. Rather that we look for a reasoned consideration of the issue rather than, say, mere assertion that external change or constraints justify non- aggregation. We have seen the following issues raised in very general terms by employers - Equal Opportunities, Compulsory Competitive Tendering, Local Management of Schools, Internal Charging, De- Centralising payrolling and Security & Audit Requirements. It is difficult to judge their relevance when facts, legislation and detailed arguments are not known. But for example Equal Opportunities legislation might be a factor for aggregation especially if most workers with two jobs are female and their benefits are affected.

In summary, there is a duty to aggregate but the legislation recognises it might not be practicable in all circumstances. Employers, their advisers and Inland Revenue staff need to consider the costs and the risks based on all the facts of the individual cases. Future editions of CWG2 will be changed to reflect Inland Revenue views as expressed in this article.

Finally Inland Revenue compliance staff in the course of an employer review normally consider the issue of whether an employer aggregates. Assuming that it is agreed that aggregation is reasonably practicable, the question then arises on whether there should be retrospection. We normally expect that at least in- date years will be adjusted but that is subject of course to any relevant individual factors including any advice that employers might have relied upon from the Inland Revenue.

The Special Commissioners' decisions in “Holly and Laurel” (SpC 225) and “Self Assessed” (SpC 207) related to notices opening an enquiry and notices requiring the production of documents and particulars. Both involved the application of time limits. It is clear from those decisions that we must use the test of receipt when we operate ITSA time limits.

We sought specific legal advice about the two 30- day time limits in S28A and S28B. Detailed guidance has been issued to our staff. This article explains our view of how S28A and S28B operate. It will refer to S28A (individuals) but applies equally to S28B (partnerships).

Section 28A(5)

• S28A (5) says that an enquiry is completed when we inform the taxpayer, by notice, that our enquiries are complete and of the amount of tax we believe should be contained in the self assessment.
• Our view is that the day of completion is the day the taxpayer receives this notice.
• If we hand the notice to the taxpayer that is the day of completion.
• If we have evidence of the day on which the notice was received through the post then that is the day of completion.
• In other cases (applying S. 7 of the Interpretation Act 1978) we shall assume that a notice is received 2 working days after being posted first class and 4 working days after being posted second class.

Section 28A(3)

• This gives the taxpayer 30 days from the day of completion (see above) in which to amend their self assessment.
• The amendment must be received by the Revenue within those 30 days.
• The 30 days start on the day of completion and end 29 days later.
• For example, where we calculate that the day of completion is Monday 16 October, this is day 1 of the taxpayer's 30- day period.
• Day 30 is Tuesday 14 November.
• If we receive a taxpayer's amendment on 15 November it is not valid.

Section 28A(4)

• S28A (4) allows the Revenue to amend the self assessment in the 30- day period immediately following the first 30- day period.
• Where we do not receive any amendment, or we disagree with an amendment made in time, or we receive a taxpayer's amendment too late, we will issue a Revenue amendment.
• If we use the same example as above, day 1 of this period is Wednesday 15 November.
• Day 30 is Thursday 14 December.
• Our amendment has to reach the taxpayer within that 30- day period to be valid.

The Finance Act 2000 brought in far- reaching changes to the way in which relief for double taxation is given to companies subject to UK Corporation Tax. A commitment was given in Parliament that the Inland Revenue would publish guidance notes on the detail of the changes as soon as possible.

We are using the Inland Revenue website to disseminate guidance on these changes. The projected timetable is:

By the end of August 2000

The three sets of Explanatory Notes which accompanied the original Budget proposals, amendments at Standing Committee stage and subsequent amendments dealing with onshore pooling.

By the end of September 2000

Further guidance including worked examples;

Details of consultation on in- country mixing and group surrenders.

After this we intend to expand this guidance as further areas that require clarification come to our attention. In consequence if there are points which you would like covered, and that you feel would be of wider interest, please contact

Susan New
International Division
Room 304
Victory House
30- 34 Kingsway
London
WC2B 6ES

Tel: 020 7438 7250

In Tax Bulletin Issue 37 (October 1998, page 598) we published some guidance entitled “Flat Management Companies: New Corporation Tax Schedule A - Residential Service Charges”. This article was primarily concerned with changes arising from the new Schedule A rules introduced by Section 38 and Schedule 5 Finance Act 1998.

As the previous article made clear, Section 42 of the Landlord and Tenant Act (LTA) 1987 provides that contributions to certain variable service charge funds (and to sinking funds) in respect of residential property should be paid into a trust fund. Investment income arising to that trust fund is chargeable on the trustee at the rate applicable to trusts, or the Schedule F trust rate, as Section 42 LTA 1987 contains an implied power to accumulate.

Since the article was published we have received a number of inquiries about flat management companies and trusts created under Section 42 of the LTA 1987. In many flat management companies the LTA 1987 will not apply and so the tax treatment of the fund will depend on the general status of the fund. It has also become clear that there are some flat management companies holding funds on trust that have previously been dealt with under the corporation tax rules that should no longer be dealt with in that way.

This article provides some more detailed guidance on the scope of Section 42 LTA 1987, what trustees should do where it applies and what to do where it does not apply.

Background

Many tenants and owners of properties in the UK make contributions to management companies and various service charge funds or sinking funds. These funds pay for a variety of services and sometimes accumulate money for future repairs. Typically, residents of a block of flats will all pay a set amount each year into a fund. That fund will either pay for joint day to day running costs of the block, such as cleaners and minor repairs, or funds will be put aside to pay for future major expenditure such as a roof repair. Some funds may do both within one fund.

The charges may typically be paid to a management company which could manage just that block of flats or any number of blocks. Sometimes residents of a block will set up their own management company, residents' association or trust to receive the funds and carry out the work. Sometimes the landlord/ freeholder holds the funds and organises the work.

Scope of Section 42 LTA 1987

The Landlord and Tenant Act 1987 applies only to England and Wales. Section 42 LTA 1987 applies where the tenants of two or more dwellings are required under the terms of their lease to contribute to the same costs by the payment of service charges (as defined in Section (18)( 1) LTA 1985). Such sums paid, or the investments representing those sums, or income accruing thereon, are held by the “payee” on trust to defray any expenses incurred in connection with service charge expenditure. Subject to such payments of service charge expenditure the funds are held on trust for the tenants for the time being. The “payee” can be the landlord or any other person to whom the service charges are payable by the tenants under the terms of the lease. Section 18 (1) LTA 1985 states that “service charge” means -

“an amount payable by a tenant of a dwelling as part of or in addition to rent -

(a) which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord's costs of management, and

(b) the whole or part of which varies or may vary according to the relevant costs”.

The “relevant costs” are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charges are payable (Section (18)( 2) LTA 1985).

If the landlord is an “exempt landlord” (as defined in Section 58( 1) LTA 1987) then Section 42 LTA 1987 does not apply. (See below.)

Therefore for Section 42 LTA 1987 to apply;

• The landlord must not be an “exempt landlord”, and
• tenants of two or more dwellings,
• under the terms of the lease,
• must be required to contribute directly or indirectly for repairs, maintenance, etc., and
• those charges, or part of them, must be variable.

If any of those elements are missing then Section 42 LTA 1987 does not apply.

Funds created

Typically there are two main types of fund to which Section 42 LTA 1987 applies:

• Sinking Funds involve the long term setting aside of funds for major repairs and renewals. Over a period, the fund can grow to a significant size and generate substantial investment income.
• Service Charge Funds are funds where the intention is to cover only the routine day to day costs of maintaining the communal areas and paying for minor repairs and decorations. The service charges are reviewed annually and set at a level to balance the actual expenditure and leave a “no surplus - no deficit” situation at the end of each year. In practise there may be a small amount held in reserve or carried over from the previous year. The trust will not accumulate any surplus charges or create any sort of contingency or sinking fund and any investment income is derived only from the short term deposit of temporarily surplus funds.

Some trusts will act both as a sinking fund and as a service charge fund, although usually the trustees would keep the two funds separate.

What sinking funds or service charge funds are within Section 42 LTA 1987

There are a number of different situations in which sinking funds or service charge funds may be created. Not all of these will necessarily fall within the scope of Section 42 LTA 1987.

Tenants of rented property
Under the terms of a rental contract either the tenant or the landlord will be responsible for repairing the property. If the landlord includes in the rent payable some figure to cover his repairing obligations the fact that the payment by the tenant will be part of his rent will not preclude the operation of Section 42 LTA 1987. However, in order to fall within the definition of “service charge” the amount must be variable according to the costs or estimated costs of repairs etc. So if the lease simply states that part of the rents payable will be used for servicing, repairs and maintenance etc. for which the landlord is then responsible then the matter is outside Section 42 LTA 1987 because the payments by the tenants do not amount to a “service charge” as defined in Section 18 LTA 1985. The whole of the rent will be Schedule A income of the landlord.

Leaseholder owners of property
Under the terms of the lease the leaseholder may have to pay into a service charge fund or sinking fund. The funds may be paid to an individual, a company, a trust or an unincorporated association. As the owner owns the property under a lease, the LTA 1987 will apply. If the lease specifies contributions are to be made to a service charge fund or sinking fund then an accumulation trust exists whether the funds are paid to an individual, a company, a trust or an unincorporated association.

The body holding the funds may not consider themselves to be trustees, for example a company. However if Section 42 LTA 1987 applies then the company will be holding the funds as a trustee.

If the lease stipulates that tenants must pay a service charge for particular services to a service company which is not the landlord, connected with the landlord or stipulated by the landlord, this too is within Section 42 LTA 1987. In that Section “the payee” is defined as “the landlord or other person to whom any such charges are payable by those tenants under the terms of their leases”.

If the lease states that the tenant should arrange for services, repairs and maintenance etc. themselves but does not specify how this should be done, any arrangement made by the tenants with a service company is outside the scope of Section 42 LTA 1987. The costs in respect of service charges are not made either to the landlord or to another person to whom such charges are payable under the terms of the lease.

Finally where there is no provision in the lease for the tenants to pay into a service charge fund, but nevertheless they decide to create one, then such an arrangement is not within Section 42 LTA 1987 as the tenants are not “required under the terms of their leases to contribute to the same costs by the payment of service charges”.

Freehold owners of property
Under the terms of sale of a freehold property (a covenant of some sort) the freeholders may have to pay into a service charge fund or sinking fund. The funds may be paid to an individual, a company, a trust or an unincorporated association. Such an arrangement does not come within Section 42 LTA 1987 as it is not under the terms of a lease.

Alternatively there may be no provision to create a service charge fund or sinking fund but the freeholders together decide to form one. They may decide to pay those contributions to an individual, a company, a trust or an unincorporated association. Again this is a private arrangement not governed by Section 42 LTA 1987 and the tax treatment depends on what the freeholders decide is going to hold the funds.

Registered Social Landlords and other “Exempt Landlords”
Registered Social Landlords (RSLs) are, in England and Wales, independent, private sector, non- profit making bodies whose main purpose is to provide decent quality, affordable housing for people on low incomes. About three quarters of them are charities.

Section 42 LTA 1987 does not apply to tenants of “exempt landlords” (Section 42( 1) LTA 1987). In accordance with Section 58( 1)( g) LTA 1987 a RSL is an exempt landlord. There are other exempt landlords defined in Section 58( 1)&( 1A) LTA 1987 such as district councils and certain development corporations. (Section 58( 1)&( 1A) LTA 1987 is reproduced below.)

Whilst Section 42 LTA 1987 does not apply to RSLs and other exempt landlords, as explained below, the terms under which sinking funds and/ or service charge funds are held by exempt landlords may still create a trust.

Thus, in summary, reference must be made to the terms of the lease to determine the application of Section 42 LTA 1987. A statutory trust will arise where the tenants of two or more dwellings are required under the terms of their leases to contribute to the payment of variable service charges to the landlord or other persons to whom such charges are payable under the terms of the leases. However, Section 42 LTA 1987 does not apply where the landlord is an “exempt landlord”.

Funds not within Section 42 LTA 1987

Where a fund exists but it is not within Section 42 LTA 1987, for example where freehold owners of property decide to create a sinking fund, or because the landlord is an RSL or other “exempt landlord”, then the treatment of that fund will depend on what structure is used:

• Where an individual holds the funds: The individual could be an employee, trading as a maintenance contractor or they could hold funds as trustee for the freeholders. If the latter then the sort of trust depends on the terms of the trust, not on Section 42 LTA 1987.
• Where a company holds the funds: Assuming the company was formed to hold funds for the freeholders who created it, then it could hold the funds as trustee. Alternatively it could trade as a flat management company receiving payments under a contractual arrangement to supply services and pay corporation tax. The status of the fund will depend on the terms under which the payments are made and the terms under which the funds are held by the company.
• Where a trust holds the funds: It could be any sort of trust depending on the terms of the deed but it would not be within Section 42 LTA 1987.
• Where an unincorporated association holds the funds: Such as a residents' association. It would be liable to corporation tax unless it was acting as a trustee. Again any trust would not be within Section 42 LTA 1987.

Any funds held by trustees would be subject to the normal trust rules. It is possible for the funds to be held under a bare trust, interest in possession trust, discretionary trust or accumulation trust arrangement. The exact status will depend on the terms and nature of the trust agreement. (The Inland Revenue leaflet IR152 “Trusts. An Introduction” provides some general information on trusts and how they are taxed.)

What trustees should do

As the October 1998 article made clear, in the past some flat management companies have been permitted to make returns in respect of investment income, arising on service charge funds and sinking funds, as part of their corporation tax returns. That is no longer appropriate where trustees are holding funds as trustees under Section 42 LTA 1987. Likewise where Section 42 LTA 1987 does not apply but the terms under which the funds are held creates a trust.

Trustees should write to the appropriate trust office, address below, enclosing a completed form 41G( Trust), or providing the following information for each trust:

• The full title of the trust fund.
• The names and addresses of the trustees.
• The name and address of any professional agents acting.
• The date the trust was established under the terms of the lease.
• The existing corporation tax reference, where appropriate.
• The gross amount of any investment income received each year which has not been included on a Corporation Tax return.
• Whether the trust is a sinking fund, service charge fund or both as outlined above.

As the October 1998 article made clear, rents receivable by flat management companies (such as ground rents - other than peppercorn rents) are outside the scope of Section 42 LTA 1987 and remain chargeable under Schedule A.

The October 1998 article explained the approach the Inland Revenue will take for all flat management companies as from 1 April 1998. However, because of the need to issue this further guidance, no action will ordinarily be taken to disturb any year or Accounting Period for which a Corporation Tax return has already been made and accepted. Where a trust return has not previously been made by a flat management company, or a trustee, of investment income arising from a fund within Section 42 LTA 1987 (or from funds otherwise specifically held on trust), the trustees will have the normal obligation to notify chargeability.

Section 58 Landlord and Tenant Act 1987

Section 58( 1) and (1A) are reproduced below. They define “exempt landlords” for the purposes of the LTA 1987.

“(1) In this Act “exempt landlord” means a landlord who is one of the following bodies, namely-

(a) a district, county or London borough council, the Common Council of the City of London, the Council of the Isles of Scilly, a police authority established under section 3 of the Police Act 1996 or a joint authority established by Part IV of the Local Government Act 1985;

(b) the Commission for the New Towns or a development corporation established by an order made (or having effect as if made) under the New Towns Act 1981;

(c) an urban development corporation within the meaning of Part XVI of the Local Government, Planning and Land Act 1980;

(ca) a housing action trust established under Part III of the Housing Act 1988;

(dd) the Broads Authority;

(de) a National Park Authority;

(e) the Housing Corporation;

(f) a housing trust (as defined in section 6 of the Housing Act 1985) which is a charity;

(g) a registered social landlord, or a fully mutual housing association which is not a registered social landlord; or

(h) an authority established under section 10 of the Local Government Act 1985 (joint arrangements for waste disposal functions).

(1A) In subsection (1)( g)-
“ fully mutual housing association” has the same meaning as in the Housing Association Act 1985 (see section 1( 1) and (2) of that Act); and “registered social landlord” has the same meaning as in the Housing Act 1985 (see section 5( 4) and (5) of that Act).”

Inland Revenue Trust Offices

The UK resident trusts affected by this article are dealt with by one of five Inland Revenue offices.

For all trusts administered in Scotland or established under Scottish law:

Edinburgh Haymarket District
Elgin House
20 Haymarket Yards
Edinburgh
EH12 5WS

Tel: 0131 346 5600

For trusts administered within the Greater London area (broadly within the M25):

London Trusts District
Charles House
375 Kensington High Street
London
W14 8QS

Tel: 020 7605 9800

Trusts administered within the Greater Manchester area:

Manchester Castlefield District
Albert Bridge House
1 Bridge Street
Manchester
M60 9AF

Tel: 0161 288 6000

Trusts administered in the South West of England:

Truro Tax District
Lysnoweth
Infirmary Hill
Truro
Cornwall
TR1 2JD

Tel: 01872 245300

Trusts not dealt with by Edinburgh, London, Manchester, or Truro Districts, including trusts administered in Northern Ireland:

Nottingham Trusts District
Huntingdon Court
90- 94 Mansfield Road
Nottingham
NG1 3HG

Tel: 0115 911 6500

Further information

If you require further guidance on this topic please contact either;

• the tax district that deals with the company tax file, where there is a company tax file, or
• where there is no company tax file, or where it appears a trust exists - the appropriate trust office as outlined above.

If you have any queries on the inheritance tax treatment of funds held on a discretionary trust, please contact the:

Capital Taxes Office
Ferrers House
PO Box 38
Castle Meadow Road
Nottingham
NG2 1BB

Tel: 0115 974 2400

Claims for relief involving two or more years are now governed by Section 42 and Schedule 1B, Taxes Management Act (TMA) 1970. Such claims will most commonly arise from the carry back of losses or personal pension payments, and farmer's averaging. The same principles apply where farmer's averaging, literary spreading or the carry back of post- cessation receipts increases income in earlier years.

Schedule 1B says that such claims are given effect as claims of the year in which the event which gives the opportunity to claim occurs (the year of claim). The relief is quantified by reference to an earlier year, as if the amount claimed could be carried back and included in the self assessment for that year. But the self assessment for the earlier year is not actually revised at all.

The way the legislation does this is by making the amount of the claim the difference between:

• Amount A - “the amount in which the person is chargeable to tax for the earlier year”; and
• Amount B - “the amount which he would be so chargeable on the assumption that effect could be, and were, given to the claim in relation to that year”.

And any reference to the amount in which a person is chargeable to tax is a reference to the amount in which they are so chargeable “after taking into account any relief or allowance for which a claim is made”.

Some doubts have arisen about whether, because the earlier year's self assessment is not reopened, taxpayers can still make (or revise) claims etc. for the earlier year as a consequence of the loss etc. in the later year (as they could do prior to SA).

A typical example of this is where a person carries back a pension payment which reduces their total income. A result of the reduction in income for the earlier year may be that they would become entitled to claim, for example, age- related Personal or Married Couple's Allowance (MCA). Can such claims be made even though the earlier year's self assessment is no longer reopened?

The answer to this question is yes. In calculating Amount B it is necessary to have regard to all reliefs and allowances. So Amount B is the net amount after taking into account all reliefs and allowances for which a claim is made.

Similarly, if the effect of a Schedule 1B claim is to free up some of the rate band below higher rate then that should be taken into account in computing the liability to CGT.

The same principle also applies where, for example, a loss carry back claim means that Net Relevant Earnings for the purposes of relief for personal pensions or retirement annuity contributions would be reduced. A clawback of PPR/ RAR is triggered and excessive personal pension contributions have to be refunded.

A slightly different situation arises where a carry back claim has a potential impact on someone else's liability to tax. The most common example of this is the transfer of surplus MCA under Section 257BB, Income and Corporation Taxes Act (ICTA) 1988. Where a person's income for an earlier year is reduced by the carry back of trading losses, such that they cannot use their entitlement to the allowance, can they still give notice that they wish to transfer surplus MCA to their husband or wife?

Again, our view is that Schedule 1B continues to permit this to happen. We think that the surplus allowance must be treated as a real consequence inevitably flowing from the claim process introduced by Schedule 1B. This will also apply to claims to transfer surplus Blind Person's Allowance under Section 265, ICTA 1988 and surplus Children's Tax Credit (CTC) under Schedule 13B, ICTA 1988 when CTC commences on 6 April 2001.

If people have had consequential claims etc. of this kind refused local tax offices will be pleased to reconsider them in the light of the views set out in this article.

In 1983 the Inland Revenue reviewed the arrangements between companies in the Film and TV industries and their casual and freelance staff. It was accepted by the industries and the Revenue that the relationships were generally that of employer and employee and as such earnings would be properly taxable under Schedule E from 6 April 1984. The only exceptions to this were the grades included on the Schedule D grading lists issued jointly by the Inland Revenue's Film and Television Industry Units. Services provided by set construction workers such as carpentry, rigging and painting do not appear on the Schedule D lists and, therefore, subject to any reviews of individual workers' employment status, income from such services is normally taxable under Schedule E. This is because typical contracts in the industry include such clauses that are typical of a contract of service and indeed the Special Commissioners, in an unreported decision, decided that the appellant set construction worker was an employee.

Under the principles of the common approach, the Contributions Agency generally adopted this line for National Insurance purposes from 1992. However, in two Secretary of State's decisions in respect of cases for Hamilton Heritage (1997) and Southbrooke Studios Ltd (1997) it was held that the set construction workers concerned were self- employed rather than employees. Secretary of State decisions are not lawful precedent and relate to the named contributors only. Following publicity surrounding these decisions it has become apparent that some Set Construction companies were incorrectly advised by local Inland Revenue (National Insurance) Offices that their workers were now self- employed and many companies also wrongly assumed that the two Secretary of State decisions applied across the industry generally.

Consequences

This has caused confusion within the industry because set construction workers can find themselves engaged on a self-employed basis with one studio and as an employee with another, whilst working under comparable terms and conditions for both. Consequently the Revenue has received representations from a number of employers in the industry requesting that it standardise the handling of these cases.

Revenue Position

The Revenue still regards set construction workers as generally being employed earners because of the contractual arrangements mentioned and the Special Commissioner's case which found that the worker concerned was taxable under Schedule E. However, employment status can only be determined after establishing the individual facts and considering their relative importance. As the decisions in both of the Secretary of State cases mentioned above were found on their own facts it is reasonable to conclude they only relate to the named contributors.

Revenue Guidance to Staff

Guidance has been issued to all Revenue offices confirming the position on Set Construction workers. Any cases of doubt will be referred for advice to the Film Industry Unit at Gateshead or the TV Broadcasting Group at Manchester to review the employment status as appropriate. Whatever the final outcome on individual reviews, the agreed status will apply for both tax and NICs. This will help to ensure a more consistent treatment for tax and NICs for set construction workers in the future.

Miscellaneous

ESC B4 presently allows a deduction for certain capital expenditure on properties let in the course of a Schedule A business. The concession will cease to have effect from 1 April 2001 for Corporation Tax and 6 April 2001 for Income Tax.

The Press Release of 17 March 1998 announcing withdrawal of the concession indicated the Inland Revenue would issue guidance material on the type of repairs expenditure which would continue to be allowable after the concession had been withdrawn. After further consideration and some consultation, we have concluded that the issue of further guidance is unnecessary. Once ESC B4 ceases to have effect, only expenditure on revenue repairs, as opposed to capital improvements, additions or alterations, will be allowable as a deduction in computing Schedule A profits. The distinction between “repairs” and “capital expenditure” for this purpose is already the subject of extensive general guidance. This is in the Board's leaflet IR 150 at paragraphs 132 to 160, the Property Income Manual at paragraph 2020, and the Inspectors' Manual at paragraphs 990 to 996.

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.

Simon Rogers

A crooked accountant was sentenced to seven years in prison, for attempting to defraud the Inland Revenue of public money thought to be in excess of £1,000,000. Nine other workers within the construction industry were also charged and eight of these were sentenced to jail for their involvement in the scam.

Simon Rogers, an unqualified accountant from Stevenage in Hertfordshire, abused his position by submitting and advising others to submit fraudulent repayment claims and deduction forms on behalf of sub- contractors in the construction industry.

The scam, which was heard by Blackfriars Crown Court, also included the creation of fictitious building workers. All the money fraudulently gained was split between Mr Rogers and the others involved in the case - contractors and sub -contractors.

Determined to get away with the scam, the court heard that Mr Rogers had a quarter of a million pounds in a slush fund with which to attempt to avoid being taken to court. Even once court proceedings had begun he continued to try and obstruct the course of justice.

During the trial it was claimed that Mr Rogers bullied two others, also charged, into not giving evidence or withdrawing statements they had previously given.

The court heard that one juror was even approached at their front door, with the offer of a bribe of cash and a bottle of vodka, on the Saturday before the guilty verdict was delivered.

The honourable Judge Byers overseeing the case, praised the Inland Revenue's Special Compliance Office investigators

“Rogers must understand that anyone who cheats the Inland Revenue steals from every honest taxpayer in the land and deprives those who might have benefited from the spending of the monies.

The investigation was carried out with great thoroughness and skill which may have led to the early pleas and the consequential saving of public money……. their conduct does them great credit……. and the public (is) indebted to them.”

Details

Simon Rogers from 5 Ranworth Avenue, Stevenage, Hertfordshire, was sentenced to seven years imprisonment on count one and two years imprisonment on count two, to run concurrently.

Particulars of Offence

Between 6 April 1991 and the 5 April 1998 - intending to defraud Her Majesty the Queen and Her Commissioners of the Inland Revenue of public revenue. Namely by reporting that income tax had been deducted by contractors from the gross pay of sub- contractors, when in fact no such payments or deductions had been made. Also by submitting claims for repayments of tax on behalf of those who were not entitled to them.

Neil Scott a sub- contractor from Biggleswade, Bedfordshire was sentenced to two years imprisonment.

Michael James a sub- contractor from Stevenage, Herts. was sentenced to three years imprisonment.

Anthony Paul Whaymand a general builder from Baldock, Herts. was sentenced to two years imprisonment.

John William Mitchell a bricklayer from Stevenage, Herts. was sentenced to two years imprisonment.

John Michael McGinnity a general builder from Shephall Way, Stevenage was sentenced to three years imprisonment.

Robin Michael Knights a manual labourer from Watford, Herts was sentenced to 12 months imprisonment.

Colin John Chantler a breakdown driver from St Ives, Cambridgeshire was sentenced to 21 months imprisonment.

Matthew Dorken a bricklayer from Stevenage in Herts. was found not guilty on 7 April 2000.

The case is now adjourned until the 27 July 2000 when an application for a confiscation order and an order for costs will be presented.

Inland Revenue Statements of Practice and Extra-Statutory Concessions issued between 1 June 2000 and 31 July 2000.

Extra Statutory Concessions

Number	Title	Date of Issue
A59	Home to work travel of severely disabled employees (amended)	28 June 2000

There have been no Statements of Practise issued in this period.

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

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