A periodic update designed to provide a summary of developments in property tax, including recent cases, and a round-up of forthcoming changes.

If you would like further information on any of the areas covered, please email catherine.robins@pinsentmasons.com or speak to your usual Pinsent Masons adviser.

Contents

Short summaries of each article shown below. If you would like to view the full article, click on the underlined links. To return to the start, click on the "Go back" link.

Managed Service Companies – implications for construction industry

There have been a number of legislative changes and announcements made recently which should set alarm bells ringing across the construction industry.  The new managed service company legislation is just one example of this. Read More

VAT – can the grant of a new lease be a Transfer of a Going Concern?

Despite HMRC published practice, some HMRC officials are treating the grant of a new lease as a transfer of a going concern for VAT purposes. Read More

Construction Industry Scheme – application to fit outs

The new Construction Industry scheme finally came into force on 6 April. In most cases the new scheme will not apply on the grant of a lease where a landlord contributes to the tenant's fit out costs. Read More 

Finance Bill – Stamp Duty Land Tax changes

The general anti avoidance provision introduced following December's pre budget report has been modified and further changes have been made to the partnership provisions. Read More

Stamp Duty Land Tax and discovery assessments

HMRC give guidance on how to avoid "discovery" assessments in relation to SDLT returns. Read More

VAT treatment of grant funding

A key issue affecting many public/private sector projects is the VAT treatment of grant funding provided by the public sector to finance the project. Read More

Green tax reforms

Announcements were made in the Budget relating to SDLT relief for zero carbon homes, Tax credits for "green technologies" and increased landfill taxes. Read More

Brownfield development

A consultation on tax reliefs for Brownfield development was issued at the Budget. It suggests extensions to land remediation relief for long-derelict land and the costs of removing Japanese knotweed and the abolition of the exemption from landfill tax for the waste from contaminated land. Read More

Changes to industrial buildings allowances

 A surprise announcement in the Budget was the phasing out of industrial buildings allowances, but what is the position for enterprise zone allowances?  Read More

Where are we now?

An update on some of the legislative changes and tax cases which are still in the pipeline. Read More

FULL ARTICLES

Managed Service Companies – implications for construction industry

There have been a number of legislative changes and announcements made recently which should set alarm bells ringing across the construction industry.  HM Revenue and Customs (HMRC) have sent out a clear message that they are turning their attentions to the employment status of workers and they have set their sights on the construction industry. 

Attack by HMRC on employment status of workers

The recent announcements suggest that they are launching a more determined assault than ever before and it is something that the industry needs to be aware of and be ready for.

This article focuses on the new "managed service companies" legislation, but it is important to see these changes in the context of the shift in HMRC's approach to employment status, particularly in the construction industry.  A worrying example of this shift is the new Construction Industry Scheme.  Under the new regime contractors are required to make a monthly declaration that their relevant workers are not employees.    HMRC have repeatedly stated that it believes that a large number of subcontractors are incorrectly engaged on a self-employed basis. HMRC expect to generate additional tax revenue of £ £130 million in 2008/09 by increasing its compliance in this area.

Managed Service Companies (MSCs)

In last year's Pre-Budget Report, the Government announced that it was introducing new legislation to clamp down on what it perceived to be widespread tax avoidance through the use of MSCs.  In HM Treasury's report, "Tackling Managed Service Companies", they estimated that the number of workers in MSCs has grown from around 65,000 in 2002-2003 to around 240,000 in 2005-2006.  The use of MSCs is particularly prevalent in the construction industry. 

MSCs are companies which are usually set-up by scheme providers to provide the services of workers to businesses.  The companies used are either single person companies, which supply the services of just one worker, or "composite" companies which supply the services of a number of unrelated workers.  They seek to avoid PAYE and National insurance Contributions (NICs) on payments to the workers by making them shareholders and paying them a mixture of dividends, expenses and salaries, not all of which are subject to PAYE and NICs. 

The new legislation applies with effect from 6 April 2007, except in relation to the "transfer of debt provisions (see below) which has been delayed until 6 August 2007.

If the legislation applies, all payments made to the workers (whether as salary, dividends or otherwise) are subject to PAYE and NICs.  In addition, the tax reliefs which were previously available for travel expenses are now limited, so that any travel to and from the client is not deductible for tax purposes.

The legislation is given teeth by the third party debt transfer provisions. These allow HMRC to go after certain third parties if the MSC does not account for the tax.  Previously, even where HMRC could establish a PAYE and NIC liability, these amounts often went unpaid as the MSC would have no assets and would simply be wound up or cease to trade.  The third parties who could be liable to pay the tax include the directors of the company, the scheme provider and also "'any person who directly or indirectly has encouraged, facilitated or otherwise been actively involved in the provision of the services of individuals through MSCs".  There has been some concern that this could extend to the ultimate user of the services ie the construction companies and this is something that HMRC contemplate in their report "Managed Service Companies - Transfer of PAYE and NIC Debts".  The legislation is not intended to catch those construction companies who do not know, or who could not reasonably be expected to know, that they were dealing with an MSC.

What does this mean for construction companies?

As this legislation is so comprehensive, we anticipate that the effect of it will be that people will simply stop using MSCs - they just won't be tax or cost efficient anymore.  Those construction companies who have encouraged or facilitated or otherwise knowingly been actively involved with the provision of services through an MSC, would be advised to review those arrangements. 

As a result of the changes, workers will look to supply their services through personal service companies (not established by scheme providers) or through direct engagement with construction companies.  Practically, this means that construction companies will have more workers whose employment status they will need to consider and get right.

The tax treatment of workers in the construction industry is now under the full glare of HMRC. They are looking to significantly increase the amount of tax they recover and, as such, they will be focussing their attentions and resources on construction companies.   This isn't something that can be ignored, because the penalties for doing so will be costly.  Go back

VAT – Transfer of a going concern – grant of new lease

The transfer of an existing interest in a property can be a transfer of a going concern for VAT purposes (TOGC) in certain circumstances, so that where certain conditions are met, the transaction is outside the scope of VAT. Examples include: where an existing interest in a let property is transferred to a buyer who will carry on the letting business; or where an existing interest in a property which is used for the purposes of a business is transferred together with the business to a buyer who will continue to run the business from the property.

HMRC's published position has always been that the grant of a lesser interest (even where it is say a 999 year lease being granted out of a freehold) in these situations does not constitute a TOGC, so that generally the VAT position will be governed by whether the seller has opted to tax. However we have recently seen TOGC clearances granted on specific transactions by a senior VAT official, allowing TOGC status where a lesser interest was granted. However, HMRC's published guidance remains that such grants cannot be TOGCs.

From a Buyer's point of view, TOGC treatment may be in their interests as it saves cashflow on the VAT and avoids SDLT being calculated on the VAT-inclusive figure. Based on this new information, Buyers could suggest TOGC treatment but the Seller is likely to want to apply for TOGC clearance to protect itself.

From a Seller's point of view, the safest course is to follow HMRC published guidance and continue to treat grants of lesser interests as not constituting TOGCs. If a Buyer raises the point and the Seller wants to be cooperative, it should to apply to HMRC for TOGC clearance to get certainty and based on a full disclosure of the facts. In this case, if clearance isn't obtained before completion you should make sure that the Seller has full cover for VAT, interest and penalties (and that the Buyer is good for that cover).  Go back

Construction Industry Scheme – application to fit outs

The long awaited new Construction Industry Scheme finally came into force on 6 April. One sometimes unexpected circumstance, where the old scheme applied, was on the grant of a lease where a landlord contributed to the tenant's fit out costs. This could treat the landlord as a contractor under CIS so that it could not make payments to the tenant contributing to the fit out costs unless the tenant had a certificate from HMRC indicating that it could be paid either gross or under deduction of tax.

However under the new scheme contributions will normally not be within CIS if they are truly for tenant fit out works, as opposed to a payment by the landlord to persuade the tenant to undertake works that would normally be the landlord's responsibility.

Even if the tenant is undertaking more than just true fit out works, the landlord only has to consider applying the CIS to the payment if either its business includes construction operations or, broadly, if its average annual expenditure on construction operations exceeds £1 million.

Nonetheless if CIS applies, the new scheme has eased some of the associated "red tape".  Previously the tenant would need to register under the CIS before the landlord was actually allowed to make the payment. The tenant may now opt to receive the payment subject to a higher tax deduction (30% instead of 20%). As this deduction can be set against monthly payroll tax, the cash flow impact may be minimal.

Lastly, don't forget that if the tenant is going to employ another person to do the fitting out, it will need to consider whether it must operate the CIS in respect of payments it is to make. If the tenant's business does not involve construction operations it will need to apply CIS to payments it makes, broadly, if its average annual expenditure on construction operations exceeds £1 million.  Go back

Finance Bill – SDLT changes

As previously reported in Property Tax Update (see http://www.pinsentmasons.com/media/257643696.htm#Stamptext), in the Pre-Budget Report in December, the Government introduced, by statutory instrument and with immediate effect, a wide ranging anti-avoidance rule. This was introduced in an attempt to prevent the use of SDLT avoidance schemes, which were being used on large transactions and which HMRC had grown of tired of blocking on a piecemeal basis.

The Finance Bill introduces some changes to the drafting of the provision, with retrospective effect, following representations by professional bodies that wholly innocent transactions could be caught. The new provision (which is due to become section 75A Finance Act 2003) applies where:

• there is a disposal of land by a Vendor and a Purchaser acquires it (or an interest in it);
• there are a number of connected or ‘scheme’ transactions; and
• the total SDLT payable is less than would have been payable had the Vendor sold directly to the Purchaser.

If these conditions are met then SDLT is imposed as if there was a straight sale of the property for the highest consideration paid under any of the scheme transactions.

The new provisions make it clear that consideration for incidental transactions which are part of the scheme transactions will not be aggregated to the extent that the consideration relates to the supply of something other than land or to the construction of a building on the land. This makes it clear - for example, that in the case of a transfer of a property as part of a sale of a business, consideration for the non property assets would not be aggregated when calculating the SDLT due in respect of the property.

However despite the changes, the provisions are still far from clear and could apply in some unexpected cases. Section 75A therefore needs to be considered in detail whenever any form of planning relating to SDLT is in contemplation, no matter how minor. 

Some further changes have also been made to the changes to the partnership SDLT provisions announced at the time of the pre-budget report. On the whole these changes are to block avoidance schemes. Go back

SDLT and discovery assessments

When you submit a stamp duty land tax (SDLT) return on a property transaction, HMRC have an initial 9 month "enquiry window" in which to open an enquiry into the return to check that the correct amount of SDLT has been paid.  Whether or not they do so then, HMRC can also open returns later ("discovery assessments") but only if there has been fraudulent or negligent conduct or HMRC could not reasonably be expected to be aware from the SDLT return that insufficient tax has been paid.

HMRC have issued some guidance on protecting against a discovery assessment (in the absence of fraudulent or negligent conduct). They state that they will apply to SDLT, statement of practice SP1/06, which was issued following the uncertainties caused as to the income tax enquiry window by the case of Langham v Veltema.

In some cases it will be advantageous to disclose to HMRC any uncertainty on the SDLT position, to limit the period in which HMRC can challenge the SDLT return. Common situations where a disclosure may be needed include where a valuation is relied on in calculating the SDLT (because the basis on which the valuation has been carried out might be contentious), or where taxpayers adopt a different interpretation of the law from that held by HMRC.  Go back

VAT treatment of grant funding

A key issue affecting many public/private sector projects (PPPs) is the VAT treatment of grant funding provided by the public sector to finance the project.

PPPs can be established where the private sector contributes its expertise, and the public sector contributes grant funding to the project. This structuring is common in relation to regeneration and other development projects in which the public sector (particularly Regional Development Agencies and local authorities) is involved. Where the public sector provides money, the question then arises: is the payment of money subject to VAT?

Broadly, a payment will be subject to VAT where it is consideration for a supply of goods or services received by the public sector body. Where grant funding is freely given with no expectation of anything in return, the grant will be outside the scope of VAT. Where however the public sector body derives a direct benefit from the arrangement, the payment could be consideration for a supply, in which case VAT must be accounted for at 17.5%. Such situations could include where any intellectual property rights generated by the project are assigned to the public sector body, or where the public sector body has the right to use data generated during the course of the project.

On projects which have an element of grant funding, the parties should scrutinise the arrangements carefully to establish the VAT position. Ideally the position should be bottomed out before contracts are exchanged, possibly with recourse to HMRC for a ruling. Alternatively, the contract should make it clear where the VAT risk falls. Otherwise the parties risk a 17.5% funding gap in situations where the so-called "grant" is actually subject to VAT, leaving the project at risk of failure.  Go back

Green tax reforms

A number of announcements made by the Chancellor in the recent Budget came under the broad umbrella of "green" tax reforms.  Of these, the following are of particular interest to the property sector:-

• SDLT relief for zero carbon homes.  This time-limited relief will apply to the first sales of new zero carbon homes from 1 October 2007, and is intended to act as a financial incentive for developers.  The qualifying criteria for a zero carbon home are due to be detailed in regulations later this Summer, although the broad intention is that, averaged over a year, such a home will generate as much energy as it requires.  The criteria will be based on the Government's existing Standard Assessment Procedure for the energy rating of dwellings, supplemented by an additional calculation to take into account the energy consumption of appliances.
• Tax credits for "green technologies".  The Budget proposed a number of changes to the capital allowances system, which will have a significant impact on those in the industrial sector and those with large property portfolios. Amongst those changes was a proposal for a payable tax credit for losses resulting from capital expenditure on certain designated "green technologies".  However the detailed design and scope of this tax credit will be the subject of consultation, and it is not yet clear what impact this will have.
• Increased Landfill Taxes.  As well as the carrots of SDLT relief and tax credits encouraging "green" behaviour, the Chancellor included a significant stick in the form of increased landfill taxes.  The standard rate of landfill tax has been increased from £21 per tonne to £24 per tonne from 1 April 2007.  More importantly, the rate is due to rise to £32 per tonne from 1 April 2008.  Businesses planning projects which will result in significant landfill might be affected.  Clearly as landfill rates increase so does the importance of reliefs such as remediation relief.

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Brownfield development - Consultation on tax reliefs

A consultation document on reforming tax reliefs associated with brownfield development was issued at the Budget.

Under the current system there are two tax reliefs targeted at developers and others involved in cleaning up contaminated land:

• a corporation tax relief known as land remediation relief, which gives a tax deduction of 150% of qualifying expenditure for the costs of decontaminating land;  and
•  an exemption from landfill tax for waste derived from contaminated land that is sent to a landfill site.

The proposals in the consultation paper include:  

• Extend land remediation tax relief to cover long derelict sites - at present these sites only benefit from relief if contamination is present, yet there are significant other cost barriers to development. The proposal would be to give land remediation relief for certain expenditure (such as removing existing buildings structures or obsolete services such as gas or water)for land that had been derelict since a fixed date (31 March 1998 is suggested).

• Link remediation relief to actual development of the site – at present you don't actually have to redevelop the site to get the relief – it is proposed that the relief could be dependent on the expenditure having been incurred pursuant to a planning condition or obligation.

• Explore timing of land remediation relief – as a corporation tax relief, it is currently only available once the company has prepared its corporation tax return, the Government is prepared to consider suggestions for making the relief available earlier if the public revenue can be protected.  It is suggested that, although the Government believes that developers should factor the benefit of the relief into their development costings, as the availability of the relief will increase the profitability of brownfield development, this does not always happen and they ask for thoughts on this.

• Extend remediation relief to include the costs of removing Japanese Knotweed (a tall vigorous ornamental plant that escaped from cultivation in the late nineteenth century and is now an aggressive invader of both urban and rural environments which can cause  structural damage to buildings and push through tarmac and paving) – views are invited on the costs of removal and the extent to which it is a barrier to development.

• Phase out landfill tax contaminated land exemption – with the increased (and encouraged) use of on-site decontamination the Government is questioning whether this relief from landfill tax for contaminated land waste should remain.

Interested parties have until 14 June 2007 to respond to the consultation paper which can be found at http://www.hmrc.gov.uk/consultations/tax-incentivesbrownfield-land.pdf.

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IBA Changes – a note of caution on enterprise zones

A surprise announcement in the Budget was the phasing out of industrial buildings allowances. The legislation in this year’s Finance Bill removes balancing adjustments and the recalculation of writing-down allowances with effect from 21 March 2007, but does not apply to balancing events in pursuance of a final, binding contract entered into before Budget day. Further these immediate changes specifically do not apply to qualifying enterprise zone (EZ) expenditure otherwise, since EZ balancing events invariably trigger a 100% clawback, it would be a green light to sell or change the use of all EZ buildings.

The legislation to phase-out IBAs from 2008-09 will be included in Finance Bill 2008 – there has, however, been no announcement about whether enterprise zone allowances (which are a form of IBA) will also be phased out. As they are carved out of the balancing adjustment provisions it looks as though they are to remain, but this is not certain. HMRC have been unable to clarify the position. There are now no current enterprise zones and so the point may be academic but many landowners have entered into golden contracts keeping the allowances available. Whilst having a contract entered into before any change would normally protect against any legislative changes, owners with golden contracts keen to claim EZ allowances might consider incurring the qualifying expenditure this year. Go back

Where are we now? - an update on some of the legislative changes and tax cases which are still in the pipeline.

Go back

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