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Tax review: The labyrinth of benefits taxation

07 November 2017 by Russell Cockburn

Tax review: The labyrinth of benefits taxation - Read more

An anorak’s dispute over when a car is a van shows the need for reforms on how work benefits are taxed

Stay in your lane

One of the regularly discussed issues with HMRC in recent years is the vexed question of how to tax van-derived cars or car-derived vans, or how to consider this problem when preparing a P11D form for an employee receiving taxable van benefits.

In many cases a van is not a taxable benefit for the employee driving it, so long as the only private use the employee makes of it is going between work and their home. Provided all other use is for business purposes then the employee can generally escape taxation under the benefits legislation.

In fact the HMRC Employment Manual does by concession allow an occasional trip to the tip – but otherwise there must be no private use of the van. Thus it can be important to be able to show that a particular vehicle is indeed a van and not a car, which could otherwise be fully-taxable as the result of home-to-work private use.

Such was the dilemma faced by the tax tribunal recently when Coca-Cola disputed the tax position on two types of vehicles, the VW Transporter Kombi and the Vauxhall Vivaro.

This case demonstrates just how ludicrously complex this area of the benefits legislation has become, with car manufacturer producing more varied and specialised vehicles designed to meet differing commercial and business needs.

The tribunal decided that the Transporter Kombi vehicles were indeed cars, whereas the Vivaro should be taxed as a van. The load bearing capacity and other facilities of both vehicles were similar – specifically both exceeded the magic one metric tonne load weight.

The tribunal judges’ decision seems to have turned on the amount of cargo space in the middle section of the Vivaro vehicles, which was not similarly available in the case of the Kombi.

The case is important because for anyone agonising over a similar conundrum it contains a detailed review of the factors to be taken into account.

Of more importance, however, is the bringing to court of another case on such a minor issue. It only shows how labyrinthine this area of the taxation of benefits has become – and how long overdue for root and branch reform it is.

Digital tax deferred

It is worth mentioning HMRC’s recent decision to defer introducing its much-vaunted Making Tax Digital project.

For most corporates this issue was probably not yet on their planning horizon, as initial plans for its introduction from April 2018 were chiefly going to affect non-corporates. HMRC has decided to delay the full version of the project, with it now affecting all businesses from April 2020 – if indeed it goes ahead. Although, VAT will be be brought into the digital world first, from 2019.

“It only shows how labyrinthine this area of the taxation of benefits has become”

It comes as no surprise to many tax practitioners that this is the initial outcome of the arduous processes of consultation. It became clear to many of us through 2016 and early 2017 that industry could not be ready for the full introduction of Making Tax Digital in 2018.

HMRC is to be congratulated for its brave deferral decision, and hopefully the slower timetable will allow businesses and the tax profession to fully prepare themselves for the final version.

Employee benefit trusts

Following the final decision on the Rangers Football Club case (see previous article), any business that has used employee benefit trusts as a tax planning strategy over the years will need to consider HMRC’s recent announcement that it intends to invite scheme participants to settle outstanding liabilities as soon as possible.

The tax authority has indicated that those who register their interest in making an early settlement will be able to avoid further enforcement action and reduce their eventual interest costs to the department.

This is to some extent a rock and a hard place decision for those involved.

Recent changes in the statute will probably mean that many users of such schemes are facing significant financial penalties anyway – however, the option of settling any specific case instead of seeking to get a different judgment in court will seem invidious to many when all the advice they have received over the years is now apparently being contradicted.

Finance bill sequel

The second Finance Bill of 2017 is making its way through the various parliamentary stages and on to royal assent.

The new bill contains 72 clauses and 18 schedules and includes almost all of the predicted provisions. These had to be dropped from the original 2017 finance bill when the general election was announced for this summer, thus curtailing the legislation’s progress.

Only two of the original clauses, on landfill tax and miscellaneous customs enforcement powers, have yet to make it back into the statute from those that were originally dropped.

“HMRC expects organisations to have put in place properly formulated and detailed risk assessment procedures and controls”

Most important is the reintroduction of the clauses on corporate trading losses and corporate interest relief. These have been fully reintroduced, in their original format. Notably, it is provided that these new rules will apply from their originally intended introduction date of 1 April 2017 – to that extent, this is retrospective legislation.

It is probably just as well that this is the manner in which these two clauses have been reintroduced, as many large companies will have been carrying out time-consuming modelling work and assessing the potential cash flow and tax impacts of the important changes on their finances for the future.

It would probably have been annoying had the introduction of these new rules been deferred for a year, as some feared they might be when the original bill was curtailed.

Helping tax evaders

Anyone in a supervisory or managerial role in the tax department of a business in the UK is likely aware of new rules on facilitating tax evasion, and taking steps to implement the changes they require.

On 30 September 2017, the Criminal Finances Act 2017 came into force, creating two new tax offences.

These new offences are intended to hold officers and employees of corporations and partnerships criminally liable if they fail to prevent their employees or anyone who provides services on their behalf ‘facilitating tax evasion’.

There is one offence for onshore and one for offshore facilitation, both being another significant increase in the powers of HMRC, further stockpiling their weaponry in the battle against tax evasion.

Incorporated bodies and partnerships who are found guilty of either of these new offences face significant fines, if the senior members of their organisation – probably the board of directors – are shown to have been aware of the offence being committed.

The new laws will be policed generally by the Financial Conduct Authority or the industry-specific regulatory bodies that supervises organisations under existing money laundering rules, and therefore it will be important that organisations show adequate systems and internal control procedures are in place.

These must be capable of showing to the authorities’ satisfaction that the potential for such offences to occur has been minimised, and that if they do occur they would be detected in a timely and effective fashion.

HMRC has also indicated that it expects organisations to have put in place properly formulated and detailed risk assessment procedures and controls. This is so that any organisation can demonstrate it has carried out proper checks on its capacity for detecting such offences, or the potential for such offences to occur in the future.

Russell Cockburn is an independent taxation consultant, and a former inspector of taxes

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