All Change for Vans
Residency – Another Important Case
Time to Review Agricultural Contracts
Enduring Powers of Attorney – Time to Act
Arctic Systems – An Update
VAT Changes – Partial Exemption and Transfers as a Going Concern

ALL CHANGE FOR VANS
As advised in previous updates the taxation of vans provided to employees is set to change from 6 April.  The change is one of the biggest percentage tax rises on record, so if you have not yet brought this change into budget you should do so now.

The current benefit in kind for an employee who is provided with a van for private use is from £350 to £500.  This benefit is increasing from 6 April 2007 to £3,000, or if fuel is also provided, £3,500.

The blow was lessened slightly when other changes were introduced in April 2005 meaning that some van drivers could avoid the charge altogether.  From that date, where an employee is provided with a van, but private use is restricted to home to work travel, and any other private use is incidental, then there should be no taxable benefit.  HMRC later issued guidance on what they view as incidental so if you require further advice on this please call your usual contact at Albert Goodman.

If you have not already reviewed your company van policy as a result of the above changes you should do so now.  As mentioned the hike in charges could be avoided in certain circumstances so it is important to review this well in advance of 5 April so that any changes can be brought into effect by the beginning of the new tax year. 

RESIDENCY – ANOTHER IMPORANT CASE
The case of Gaines-Cooper v HMRC SpC 568 has turned long-standing tax practice regarding residency status on its head.  H M Revenue and Customs (HMRC) practice, as set out in IR20, has been widely regarded as the authority for residency for many years.  However, the decision in this case questions the reliance on IR20.

When looking at the number of days spent in the UK the advice in HMRC’s own guidance, IR20, was to ignore days of arrival and departure.  However, in the above case the Special Commissioners did not follow this long-standing practice.  They counted nights actually spent in the UK, including flights to and from the UK.  As a result the increase in days spent in the UK meant that the Special Commissioners ruled the taxpayer to be UK resident.

In addition to residency the case also concerned domicile and ruled that the taxpayer had not abandoned his domicile of origin in England for a domicile of choice in the Seychelles due to his continuing connections with the UK, including his son attending school here, regular visits to the UK and family and business ties in the UK.

Since the case HMRC published a brief confirming that there has been no change to its practice in relation to residence and the ’91-day test’.  They say that in this particular case they were questioning whether the taxpayer had ever left the UK and in reviewing this included the days of arrival and departure.

On the basis of the above whilst IR20 and case law is still the only guidance on residency, we should not rely on it.  If you wish to show a change in residency it is important that there are little to no ties left in the UK that will potentially undermine the position.
 

Time to Review Agricultural Contracts
Many farms in the South West have been bought up over the last few years by successful businessmen.  The main drive for doing this was so that they could shelter assets from inheritance tax (IHT) by achieving agricultural property relief (APR).

However, there have been a number of cases that we have reported on in the last couple of years that have shed some doubt on whether APR will apply in full.  These were regarding the farmhouse and whether it should qualify for APR and there has now been another significant APR case, which is known as Arnander or McKenna.

This case involved a farm in Cornwall, where the Executors of the estate of Mr David McKenna deceased argued APR applied on the land, consisting of 188 acres, and the farmhouse.

David McKenna and his wife owned The Rosteague Estate on the Roseland Peninsula.  Rosteague House is extremely old and was described in the sale particulars as being an historic and substantial manor house, Listed Grade II* with seven bedrooms, many public rooms and a staff flat.

Mr McKenna purchased the estate in 1945, and from 1972 to 1984 it was let out on a tenancy.  From 1984, until Mr McKenna died, the land was farmed under various contract-farming agreements. 

Under this type of agreement the landowner typically provides the land and buildings and invoices the contractor for the sale of crops.  The contractor provides the machinery, labour and undertakes the physical work on the land and invoices the landowner for ploughing and planting etc.  For income tax and capital gains tax purposes the landowner is treated as farming.  The contractor is treated as trading.

In this case, in practice the land agent managed the last contract farming operation, and on a quarterly basis there was an exchange of invoices.  Typically the invoice from Mr McKenna to the contractor was always greater than the invoice going the other way by exactly the amount of the agreed quarterly payment by the contractor to the landowner and in practice the contractor undertook most of the farming operations.

This had a detrimental affect on the Executors claim to APR.  As a result of these cases to be a farmhouse it has to be shown that the farmhouse is the dwelling from which the farm was managed.  Also the dwelling has to be the farmer’s house, and the farmer is the person who farms the land on a day-to-day basis.  In addition, the house should be of a character appropriate to the land, i.e. it looks like a farmhouse and is not too substantial for the acreage of land.

It was concluded that the house was not used as the main dwelling from which the farming operations were conducted and managed, as the land agent and contractor did this.  The landowner had very little involvement in the day to day running of the farm and merely received the same income each quarter.  Further, it was the Commissioners view that the house was grander, more elaborate and more expensive than was required for the size of farming operations. 

As a result IHT was charged on the full value of the farmhouse at 40%.

Our message from this case is that it is important that landowners review their contract farming, share farming and grazing agreements to ensure they are commercial.  It is important that in practice the farming operations are carried out in accordance with these agreements and the landowner is involved with the running of farm and takes some risk by sharing in any farming loss.  In this case, the landowners received the same quarterly payment each month and therefore took no real risk in the actual farming profits or losses.  He was effectively, in practice, being paid a rent by the person who farmed the land.

For most commercial farmers, they should not be too concerned with this case.  Assuming your farmhouse is the centre of the farming operations from where the farm is run, and it is appropriate in size in comparison to the business, you should still qualify for APR.  However, we would suggest that you discuss this with your tax advisor and land agent for confirmation.

However, there are a number of cases where the farming operation has been handed to the next generation or a third party, and the management has moved from the main farmhouse to another property.  This could present an issue and again we suggest you consult your tax advisor.
 

ENDURING POWERS OF ATTORNEY – TIME TO ACT
Enduring powers of attorney (EPAs) have historically been prepared with your Will by your solicitor.  They allow you to appoint someone, usually a spouse or relative, to look after your money and property should you become mentally incapable as a result of an accident or illness.

They are particularly valuable in old age, however the Government is bringing in a new document to replace the EPA under The Mental Capacity Act 2005.  The new document is referred to as a Lasting Power of Attorney (LPA) and is set to be introduced in October 2007.

The new LPAs will cover a wider area including personal and welfare issues and therefore, as a result of this added complexity are likely to cost more to put in place.

If you do not have an EPA, we suggest you consider putting one in place before October 2007 as an EPA will continue to be valid after the new LPA regime starts.

If an EPA or LPA is not put in place and you become mentally incapable of managing your affairs, the appointment of a receiver by the Court of Protection is the only alternative.  This is more expensive and complicated for the family.

ARCTIC SYSTEMS – UPDATE
It has been announced that the House of Lords will hear HMRC’s appeal against the decision of the Court of Appeal in the case of Jones v Garnett (Arctic Systems Ltd) on 5 to 7 June 2007.

This case has featured in many updates over the past couple of years and concerns arrangements involving a company, with husband and wife shareholders and whether these arrangements fall within the settlement legislation, so that all income should be taxed on the main earner.

HMRC won the original case and the appeal at the High Court.  However, it lost in the Court of Appeal.  HMRCs petition to the House of Lords for appeal was granted and will be heard on 5 to 7 June 2007.

Whilst this case is an important one for the settlements legislation you should bear in that this case has its own unique circumstances and every other individual case is likely to be different. 

VAT Changes

Partial Exemption
Businesses wishing to use partial exemption special methods to calculate deductible input tax will, in the future, need to make a declaration to HM Revenue & Customs that the proposed special method is fair and reasonable. The expected date of the change is 1 April 2007.
 
Although Customs have said that this requirement will speed up the special method approval process it also provides Customs with an opportunity to attack the method on the basis that it is not fair and reasonable. If such a challenge were successful the business would have to recalculate its VAT recovery position from the time when the special method was applied.
 
This change adds further complications for what is already a minefield for many businesses.
 
Transfer of Going Concerns
Under proposed changes to the existing provisions the VAT record keeping requirements for businesses transferred as going concerns are to be brought in line with other tax and regulatory regimes. The transferor will now retain the business records without having to apply for a HM Revenue & Customs direction to do so. The only exception to this will be where the transferee takes over the transferor’s VAT registration number.
 
This change will take place when the 2007 Finance Bill receives Royal Assent.

Posted on 20 Feb 2007