Tax Bites - December 2023

Welcome to the latest edition of RPC's Tax Bites - providing monthly bite-sized updates from the tax world.

News

HMRC publishes guidelines on R&D for tax purposes

HMRC has published Help to see if your work qualifies as Research and Development for tax purposes, as part of HMRC's Guidelines for Compliance series.  

The newly published guidelines focus on Research and Development (R&D) claims and explore what would qualify as R&D for tax purposes, and some common mistakes to avoid.

The guidelines cover several aspects of making an R&D claim including:

• The steps HMRC expects a claimant to take before making a claim for R&D expenditure. This includes the steps which a competent professional in the relevant field of science or technology should take and how a company should be supported by a competent professional.
• How to identify qualifying R&D activities. The guidance explains that R&D activities must be part of a project. A project is defined as consisting of a number of activities conducted to a method or plan to achieve a goal. The project must seek to resolve specific uncertainties to achieve an advance in a qualifying field of science or technology.
• HMRC's recommended approach to claims and record keeping. The guidance notes that HMRC considers that claims to R&D relief are more likely to be correct if the company is aware at the time the work is carried out that it may qualify for R&D tax relief. The guidance provides steps to take when planning for such work to be carried out.

UK to implement the Cryptoassets Reporting Framework by 2027

HM Treasury has published a joint statement, along with 47 other countries, confirming that the UK will implement the cryptoassets reporting framework  (CARF) in time for information exchange to commence by 2027.

CARF is the Organisation for Economic Cooperation and Development's (OECD) latest tax transparency standard. The 48 countries which are implementing CARF, host active crypto markets. The new framework provides for the automatic exchange of information between tax authorities on crypto exchanges and aims to combat offshore tax avoidance and evasion.

The countries implementing CARF are also signatories of the common reporting standard (CRS) which is an existing tax transparency standard for the exchange of financial account information. These countries will implement amendments to the CRS that were agreed earlier this year. 

HMRC publishes guidance on tax reporting for digital platforms 

HMRC has published guidance on the tax reporting rules for digital platforms in an update to its International Exchange of Information Manual.

The new chapter sets out the tax reporting rules for digital platforms introduced by the Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023 (SI 2023/817), which implement in the UK the OECD's model tax reporting rules for digital platforms.

The guidance provides definitions (IEIM901000) of terms such as 'platforms', 'platform operators', and 'sellers', an overview of due diligence and due diligence requirements (IEIM902000) and the reporting process (IEIM904000), including the timings and manner of reporting, information to be reported and who has an obligation to report under the regulations. 

OECD publishes its annual progress report of the OECD/G20 Inclusive Framework on BEPS

The OECD has published its seventh annual progress report of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The BEPS Action Plan was adopted in 2013 to address tax avoidance and double non-taxation of multinational enterprise profits. The OECD/G20 Inclusive Framework on BEPS was then introduced in 2016, with the aim to make international tax rules more coherent and transparent.

The recently published report covers the period from September 2022 to September 2023 and the progress made by the Inclusive Framework during this time. The report is split into different sections which cover:

• the implementation of the Two-Pillar solution;
• the BEPS Minimum Standards which includes country-by-country reporting and combatting harmful tax regimes;
• progress on other BEPS actions including VAT challenges of the digital economy; and
• support for developing countries.

Case reports

Tribunal confirms that payments of a punitive nature are not deductible

In Scottishpower (SCPL) Ltd and Others v HMRC [2023] UKUT 00218 (TCC), the Upper Tribunal (UT) held that certain payments made by a utility company  to consumers, in lieu of penalties, were not deductible for corporation tax purposes due to their penal character.

This decision illustrates the importance that public policy considerations can have on the tax tribunals and courts when determining tax appeals. Payments that are of a punitive nature will generally not be deductible for tax purposes as permitting a deduction would lessen the effect of the payments contrary to public policy.

Our commentary on the decision can be read here.

Upper Tribunal dismisses taxpayer's appeal in  substantial shareholding exemption case

In M Group Holdings Ltd v HMRC [2023] UKUT 213 (TCC), the UT has upheld the decision of the First-tier Tribunal (FTT), which found that a company was not entitled to benefit from the substantial shareholding exemption (SSE), as the shareholding had only been held for eleven months, as opposed to the required twelve months. Paragraph 15A, Schedule 7AC, Taxation of Chargeable Gains Act 1992 (which extends SSE relief when assets have been transferred within a group), was found not to apply.

This decision confirms that the SSE extension will not apply to a stand-alone company and only applies to a group structure. Companies should bear in mind the relevant time-frames necessary in order to benefit from SSE relief. Whilst the reasoning as to why M Group Holdings sold the shareholding at eleven months instead of twelve months is unclear, if it had waited an additional month, it would have qualified for SEE relief and saved a corporation tax bill in excess of £10 million.

Our commentary on the decision can be read here.

Tribunal finds that CGT saving was not the main purpose of wider arrangements

In Wilkinson and others v HMRC [2023] UKFTT 00695 (TC), the FTT allowed the taxpayers' appeals on the basis that CGT avoidance was not the main, or one of the main, purposes behind a deal involving a share sale and a securities exchange.

This decision demonstrates the highly fact-dependant questions to be considered in determining whether the anti-avoidance provisions in relation to rollover relief apply. The decision also highlights the importance of identifying the scheme or arrangement to which the purpose test is to be applied. In this instance, a relatively small tax saving built into the wider arrangements did not amount to a main purpose of the whole deal. 

Our commentary on the decision can be read here.

And finally...

In RPC's recent episode of Taxing Matters, CEO of Octopus Money, Ruth Handcock, and financial coach at Octopus Money Ali Poulton, discuss why now is the right time to get to grips with your money. The speakers discuss the hot topic of financial health, wellbeing and confidence and provide some practical guidance.

Listen to the full podcast episode here.