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UK Announces VAT Changes,

Last updated Wednesday, March 31, 2010
The UK tax authority, HM Revenue and Customs (HMRC), has announced changes to the VAT exemption for sports-related services, to be introduced from September 1, 2010. The change will primarily affect affiliation fees charged by sports governing bodies to member clubs although the VAT treatment of other sports-related supplies may also be affected.

Under current law, certain services closely linked with and essential to sport or physical education are VAT exempt when supplied by an eligible body (that is, essentially non-profit making bodies not subject to commercial influence) to an individual taking part in sport.

In respect of affiliation fees charged by sports governing bodies to their member sports clubs, HMRC has previously restricted the exemption to fees calculated on a per person basis (permitted in some cases where services provided were closely linked to sport). On the other hand, affiliation fees calculated by other methods, for example, on the basis of the club size or the number of teams fielded, were standard rated for VAT.

A recent European Court of Justice (ECJ) judgement in the case of Canterbury Hockey Club and Canterbury Ladies’ Hockey Club found that the exemption applies more widely. It has ruled that in the context of persons taking part in sport, the exemption includes services supplied to corporate persons and to unincorporated associations, provided that the supplies are closely linked and essential to sport, that they are supplied by non-profit making organisations and the true beneficiaries are individuals taking part in sport.

The ECJ ruling means that some supplies which were standard-rated, for example because they were supplied to a corporate body or unincorporated association, may now be exempt from VAT if the services are closely linked and essential to sport and the true beneficiaries are individuals taking part in sport.

From September 1, 2010, eligible bodies meeting the conditions for exemption outlined in VAT Notice 701/45 must exempt supplies where the true beneficiaries are persons taking part in sport, even if the supply is not made direct to an individual and irrespective of how the fee is calculated. Supplies made to commercial profit-making organisations do not meet the true beneficiary test and will not be entitled to the exemption.

Where the affiliation fee confers a number of benefits, which individually would be liable to different VAT treatment, the advice in section 4 of Notice 701/5 March 2002 will help determine whether there is a single or multiple supply. Where the conditions of Extra Statutory Concession 3.35 (apportionment of membership subscriptions to certain non-profit making bodies) are met governing bodies may continue to take advantage of the option to apportion their affiliation fees between the rates of VAT applicable to the individual elements. The ECJ gave some examples of services that do not fall within the exemption, including advice about marketing and the obtaining of sponsors. These will be liable to the standard rate of VAT when ESC 3.35 is applied unless relief is available under another part of the VAT Act.

This policy change may also have implications on some other supplies closely linked and essential to sport by eligible bodies to corporate persons and unincorporated associations where the true beneficiary is a person taking part in sport. An example could be the letting of sports facilities to a club for the direct use of its members. In these circumstances, the supply is exempt if the club is non-profit making. Otherwise it will be taxable.

The aforementioned changes must be implemented from September 1, 2010, and there is no requirement to make adjustments in respect of supplies made prior to this date. However, any organisations wishing to implement the judgment before September 1, 2010, (and start exempting affected fees from an earlier date) are entitled to do so.

Where a business wishes to make a claim to HMRC (under section 80 of the VAT Act 1994) for repayment of VAT incorrectly accounted for on sports related services, they may do so, subject to the conditions set out in Notice 700/45 “How to correct VAT errors and make adjustments or claims”. As standard, all claims will be subject to the four-year time limit in section 80(4) of the VAT Act 1994 and to the set-off provisions in section 81 of the VAT Act and section 130 of the Finance Act 2008.

France To Review Property Tax Breaks

Last updated Thursday, April 01, 2010
Determined to reduce the number of tax breaks or “niches fiscales” available in France, the government has announced its intention to revise the tax credit on loan interest accorded to individuals purchasing a main residence. Designed to facilitate home ownership for the “middle classes,” and championed by French President Nicolas Sarkozy during his election campaign in 2007, when he declared that anyone in France could become a property owner, the measure is now under threat due to significantly rising costs. According to Gilles Carrez, parliamentary budget rapporteur, the measure cost the government around EUR280m in 2008, EUR1bn in 2009, EUR1.5bn in 2010 and is expected to cost in the region of EUR3bn by 2013. French Secretary of State responsible for housing, Benoist Apparu, has confirmed plans to present a draft reform of existing measures by the autumn. Rather than merely introduce “cosmetic” changes, Apparu has indicated plans to start from scratch in order to create a simple and efficient tool, designed to benefit the middle and lower middle classes, while also ensuring that the measure does not destabilize the property market in France. Introduced within the framework of the TEPA law (work, employment and purchasing power), the current measure provides that borrowers purchasing a main residence, whether they are first-time buyers or not, benefit from a tax reduction (or tax credit in the case of non-taxpayers) equivalent to 40% of mortgage interest paid in the first year and 20% for the subsequent four years, up to a limit of EUR3,750 paid interest for an individual, and EUR7,500 for couples, increased by EUR500 for each dependent.

US Living Trusts May Trigger UK Tax

Last updated | Thursday, April 01, 2010
UK nationals living and working in the US are continuing to leave themselves open to potential additional UK tax liabilities through adopting the popular US tax planning vehicle known as a ‘Living Trust,' a British law firm has warned.

Living Trusts are typically taken out during an individual’s lifetime usually to avoid having to apply for probate in the US. However, since the introduction of the 2006 Finance Act and changes to UK trust taxation, a Living Trust in the US may trigger a 20% tax charge in the UK. Even US nationals may be caught by the UK tax regime in some circumstances, according to law firm Boodle Hadfield.

The 2006 Finance Act introduced an automatic 20% charge on the creation of a lifetime trust (with few exceptions), with periodic charges to UK inheritance tax every 10 years and exit charges when assets leave the trust.

Geoffrey Todd, a partner at Boodle Hatfield who regularly advises UK nationals living and working in the US and US nationals in the UK said:

Difficulties arise for a UK domiciliary who is resident in the US, as he or she may well fall within both the UK and US estate tax regimes.”

A UK national living in the US might well believe that he has lost his UK domicile by virtue of becoming a resident in the US for an extended period of time. However it is quite difficult to lose UK domicile status and such a claim is likely to come under close scrutiny from the Revenue in the UK.”

The double tax treaty between the two countries will be of little assistance in preventing a charge to UK tax arising in these circumstances and there could be additional penalties imposed if the Living Trust is not reported to the UK Revenue.

Boodle Hatfield reports that UK nationals and, rather more worryingly, US financial advisers and tax planners, are still largely unaware of the changes in UK trust tax legislation and continue to recommend Living Trusts as a sensible option – even to the extent of including UK assets within the vehicle.

Overlooking the UK perspective is potentially disastrous for an individual with a UK domicile,” adds Todd.

And it is not just UK nationals living and working in the US that might get caught with a UK tax liability, the firm warns. US nationals who hold assets in the UK or if they become domiciled in the UK by virtue of spending many years in the UK might also find themselves with a UK tax liability from a Living Trust made in the US.

Todd concludes: “Not all Living Trusts will be caught and only those created or amended after 22 March 2006 are at risk. Much will depend on how the trust document is worded and the individual circumstances. We would always suggest that an individual considering or holding a Living Trust in the US but living or spending considerable time in the UK take advice.

UK File Sharing Case Collapses

Last updated | Wednesday, March 31, 2010
The UK Crown Prosecution Service (CPS) has dropped charges against a 19-year-old accused of illegally sharing copyrighted music files over the internet in a case which proves how difficult it is for the record industry and prosecutors to secure criminal convictions against file sharers.

Matthew Wyatt was accused of uploading three albums and one single to the bit torrent file sharing site OiNK. He was arrested by police in 2007 when just 17 years old and his family home was subjected to a search by the prosecuting authorities. If convicted, he faced up to 10 years in jail.

The case against Wyatt was part of a wider effort to shut down OiNK and prosecute its owner, Alan Ellis, but this case collapsed earlier in the year because the prosecution failed to trace the original owners of the copyrighted material, thus failing to prove that the allegedly stolen songs were in fact copyrighted - a blunder on the part of police, the CPS and music companies which Wyatt's lawyer labelled as "extraordinary."

Matthew Wyatt was the victim of a cynical attempt by the record industry to legitimize its heavy-handed tactics and dubious methods by using police resources and the public purse,” said David Cook, of Burrows Bussin Solicitors, who represented Wyatt.

The CPS was also criticized for failing to explain the investigation methods used to locate Wyatt prior to his arrest and his home being searched, raising concerns that European data protection laws and the UK Regulation Of Investigatory Powers Act were both flouted.

Alan Ellis, who created and operated the website OiNK, was found not guilty of conspiracy to defraud by a jury in Teeside Crown Court on January 15. Ellis was arrested in October 2007 and his website shut down following raids by police in the UK and the Netherlands, where the OiNK server was based, coordinated by Interpol and concluding a two-year investigation.

The court heard that OiNK had close to 200,000 members when the site was shut down, and some 21 million music files had been downloaded in the period from 2004 to 2007.

OiNK was run on a membership basis and users could invite their friends to use the site in return for making a donation. The court was told that the website collected GBP11,000 (USD15,500) per month in such donations and when Ellis was arrested police found GBP180,000 in his PayPal account.

The prosecution attempted to argue that Ellis had profited from his fraudulent activities, but it was unable to convince the jury, which unanimously decided to acquit Ellis.

The case highlights the difficulty of securing criminal convictions against illegal file sharers in the UK, and legal experts have suggested that the police were wrong to charge Ellis with conspiracy to defraud.

"Every indication we had was that this should have been a civil, not a criminal, case," said Cook. "I think their eleventh hour decision not to proceed means that that is probably true."

UK Game Tax Breaks Welcomed

Tuesday, March 30, 2010
The UK body, which represents the nation’s computer games industry, TIGA, has lauded the government’s decision to introduce tax relief on the production of video games in the March budget as a positive move for the industry and for the wider UK economy.

Prior to the introduction of the relief, the UK games industry was struggling to keep up with its principal competitors in Australia, Canada, France, South Korea, and the USA, all countries of which offer regional or national tax breaks for games production. In recent months TIGA has been at the forefront of lobbying efforts for the introduction of tax concessions to prop up the industry.

The UK video games industry is an important part of the UK economy, contributing GBP1bn to the UK’s Gross Domestic Product (GDP), sustaining 27,000 jobs, including over 9,000 highly skilled roles in game development. However, due to lack of government support until now, since July 2008 the number of employees at British game development studios fell by 7% and 15% of British firms went out of business. Between 2006 and 2009, the UK fell from third to fifth place in global sales charts, overtaken by Canada and South Korea, whose studios are heavily government supported.

The newly introduced Games Tax Relief is to operate in a manner similar to UK Film Tax Relief. In order to qualify for Games Tax Relief, a company would have to fall within the scope of UK Corporation Tax. Additionally, video games would need to pass a cultural test, scoring against criteria of European heritage and game locations, languages, innovation, narrative, and location of development and key development staff. Video games that passed the cultural test would then be entitled to benefit from Games Tax Relief. If the game makes a profit, the development company would then be able to use the Games Tax Relief to reduce the amount of tax payable on that profit. If, on the other hand, the game makes a loss, the development company would be able to use the Games Tax Relief to offset losses.

TIGA’s research indicates that over five years Games Tax Relief will create or save around 3,550 graduate level jobs; increase and safeguard GBP457m in new development expenditure and ‘saved’ development expenditure that would be lost without the relief; and generate GBP415m in tax receipts for the Treasury, comfortably exceeding the cost of Games Tax Relief. Games Tax Relief would also encourage game developers to adopt new online, more sustainable business models and sell directly to the consumer.

Commenting, Richard Wilson, TIGA CEO, stated:

“For Games Tax Relief to be announced in the Budget is the decisive breakthrough that TIGA has campaigned for. Ministers have made the right decision at the right time for the right industry. Government ministers are to be warmly congratulated for their visionary decision. TIGA now looks to the opposition parties to give their full support to Games Tax Relief in the Finance Bill.

US Flat Tax Proposed

Last updated | Wednesday, March 31, 2010
The Center for Freedom and Prosperity (CF&P) has proposed that the increasingly complex US Internal Revenue Code be replaced by a flat tax that would dramatically simplify the US tax system.

In a video documentary released on March 29, the CF&P suggests that a flat tax would enable taxpayers to complete their annual tax return on simple postcard-sized forms, replacing the hundreds of forms needed to administer the current tax system.

The current income tax system is burdensome, rigged to help the politically well connected, and it makes America less competitive" said CF&P Foundation President Andrew Quinlan. "A flat tax would help the economy and treat all Americans equally.

America's top fiscal policy goal should be smaller government," added Dan Mitchell, narrator of the video and Cato Institute Senior Fellow. "But fixing the tax code should be second on the list since the current system needlessly reduces prosperity.

According to the National Taxpayer Advocate's 2009 annual report to Congress, there had been more than 3,250 changes to the tax code since 2001 - an average of more than one a day. In 2008, there were more than 500 changes alone. What’s more, nobody is quite sure quite how long the tax code is any more. Olson’s office turned up 3.7 million words during the course of preparing her 2008 report to Congress. The Tax Foundation, the non-partisan tax policy think tank, has calculated that the tax code has tripled in length since 1975.

In 2006, individuals and businesses spent a combined USD193bn – equal to 14% of total US tax receipts – complying with the tax code; and 82% of individual tax filers have to pay for help to complete their tax returns, so complex and daunting do they find the task.

UK Scores Pensions Tax Own Goal

Last updated | Wednesday, March 31, 2010
The UK government's determination to press ahead with plans to restrict pension tax relief for higher earners will create an administrative nightmare for all concerned and undermine the proposal's original policy objective, it has been argued.

Citing the government's own figures, the Chartered Institute of Taxation (CIOT) warns that the changes to the pension tax relief rules from April 6, 2011, will increase compliance costs for business by about GBP1bn.

“The government’s proposed method of restricting tax relief will cause disproportionate complexity and an increase in the costs for employers, pensions scheme and the pensions industry as a whole," says Colin Ben-Nathan, Chairman of the CIOT’s Employment Taxes Sub-Committee.

“It is disappointing that, having identified the magnitude of the cost to business, the government is nevertheless continuing with its proposals virtually unchanged. This is particularly so at a time when there is a real need for business and the public sector alike to streamline process, eliminate administrative complexity and focus on service delivery.

Under the government’s proposals people with incomes of GBP150,000 to GBP180,000 will see income tax relief on their pension contributions tapered from 50% to 20%. Those on GBP180,000 or more will have relief restricted to 20%. Relief on pension contributions made by an individual’s employer will also be restricted – by way of a special tax recovery charge imposed on the individual; it will be mandatory for the scheme to meet this tax charge at the individual’s request, subject to certain conditions, including a de minimis amount, by reducing the member’s accrued benefits or money purchase pot.

The legislation will also impose an obligation on employers to provide information to employees within three months of their being asked to do so. For defined benefit pension schemes the scheme administrator will have to carry out a complicated calculation to establish a notional contribution. However, in order for the scheme to undertake the calculation it will need to receive information from the employer on pensionable pay and service within a 'reasonable time.

Furthermore, it is proposed that the restrictions on relief apply equally to those who are members of tax privileged overseas plans which will cause further complexity, not least in being able to obtain the relevant information from the overseas administrator. The CIOT says that the additional tax costs involved are also likely to act as a further barrier to international groups of companies wanting to do business in the UK, as opposed to other less costly jurisdictions.

The government set out its proposals in a lengthy consultative document issued at the time of the pre-budget report in December. The consultation period ended on March 3 and the government confirmed in the budget on March 24 that it intends to legislate along the lines originally proposed - despite warnings from tax experts such as the CIOT and pensions industry bodies.

If the objective is to reduce the tax relief the wealthy receive on pension contributions, we think that a simpler way to achieve this would be to restrict the maximum amount (annual allowance) you can put into registered pension schemes each year," continues Ben-Nathan.

In our view the government’s current proposals involve such administrative complexity as to make them virtually unworkable," he concludes.

A comprehensive report in our Intelligence Report series titled "The Lowtax International Pensions Report" which has an in depth view on The Mechanics of Pensions Provision, 'High-Tax' Country Pension Regimes and 'Lowtax' Jurisdictions In Which To Locate Pensions Savings, is available in the Lowtax Library at and a description of the report can be seen at

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