But before sticking my head above the parapet, I will return to the first of these (to date) articles when I ventured into political punditry for the first time to speculate on how long schools might have to prepare for VAT on school fees and own up to losing the 50p bet I had on there being an Autumn General Election in October.

Rishi Sunak caught me completely off guard (along with, by all accounts, many of his own Party), as- at the time of writing this we are now five days after the election. October may still be significant, though now in the context of when the first Budget for the new Government is held.

But to return to Fees in Advance, schemes allowing for the payment of school fees in advance have been around since before VAT was invented. The advantage for parents was, in most cases, a small discount on school fees. For the school, it provided access to a pool of money which was cheaper than bank borrowing.

Other motivations included using bonuses to pay for school fees where a person had exceeded the limit for pension or ISA contributions, grandparents wishing to help out their children, or parents taking advantage of a windfall, such as an inheritance.

Since the possibility of VAT being introduced on school fees became more likely, the question of whether paying in advance could beat a VAT charge also became part of the equation.

The technical answer

Technically the answer is yes. The VAT legislation contains provisions which determine when a supply is made. There are good reasons for these, not least so a taxpayer knows when they have to declare VAT, i.e. the return when the supply was made.

The starting point for services is that a service is deemed to be made when it is performed. But the legislation goes on to say that if before that time, a VAT invoice is issued or payment is received, then the legislation says that the supply is deemed to be made at the earliest of these three dates:

• Date of performance of service.
• Date of issue of the VAT invoice.
• Date of receipt of payment.

With a service like education, which is performed over a period of time, the use of the date of performance to set the time of supply becomes even more problematic. The VAT regulations deal with “continuous supplies of services” in Regulation 90, which again refers to the date of issue of a VAT invoice, or the date of receipt of payment, as crystallising a time of supply to the extent covered by the invoice or payment.

But that’s the wrong answer!

From the point of view of an incoming Labour administration, that is unlikely to be welcome so the question of what, if anything, can be done about it remains.

It seems to me there are three possible lines of attack, retrospective legislation, a novel interpretation of existing legislation, or an attack on VAT avoidance grounds. If we look at these in turn my thoughts are as follows.

Retrospective legislation

This obviously cannot be ruled out, but shortly before the Election, the then Shadow Chancellor, Rachel Reeves, indicated that she had no intention of introducing retrospective legislation. If this commitment is adhered, then it deserves credit for being both morally right and also pragmatic.

From the moral point of view, to retrospectively penalise somebody for doing something which is entirely legal at the time they do it just doesn’t seem right.

But from the pragmatic point of view, realistically how much VAT will not be paid if parents do choose to pay in advance? I suspect the answer is not very much since it will only be the very wealthiest people who can choose to make payments in advance for many years. Some might be able to dip into savings, or remortgage to pay a year or so. But far more will simply not be able to afford to pay in advance as they struggle to afford the fees anyway.

Secondly, retrospective legislation is unlikely to be easy to achieve. There are two aspects to this. Firstly, human rights legislation guarantees an individual the right to the peaceful enjoyment of their possessions. There is a carve out which allows governments to take away your possessions in the form of taking money through taxation. But it is far from clear that the European Court of Human Rights (ECHR) would allow this to extend to giving a government the right to retrospectively impose a tax, and Labour, unlike the Conservatives, are unlikely to leave the ECHR.

The other UK Courts might also have something to say about this, as VAT remains largely governed by EU VAT legislation and this extends to what is now referred to as assimilated EU case law. The case which seems likely to be relevant here is that of Marks & Spencer [Case C-62/00]. The current time limit for correcting errors is four years, but prior to 1995, it was six years. HMCE (now HMRC) was concerned about the possible impact of a case going through the European Court of Justice (ECJ) and shortened the time limit from six years to three years with no notice.

The case they were concerned about came to nothing, but it did impact Marks & Spencer, who were in the process of making a claim for VAT they had overpaid on teacakes (not Jaffa Cakes!). The ECJ ruled that the Government had been wrong to shorten the time limit without an effective transitional period, as it retroactively deprived taxpayers of their right to make a claim.

Whilst the facts are different, the Court’s opposition to retrospective legislation does highlight the potential difficulties an attempt to implement it would face and it may well be that the Chancellor had concluded that for the amount of money at stake, it simply wasn’t worth trying it.

Retroactive legislation

However, whilst retrospective legislation seems to have been ruled out, retroactive legislation is highly likely in the shape of anti-forestalling provisions. This is nothing new and one only has to think back to old Budgets when we were told “fags and booze go up by a penny at midnight” for an  example of an anti-forestalling provision in that  the Provisional Collection of Taxes Act 1968allows for this tax to be collected, even though the Finance Bill still had to go through two readings in the Lords and Commons, and would not become a Finance Act until it had received Royal Assent, circa three months later.

For schools, what is likely to happen is that the Chancellor will make a statement announcing the date that the change in VAT legislation is to take effect from (now likely to be September 2025), and that payments made after the date of the statement, but relating to education supplied after the date of the change in legislation, will be subject to VAT.

The difference between retrospective and retroactive legislation is that in the latter you are being told in advance that something will be taxed from a future date, but with retroactive effect, as opposed to being told after the event that something you did will now be taxed.

A new interpretation of existing legislation

If payment in advance cannot be stopped by retrospective legislation, the next question is could it be stopped by a novel interpretation of existing legislation?

It seems to me that there are two possible arguments. The first of these would be to seek to argue that the time of supply rules should be set aside and that any payment received in advance should be deemed to relate to the period for which it is paid, e.g. £5,000 paid now for education in the spring term of 2026 should be brought to account in spring 2026 and is therefore subject to VAT.

A difficulty with this argument is that it is contrary to what HMRC has recently successfully argued before the Court of Appeal. The case involved was the Prudential case (Prudential Assurance Company Ltd v Commissioners for Her Majesty’s Revenue and Customs) which concerned fund management services supplied by one company in the s VAT group to another. Supplies between members of the same VAT group are disregarded, so at the time the work was done, no VAT was chargeable.

The company which had supplied the investment management services subsequently left the VAT group following a management buy out and about seven years later, became liable to receive some additional fees based on the performance of the investments it had managed. As it was now outside the VAT group, it issued VAT invoices charging VAT on the amounts it was due. The Prudential challenged this, saying that no VAT was due because the work was done at the time it was in the VAT group and HMRC supported the company that was due the performance related fees by saying VAT was due because the issue of the VAT invoice and receipt of the performance related fee created a new time of supply.

The Prudential won at both First and Upper Tribunal, but HMRC succeeded by a 2:1 majority decision at the Court of Appeal which held that the deemed time of supply created by the bonus overrode the time the actual work was done because there was no supply in respect of it at that earlier time.

It would therefore be difficult for HMRC to now argue that you can ignore what the law says unless, of course, the case is appealed to the Supreme Court and the Prudential win.

The other possible novel interpretation of the time of supply rules dates back to a case which started in the late nineties, where in anticipation of the removal of the zero-rate from certain drugs and prostheses, a company in one of BUPA’s VAT groups entered into a pre-payment scheme with an associated company. The ECJ held that for the pre-payment scheme to be effective, the specific goods or services must be specifically identified at the time the payment is made.

The question then is whether this could prevent a pre-payment from crystallising a time of supply. The difference of course is quite significant in that in the BUPA case, the pre-payment would be called off against undetermined drugs or different types of prostheses to be decided upon at a later date.

Here the payment is specifically for a supply of education, so the services have been identified at the time the payment is made.

VAT avoidance

That leaves the question of whether a Fees In Advance scheme could be attacked as VAT avoidance. The lead case here is the principle advanced in the Halifax case by the ECJ [Case 255/02] of “abuse of rights”. This allows a tax authority to recategorise a transaction which has been entered into to obtain a tax advantage which it should not be able to obtain.

In the case of the Halifax, they were seeking to reclaim VAT on costs, even though those costs were overwhelmingly used in making exempt supplies. The Court held that, where this principle applied, a tax authority could remake or recategorise the transaction to what it should have been. In the case of fees in advance, HMRC could use it to allocate pre-payments to the relevant terms after a change in legislation.

However, the key point in the Halifax case is that recategorisation only applies where a transaction is entered into solely to avoid VAT, and in the case of fees in advance, as set out above, such schemes have been around for many years and other reasons.

Clearly, some parents fortunate enough to be able to make an advance payment will do so in the hope of paying no or less VAT. But, that is not the motivation of the school for operating the scheme, or for the parents who have been availing themselves of Fees in Advance schemes before.

It seems to me that Fees in Advance schemes could only be attacked on Halifax avoidance grounds if it had been set up just for parents to avoid paying VAT and the school had been publicising it as such, but even then, the school derives no VAT advantage from it.

Conclusion

Whilst we cannot rule out an attack on payments made in advance of a change in legislation, it does seem unlikely that such an attack would be successful, and it does not look as though the new Government intends to, though they will almost certainly seek to curtail it through anti-forestalling legislation.

The real downside to this is that it does reinforce the stereotype that Independent Schools are for the very privileged who can afford to stump up tens of thousands of pounds in advance, which is far from being true for very many parents who struggle to put their children through independent schools.

Perhaps the answer to that would be for Labour to have been more honest by increasing Income Tax for the very wealthiest who will be able to afford to pay VAT on school fees, with perhaps a levy on overseas pupils who would not otherwise pay UK Income Tax.

For further advice, contact Phil Salmon directly or a member of the VAT team.

You haven’t come to us to be lectured on audits or tax. You’re here so we can make things clear, help you plan and solve your problems. So that’s what we’ll do.

What sets us apart from other accountancy firms? Our people and our approach. We believe we’ll achieve more for you because our people are genuinely interested, thorough and personable. Our friendliness isn’t a façade. It’s our work ethic, why we gel as a team and how we build so many long-lasting client relationships.

Draft legislation has recently been published and some important changes are proposed, representing a significant shift in the taxation landscape for affected landlords. The regime will be effective for individuals paying Income Tax on profits from 6 April 2025 and from 1 April 2025 for those paying Corporation Tax.

Here are the headline implications for landlords:

1.Capital Allowances:

• Current Regime: Capital allowances available on qualifying expenditure.
• Post-2025: No capital allowances on new expenditure. Transitional rules in the legislation show that there will be no balancing allowances on expenditure previously claimed via capital allowances, but historical items still eligible for relief can be claimed over time.

2. Replacement of Domestic Items:

• Current Regime: Initial acquisition of items could qualify for capital allowances as detailed above.
• Post-2025: Relief can only be claimed for replacement domestic items, e.g. white goods, not the initial acquisition.

3. Loan Interest Restriction:

• Current Regime: Full mortgage interest deduction as allowable expenditure.
• Post-2025: Deduction of loan interest payments will be restricted to basic rate tax (similar to other rental properties) under the finance cost restriction rules for individuals.

4. Net Relevant Earnings for Pensions:

• Current Regime: Profits treated as net relevant earnings for pension contribution purposes.
• Post-2025: No longer treated as net relevant earnings.

5. Losses:

• Current Regime: Losses can only be offset against future profits from the same FHL business (UK and overseas).
• Post-2025: Losses can be amalgamated with other property income.

6. Capital Gains Tax (CGT):

• Current Regime: FHL properties qualify for various Capital Gains Tax (CGT) reliefs for individuals and corporates (e.g. Business Asset Disposal Relief, Rollover Relief, and Holdover Relief). A residential property CGT return will be due within 60 days of completion, for individuals selling or gifting, where a tax liability arises.
• Post-2025: FHL properties will be taxed like other properties at CGT rates of 18%/24% for individuals and the relevant Corporation Tax rate for companies. The need to file a CGT return continues for individuals.

7. Anti-Forestalling Rule:

•  This will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules — this rule applies from 6 March 2024.

Actions to consider now:

1. Given that the initial cost of domestic items will not receive immediate tax relief from April 2025, consider accelerating any plans for renovations/ improvements to ahead of this date.
2. Review current financing arrangements and consider the impact of restricted mortgage interest relief, given that additional tax liabilities for individuals may arise.
3. If attainable, plan any potential sales of FHL properties to complete before the changes take effect, to benefit from the current reliefs to manage CGT liabilities effectively.
4. Review of current property portfolio (if applicable), given that the losses will be amalgamated from April 2025.

There are some noteworthy changes being planned, therefore for those who may be affected, please contact Duncan Cleary, Senior Tax Manager, for advice or support with any of the above.

This is likely to mean that taking action before then can minimise any CGT due on distributions made to UK resident beneficiaries, as was the case in 2010.

Where trusts have ‘stockpiled’ gains realised in earlier tax years that can be matched to ‘capital payments’, the CGT due is increased by a surcharge, which exaggerates the potential benefit of taking advantage of the current relatively low CGT rates. For instance, if the CGT rates are aligned with the income tax rates, the top rate of CGT, assuming the maximum 60% surcharge applies, will be an eye watering 72%.  To put that in context, on a £1m appointment, that would be a £400k increase in the CGT payable, leaving a net post tax receipt of only £280k. Even if, the top rate of CGT only went up to 30%, then where the full 60% surcharge applies, the top marginal rate of CGT will be 48% i.e. more than the current top rate income tax.

The fact that the top marginal rate of CGT (i.e. including the full 60% surcharge) is currently 32% illustrates the potential advantages of taking action now to minimise beneficiaries’ CGT liability and maximise their net after tax receipt.

Therefore, we recommend trustees consider:

1. Making capital payments to UK resident beneficiaries, ensuring they are made before the Budget to maximise the possibility of locking in the current CGT rates; and
2. If there are insufficient stockpiled gains to match with any such capital payments, for the trustees to sell assets to realise sufficient gains to cover the capital payments made before 30 October 2024.  If this is not possible, we would be happy to discuss more complex planning such as the creation of sub-funds before 30 October 2024 and then deciding after the Budget whether to make the sub-fund election.

The position for UK resident, non-UK domiciled remittance basis users is more complex, as the rate of CGT is set when the remittance to the UK is made. However, if capital distributions are made before 30 October 2024, then this does give the beneficiary the option of subsequently deciding whether to claim the remittance basis once the Budget clarifies:

1. What the rate of CGT will be increased to;
2. When the increase will come into effect; and
3. Whether stockpiled gains are brought within the Temporary Repatriation Facility (TRF).

Also, one option for remittance basis users who have already received capital distributions that have been matched with stockpiled gains, is to ensure that they remit the capital payment to the UK before 30 October 2024 to maximise the possibility of locking into the current CGT rates.

As ever with ‘offshore’ trust structures, the UK tax provisions are complex and we highly recommend bespoke tax advice is taken so that any actions are tailored to the specific circumstances of your trust structure, and the respective beneficiary’s circumstances. However, given the limited time before the Budget, we wanted to make you aware of potential planning opportunities and we would be happy to arrange a call to discuss how the above may apply to your trust structure. For further support and advice, email James Walker.

Creative, Media & Technology, or more commonly referred to as ‘CMT’ in the haysmacintyre office, is our firm’s largest sector, encompassing, technology companies at varying stages of their lifecycle, digital and media agencies, retail, fashion and ecommerce brands, and listed corporate entities, including some of the UK’s most exciting businesses.

UK residents

If you are a UK resident and dispose of UK land and property, you must calculate, report, and pay CGT to HMRC on a separate return within 60 days following the completion of the property sale. Initially, the period was 30 days (completion dates between 6 April 2020 and 26 October 2021), but in the 2021 Autumn Budget, this period was increased to 60 days for completion dates on or after 27 October 2021.

It is important to note capital gains can also arise on the gift or sale at undervalue of a property, which also needs to be reported within the 60-day time scale.

The requirement to file applies to UK residents, even if you intend to file a Self Assessment (SA) tax return for that year. However, you do not have to complete the capital gains return if you sell the property you live in, provided you have lived in it throughout your period of ownership, as this gain is likely to be covered by the Principal Private Residence Relief. You also do not have to file a CGT return if no CGT is payable.

Non-UK residents

The reporting requirements for non-UK residents have been in place longer than for UK residents.

For the disposal of UK land and property between 6 April 2015 and 5 April 2020, non-UK residents were subject to a 30-day CGT reporting and payment regime (non-resident Capital Gains Tax – NRCGT). If you dispose of UK residential property or land after 6 April 2020, you must report the gain within 60 days and pay the CGT liability within the same time frame. The reporting requirement is irrespective if CGT is due or if you have made a loss.

How to report

UK residents are required to set up a Capital Gains UK property account to file a CGT return, which is made using an HMRC digital service. It is a standalone service, not within the Personal Tax Account, and it does not use Self-Assessment accounts or references.

The return is made online using your Government Gateway ID, if you have one. If you do not have an ID, you must create one when you sign in.

Non-UK residents now fall within the same reporting regime. The reporting requirements extend to all direct and indirect disposals of UK residential and non-residential property and land, including property-rich companies.

Agents can submit returns on behalf of clients. However, you must set up the CGT UK property account regardless of whether you report the gain or appoint an agent. Once the account is set up, you can authorise an agent to report the gain. Following successful filing, the agent and client will receive a confirmation email from HMRC with a payment reference used to pay the CGT liability.

Penalties & interest

Late filing penalties may be charged (up to £700 or 5% of the tax due, whichever is greater) as well as interest on any unpaid tax. These apply to both UK and non-UK residents.

CGT rates and Annual Exempt Amount

The CGT rates for residential property are 18% for the basic rate taxpayer and 28% for the higher and additional rate taxpayer.

The tax-free capital gains Annual Exempt Amount (AEA) for the 2023/24 tax year has decreased by more than 50% from its 2022/23 threshold of £12,300 to £6,000. For the 2024/25 tax year, this allowance is further reduced to £3,000.

Considerations

The rules on CGT can be complex and dealing with HMRC can be a challenging experience. A tax computation must be prepared to calculate the estimated tax due, and the CGT return can be amended for inaccuracies or details finalised after the filing deadline.

Further tax planning opportunities may be available to mitigate or defer a CGT liability. It is essential to consider these before a sale or gift of UK residential property or land is made.

If you are planning on selling or gifting residential property and would like our assistance with the CGT reporting requirement under the 60-day rules or advice on how you might mitigate your liability please get in touch with your usual haysmacintyre contact within the Private Client and Trust team.

HMRC confirmed in early 2024 that partnerships with corporate partners (also known as mixed partnerships) are now able to claim capital allowances which have previously only been available to companies within the charge to Corporation Tax.  The capital allowances are first year allowances such as full expensing.

Full expensing allows companies (and partnerships with corporate members) to immediately deduct the entire cost of qualifying capital expenditures from their taxable income, in the year of purchase. This contrasts with traditional capital allowance methods, where the cost is spread out over several years. For partnerships with corporate members, investments in assets, such as machinery, equipment, or vehicles, can result in receiving tax relief (at up to 25%) on these investments immediately, which can alleviate the cash flow issues of investment. Consequently, more funds become available for reinvestment in the business or distribution to partners.

In conclusion, partnerships with corporate members in the UK stand to benefit significantly from full expensing.

Tax implications

The implications of these tax incentives are extensive for partnerships. By encouraging investment in critical assets, the Government aims to foster business growth and competitiveness. For partnerships with corporate members, these incentives translate into enhanced financial performance and increased flexibility in capital allocation. With reduced cash flow constraints, partnerships have the opportunity to invest in innovation, expansion, or infrastructure improvements, all of which can contribute to long-term success.

However, to fully capitalise on these incentives, partnerships must ensure compliance with relevant tax regulations. This involves accurately identifying qualifying capital expenditures, maintaining thorough records, and adhering to reporting requirements set by HMRC legislation. Given the complexity of tax planning, partnerships may benefit from seeking guidance from tax professionals or accountants to navigate the intricacies of these incentives and optimise their tax strategy.

In conclusion, partnerships with corporate members in the UK stand to benefit significantly from full expensing and super-deductions. These tax incentives provide valuable opportunities for partnerships to enhance their financial position, drive investment, and contribute to economic growth. By leveraging these incentives effectively and ensuring compliance with regulatory requirements, partnerships can position themselves for sustained success in an increasingly competitive business environment.

For advice on these issues and capital allowances for partnerships generally, please contact Kiran Chotai, Private Client Senior Manager.

We can help you complete deals quickly, smoothly and on favourable terms. We do this by identifying the risks early and uncovering the information that can be crucial in negotiating the terms of a deal.

The rules tax the members of an LLP as employees if three conditions are all met:

• Condition A: it is reasonable to expect that at least 80% of an individual member’s total remuneration is ‘disguised salary’ (which does not vary or which varies but without reference to the LLP’s profits);
• Condition B: the individual member does not have significant influence over the affairs of the LLP; and
• Condition C: the individual member’s capital contribution is less than 25% of the disguised salary that it is reasonable to expect will be payable to him in the relevant tax year.

Failure to meet one or more of these three conditions means that the relevant member will be taxed as self-employed rather than as an employee, which can result in a significant saving of employer’s National Insurance (NI). Alternatively, where salaried members are taxed as employees and their income forms part of the employer’s tax bill, it will also be subject to the Apprenticeship Levy (0.5%), where the employer’s annual total pay bill is £3m or more.

HMRC’s new guidance

HMRC has recently changed its guidance on the interaction of the targeted anti-avoidance rule (TAAR) and Condition C. The TAAR states that any arrangements must be disregarded if those arrangements , ensuring that salaried members rules do not apply.

Until recently, HMRC’s guidance did not preclude LLPs from requiring capital contributions of 25% or more, in order to ensure that Condition C was not applicable. HMRC has, however, amended its Partnership Manual to remove this assurance and to insert an example suggesting that the TAAR applies where a capital contribution is increased with a view to avoid meeting Condition C.

Why the change in stance?

Whilst we can’t be certain, we understand that HMRC’s change of stance was prompted by the recent case of HMRC v BlueCrest Capital Management (UK) LLP. The recent changes to HMRC’s guidance indicates that it is taking a wider view of how and when the TAAR will apply.

The changes to the guidance will be of immediate concern to LLPs and members who have arrangements in place, which apply incremental movements in capital, as these arrangements may now trigger the TAAR. LLPs must ensure they have a robust process in place and assess each member against all three conditions on a regular basis, and at least before the start of each tax year.

However, we must note that the change is only to HMRC’s guidance, not a change to the legislation or case law. HMRC’s guidance will remain relevant to arrangements put in place before the recent change.

How we can help

We can help you review current arrangements to determine if you are compliant with the legislation, to identify if there is a greater risk of HMRC challenge – given its change in guidance – and to mitigate any risks identified.

For more information or to discuss the above, please get in touch with your usual haysmacintyre contact, our Employment Tax team, or our Partnerships Tax team.

By specialising in the Corporate sectors we work in, we bring greater value, understanding and effectiveness. We’ll help you operate and grow with the confidence that comes from our mix of topical insights and years of sector knowledge.