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26 Aug 2020

Tax News August 2020


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Andersen LLP

August 2020




The end of summer is nigh and with it so too is (hopefully) lockdown. A return to normality (whatever that might be) is essential for the economy and our well-being. The full effect of lockdown is unlikely to be felt for some time, but with furlough ending in October, the coming months are going to be an uncomfortable ride for many. A further lockdown can’t be afforded, despite what the proponents of Modern Monetary Theory claim, and we can only hope that the Government will start to provide clear, decisive guidance and leadership which is needed, amongst other things, to stimulate a “V” shaped recovery.

In this month’s edition of Andersen Tax News we take a look at California state tax and the traps waiting for the unwitting. We then review s.205A ITEPA 2003 in the context of assets used by employees and their families, and whether there is scope to reduce the benefit in kind charge. Next up is an update on Brexit and imports/exports and staying with the EU theme we consider how the CJEU will continue to have an influence on UK courts, once a deal is done. Andrew Parkes has the final say with a practical overview of Certificates of Residence and HMRC’s approach in this area.

Stay well and happy reading!

Andersen LLP









  1. The US: California Dreaming (or a Nightmare?)
  2. The UK: The Jet Set and Taxable Benefits
  3. The UK: Brexit – Consequences for UK-EU Imports and Exports
  4. The EU: Not the end of the Court of Justice of the European Union
  5. The UK: HMRC Insights – Certificates of Residence




1. The US: California Dreaming (or a Nightmare?)

It is no secret that California tax rates can be brutal, with the top rate reaching 13.3% on all income (including capital gains), so it is important for individuals to understand the scenarios in which they will become liable to California taxes, and how not to get caught out and inadvertently subject to tax.

California taxes individuals regarded as ‘resident’ in California on their worldwide income and gains. A non-resident of California is subject to tax on California source income only (gains, other than real estate gains are exempt).  California source income does not usually include investment income such as interest and dividends; however, if income is related to a business in California, real estate or an LLC based in California, it may need to be reported as California source income. If you are employed, working in California will result in California source income that is subject to tax. Similarly, gains from stock options where you worked in California in the period to vesting could be California source.

If you are regarded as resident in California then you will be subject to tax on your worldwide income. If the income is also taxed by another state, California will usually allow a credit to be claimed for state taxes against the California tax. However, and critically, California will not allow a credit for foreign taxes meaning the imposition of Californian state tax is an “additional tax” that doesn’t qualify for treaty relief. For example, if you are not a US citizen or green card holder and are able to utilise a tax treaty (e.g. the US/UK double tax treaty) to claim non-residence for federal purposes, the treaty position would not impact the California resident position, with the result that you would only be taxed on US source income for federal purposes, but on a worldwide basis for California state tax purposes.

The Californian Test for Residence 

The pressing question then, is how does California determine residence? California uses a “facts and circumstances” test to determine residence status. Generally, you will be considered a California resident if you are present in California for any reason other than a ‘temporary or transitory’ purpose. For example, if your employer assigns you to an office in California for a long term or indefinite period, or if you retire in California and have no specific plans to leave, you will be resident.

If you are in California for more than 9 months, you are presumed to be a resident. However, it is possible that you will be considered a resident in California if you are present for less than 6183 days of presence, if the facts and circumstances indicate your ties (closer connection) are greater to California than any other state or territory. Essentially, this is a centre of vital interests test, which widens the net significantly. As such, if your main base of employment is in California or you own or operate a business in California then you may be considered a California resident, even if you are rarely in the state.

In order to determine a closer connection to California, the Franchise Tax Board (FTB) considers the facts and circumstances including intent. Factors to be considered include, but are not limited to:

  • Number of days spent in California vs. days spent elsewhere

  • Where your immediate family reside (spouse and children)

  • Location of your principal residence

  • Location of real estate, partnerships, LLCs and financial investments

  • State in which you are registered to vote

  • State which issued your driver’s license

  • Location of your bank accounts

  • Location of your social ties, i.e. country club memberships, place of worship

  • Location of doctors, dentists and other healthcare providers

  • Location of main base of employment

Californian Domicile 

If you are considered resident in California it is likely that you will also be considered “domiciled” there for the period of your residence. Domicile is defined as “the place where an individual has his true, fixed, permanent home and principal establishment and to which he has, whenever he is absent, the intention of returning”. You can only have one domicile and the domicile remains permanent, until the taxpayer establishes a domicile in another state or territory.

Given the nature of domicile and the closer connection test, if you are intending to leave California to take up residence in another state, it is important to break as many ties with California as possible.

The Safe Harbour 

There is a safe harbour rule which applies if you are considered domiciled in California but leave to take up an employment contract in another state or country. The assignment in the other state or foreign country needs to be for at least 18 months before you can be presumed to be non-resident. In addition, you would also need to limit your presence in California to less than 45 days in a calendar year.

This safe harbour cannot be used in cases where the individual has intangible income exceeding $200,000 in any tax year, during which the employment related contract is in effect, or where the principal purpose of absence from California is to avoid personal income tax.

The FTB is very active in auditing and will tenaciously probe into how and when you stopped being resident in their state. The burden is on you to prove your non-residence. If you do not file a California return because you do not believe you are resident and the FTB disagrees, they may have an unlimited time frame to look into your status as there is no statute of limitations. If you have California source income as a non-resident and it is a small amount, it may be worth filing to activate the statute of limitations.

Steps to Take 

It is best to sever all ties with California when you leave, but if this is not possible you should take all possible steps to reduce your ties. How this can be accomplished will depend on an individual’s specific assets, family and circumstances, but some common steps to be taken are listed below:

  • sell or rent your California property as soon as possible upon making the decision to leave California, retaining all records of hiring real estate professionals as back up documentation;

  • if returning to California at all, do not stay in your former residence, stay with family or in hotels;

  • change the location of doctors or medical providers to another state;

  • cut ties with any social memberships (i.e. golf club memberships). If you are unable to cancel the membership, at least retain proof that you tried to cancel such memberships; and relocate all vehicles to your new state of residence, where possible.

Each of these steps would help to aid the breaking of your California residency and domicile, but it is important to note that each taxpayer will be assessed on a case by case basis and your tax adviser should be consulted before making any changes to your residence circumstances.

Julie Philp

For further information on the above and taxation of benefits in general, please contact Julie Philp on +44 (0)7340 097 269 or


Elizabeth Corkery

or Lizzie Corkery on +44 (0)7729 667 616 or




2. The UK: The Jet Set and Taxable Benefits  

It is commonplace for employers to provide their staff with benefits. This could be anything from private medical, a gym membership, a season ticket loan to having use of the corporate private jet or yacht.

Where an employer provides a benefit (other than a non-taxable benefit, for example pension or health screening) to an employee (or a member of the employee’s family or household) there will be an ‘employment related benefit’. This employment related benefit is subject to UK tax.

The “cash equivalent” of the employment related benefit is usually treated as earnings from employment for the employee, during the tax year in which the benefit is provided. This cash equivalent is defined in legislation as the “cost of the benefit” less any part of that cost made good or reimbursed by the employee to the persons providing the benefit.

The rules outlined in s.204 & s.205 ITEPA 2003 distinguish the difference between calculating the “cost of the benefit” for assets made available for the employees private use, without the actual transfer of the asset to the employee (s.205) versus “in house benefits”, meaning assets or services that are at the employees disposal (s.204), such as a train company providing free or reduced cost travel, or reduced school fees for the children of teachers.

In this article, we will focus on the s.205 rules and how we might calculate the cost of an asset that is made available to an employee for their private use, but is not transferred into the ownership of the employee.

How is the “cost of the benefit” calculated? 

Calculating the cost of the benefit of assets made available for transfer is done with reference to the fair market value of the asset. The meaning of “market value” is not entirely clear, but the statutory definition is that it means the price which the asset might reasonably be expected to achieve on a sale in the open market at that time.

In the case of most assets, the benefit calculation is relatively straightforward.  For example, the benefit of a computer made available to the employee or his or her family for private use would be calculated as 20% of the fair market value of the computer. An allocation of the days it was available for personal use is then applied.

However, if the same rules are applied to the use of a more expensive asset, then the resulting imputed benefit would likely come as a shock to the employee. Imagine the case where an executive is provided with the use of a corporate private jet for business related journeys. This would normally result in no benefit as the journeys are not for private purposes.  However, if the executive is accompanied by family on any of the flights, there is potentially private use of an asset without transfer.

Under s.205 ITEPA 2003, the “annual value” of the asset is 20% of the market value of the jet and although the value would be prorated for the days of private use, the resulting imputed taxable benefit, even for one trip, would be very substantial.

In addition, any expenses incurred in connection with providing the asset should be added to the 20% market value figure when calculating the benefit for the year (e.g. cost of crew, maintenance and fuel).

In some cases, it may be possible to argue there is no additional cost for the provision of a service.  In Pepper (Inspector of Taxes) v Hart [1992] UKHL 3, concerning schoolmasters’ sons being educated for a reduced fee, the case focused on the “marginal additional cost” which must be taken into account when calculating the benefit.  This is the additional cost to the employer of providing the benefit in question. The schoolmasters paid a reduced fee but because there was no marginal additional cost to teaching the extra children in the classroom, no taxable benefit arose.

If this “marginal additional cost” concept is applied to a flight taken by an executive’s family, it might be argued that there is no additional cost incurred in including additional passengers on the corporate jet. This is because the executive was using it in any event to get to, say, Geneva for a board meeting.  However, HMRC have stated that they do not consider that Pepper v Hart applies to taxable benefits covered by s.205 (i.e. assets made available without transfer).

Not available for private use

The Finance Act 2017 updated ss.204 and 205 and inserted a new s.205A which provides a helpful deduction in certain circumstances. This deduction in the value of the asset is allowed where there is a period that the asset is “unavailable for private use”.

An asset is unavailable for private use on any day if:

(a) that day falls before the day on which the asset is first available to the employee;

(b) that day falls after the day on which the asset is last available to the employee;

(c) for more than 12 hours during that day the asset:

(i) is not in a condition fit for use;

(ii) is undergoing repair or maintenance;

(iii) could not lawfully be used;

(iv) is in the possession of a person who has a lien over it and who is not the employer, not a person connected with the employer, not the employee, not a member of the employee’s family and not a member of the employee’s household; or

(v) is used in a way that is neither used by, nor used at the direction of, the employee or a member of the employee’s family or household; or

(d) on that day the employee:

(i) uses the asset in the performance of the duties of the employment; and

(ii) does not use the asset otherwise than in the performance of duties of the employment.

In light of the above, it is worth considering whether the facts and circumstances are such that the deductions in (c)(v) can be availed of, on the basis that the use by the family of the corporate jet is not at the “direction” of the employee or family. Or alternatively, the circumstances in (d)(i) and (ii) might apply so the day of use is regarded as not being a day of private use.

HMRC would undoubtedly look at the corporate aircraft policy and records of use and it would be helpful if the executive’s use of the jet is restricted to business use and if other employees and executives also travel on the jet from time to time. It is also helpful that no additional cost is incurred to transport the family.

Julie Philp

For further information on the above and taxation of benefits in general, please contact Julie Philp on +44 (0)7340 097 269 or

Holly Fletcher

or Holly Fletcher on +44 (0)7835 413 123 or




3. The UK: Brexit – Consequences for UK-EU Imports and Exports 

On Friday 12 June, the UK Government formally notified the EU that the UK will neither request nor accept an extension to the current Brexit transition phase past 31 December 2020, saying that “the moment for extension has now passed”. The creation of a new customs border between the UK and EU will therefore be effective from 1 January 2021 and full customs border formalities will be required for goods exported from the UK into the EU from this date. The UK will have the autonomy to introduce its own approach to goods imported to Great Britain from the EU from 1 January 2021.

Given the increased level of certainty this provides, businesses will need to refocus their Brexit planning to ensure that any changes required can be implemented in time. The UK has taken the decision to introduce the new import border controls in three stages up until 1 July 2021 to give businesses affected by coronavirus more time to prepare. This should therefore allow some flexibility in planning. The implementation is broadly split into three phases as follows:

From January 2021 – Traders importing standard goods will need to prepare for basic customs requirements but will have up to six months to complete customs declarations. Tariffs will need to be paid on all imports. However, payments can be deferred until the declaration has been made. There will be checks on controlled goods like alcohol and tobacco. Businesses will also need to consider how they account for VAT on imported goods. There will be physical checks on all high risk live animals and plants.

From April 2021 – All products of animal origin (POAO) e.g., meat and dairy products, all regulated plants and plant products will also require pre-notification and the relevant health documentation.

From July 2021 – Importers moving all goods will have to make full declarations at the point of importation and pay the relevant tariffs. Full Safety and Security declarations will be required and increased physical checks on animals, plants and their products will come into force and take place at Border Control Posts.

The easements above are for GB/EU trade. This approach does not apply to the flows of goods between Great Britain and Northern Ireland, details of which have yet to be finalised.

Whilst these easements are good news for UK/EU trade, detailed records will need to be kept to support the deferred declarations and funds will need to be set aside to prepare for any deferred payments to ensure full compliance. Careful planning will therefore be required.

We are working with a number of businesses to help them prepare for these changes so please do not hesitate to contact us if you require any assistance in respect of Brexit planning and preparation for the new border requirements.

Sarah Shears

For more information on this issue and VAT generally,
please contact Sarah Shears on  +44 (0)7772 544 345 or




4. The EU: Not the end of the Court of Justice of the European Union

One of the aims of Brexit was to stop those pesky judges of the Court of Justice of the European Union, (CJEU) or the ECJ in old speak, sitting in Luxembourg from telling us Brits what we can and can’t do. That is a matter for UK judges, (unless it is about Brexit, in which case our judges should do as the editors of the Daily Mail and Daily Express want).

However, the recent Swiss Supreme Court case of AA Ltd v Federal Tax Administration [2C_354 / 2018] shows how the court may have a lasting effect upon the UK, even after we have gone, and even if we do not have any sort of bi-lateral agreements with the EU.

The weight of overseas judgments

When seeking to interpret legislation, the UK courts have always had the option to consider judgements of overseas courts, with the weight given to the judgments being based upon the standing of the court. The musings of a lower court from somewhere that does not have a history of judicial independence will be given less weight than that of a final court, especially one where UK Supreme Court judges sit – hence the quoting of Riberio PJ’s judgment in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, from the Hong Kong Court of Final Appeal in many UK tax cases. That being said, given the current situation in Hong Kong, we will have to see if any future decisions are given such consideration.

Further points in a foreign court’s favour will be if they are considering an international agreement or publication that is also used in the UK. An example here would be the OECD’s commentary to the Model Tax Convention. It also helps if the country is a common law jurisdiction, especially one whose laws are based on (usually quite old) UK laws.

The shadow of the CJEU

The CJEU qualifies as a sufficiently prestigious and respected court for the UK to give its judgments weight, even if most of the justices are from civil law countries. Also, the EU could be considered a quasi-civil law jurisdiction even if the Member States apply any decisions etc. according to their national system.

It won’t be using old UK decisions but it may well be interpreting common terms used in international treaties and agreements. A prime example are the “Danish cases” (Cases C-115/16, C-118/16, C-119/16, C-299/16, C-116/16 and C-117/17)) where the CJEU commented upon beneficial ownership as it applied to the Interest and Royalties Directive and the OECD commentaries on the subject. The Court found that they could take the commentaries into consideration as the directive drew upon the model tax convention and they were clearly aimed at the same subject, that of reducing (not avoiding) international double taxation.

As the UK courts routinely refer to the OECD’s commentaries (and HMRC have a big hand in writing them) we can expect the CJEU’s decisions in the Danish cases to be referred to the next time “beneficial ownership” comes before the UK courts.

It should be noted that the Great Repeal Bill has left both the EU’s Interest and Royalties Directive and Parent Subsidiary Directive firmly in UK legislation, albeit “one-way” since the recipient of the payment has to be in a Member State which covers payments out of the UK but not those coming in. Therefore, we can expect the CJEU’s decisions to still have near direct effect unless and until UK legislation in these areas is amended.

What comes next?

The Swiss Supreme Court decision mentioned above was not about any of the EU’s directives, but about the Swiss-EU Agreement. Here, the Swiss Supreme Court held that under both the Vienna Convention on the Law of Treaties and the principle of common interpretation, where both parties to an international agreement will seek to interpret a treaty the same way (where they can) ,they referred to the CJEU’s decision. It is notable, however, that they differed from the French Courts as to whether the CJEU were implying a beneficial ownership limitation in their decision.

Therefore, when, or if, we get any agreement with the EU, we can expect the UK courts to look at judgments of the CJEU very carefully, especially where a common international principle is being examined by the CJEU and the UK is looking at the same issue.

Not all said and done

Given the increasing breadth of the OECD’s reach in international taxation matters, the UK’s championing of the commentaries and the EU and OECD often seeking to harmonise common areas (BEPs Action 5 and DAC3 cover the same area and have very similar reporting requirements), we can expect decisions of the CJEU to have an effect on UK taxation for many years to come. And this is even before we have any agreement between us.

Andrew Parkes

If you have any queries regarding the UK’s double
taxation agreements, please contact Andrew Parkes on +44 (0)7522 229 589 or

Miles Dean

or Miles Dean on +44 (0)7785 770 431 or




5. The UK: HMRC Insights – Certificates of Residence

Certificates of Residence (CoR) are part of the basic machinery of international taxation. They allow a person (including companies) to prove to someone in another country that they qualify for the benefits of a double taxation agreement (DTA), and qualify for a lower rate of withholding tax (WHT).

As they are issued in one country, to be used in another they have to be simple and easy to understand. Also, because they are official forms and can be relied upon by another country, they have to be accurate and unambiguous. Finally, and in order that the issuing country’s Revenue Authority does not have to expend an unreasonable amount of their resources on dealing with requests, the system has to be simple to administer.

This suggests that CoR should be short, to the point and be able to cover as many requests as possible. The UK’s system certainly fits this bill. HMRC staff are told to issue certificates with the following wording (and not to deviate from it):

“I certify that to the best of HM Revenue & Customs’ knowledge [Name and address/Registered Office of individual/company] as at [date] is a resident of the UK in accordance with Article [number applicable to residence – usually 4] of the Convention in force between the UK and [other State].”

This is so other fiscal authorities can be certain that what they have is an HMRC CoR. This is not a theoretical problem as, looking at things the other way, I had to query a CoR from another European partner as the official stamp looked fake. It transpired that the officer couldn’t find his usual “stamp” and used one he found at the back of a drawer which had been withdrawn a number of years ago. So, the CoR was “allowed,” it just took an extra 6 months to agree it was valid!

However, although this short CoR hits the spot for HMRC, it often doesn’t for other fiscal authorities. They often want the certificate to confirm that, say, the criteria of Article 12 (Royalties) is met, or that the income is subject (and not just liable) to taxation.  If this sort of information is contained in a certificate, there would be many, many versions and it may not be possible for the other fiscal authority to be sure they had a legitimate HMRC CoR. HMRC do, therefore, tell their staff to put such statements in a “side letter”, so preserving the wording of the CoR. The problem with this though is that the side letter is headed “THIS IS NOT A CERTIFICATE OF RESIDENCE” and has been known to cause both the side letter and the CoR to be rejected.

Another option is for the other fiscal authority to provide a form of their own to be stamped and HMRC are usually happy to do so. However, they do have to recognise the form and will not just stamp anything said to be “official” that is put in front of them. This is because HMRC have to be careful what they are certifying and why they try to keep details of the various forms in their Double Taxation Relief Manual. On one occasion, the form was an official one but required HMRC to confirm that the person was resident throughout the current tax year, which was simply not possible. It is another central tenet of HMRC’s approach to CoRs that they can only certify up to the date they are issued – how can HMRC certify someone is resident tomorrow, when they could have left the UK?

Therefore, if a country requires extra wording but does not have a form, or at least a form agreed with HMRC, it is best to suggest simple wording to HMRC for any side letter in the style used for the certificate of residence. This is because the wording of a side letter has to go to my old team, HMRC’s Base Protection Policy team in Canary Wharf, for agreement and the less that is in the letter, the more likely they are able to agree to it.

However, despite HMRC’s clear instructions to their staff as to what to do, we have recently seen very specific wording being included on a CoR going beyond the standard wording. In the immortal words of the Rolling Stones:

“You can’t always get what you want
You can’t always get what you want
But if you try sometime you find
You get what you need”

Andrew Parkes

For more information on Certificates of Residence and the workings of HMRC generally, please contact Andrew Parkes on +44 (0)7522 229 589 or





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The content of this newsletter and any subsequent updates we send do not constitute tax or legal advice and should not be acted upon as such. Specific tax and / or legal advice should be taken before acting on any of the topics covered.




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