028. Budget 2021

In a written ministerial statement to Parliament on 17 December 2020, the Chancellor confirmed the date of the next UK Budget as 3 March 2021.

The government has not held a formal fiscal event since 11 March 2020, and the expectation had been that a second Budget would be held in autumn 2020.

029. Income tax personal allowance and limits 2021/22

The spending review on 25 November 2020 contained a statement that some income tax allowances and thresholds and national insurance limits would increase in line with the September consumer price index (CPI) figure. The default position is that allowances are uprated in line with September’s CPI. The annual CPI increase to September 2020 was 0.5%.

Income tax personal allowance

When increasing the income tax personal allowance, the increase is rounded up to the next £10 (see s57, Income Tax Act 2007 (ITA 2007)). This means that the personal allowance for 2021/22 should be £12,570 (up from £12,500 in 2020/21).

Income tax basic rate limit

The basic rate limit is always a multiple of £100, and when the limit is increased, the legislation allows for the limit to be rounded up to the next £100 (see s21, ITA 2007). This means that the basic rate limit for 2021/22 should be £37,700 (up from £37,500 in 2020/21).

30. Accounting date easement for corporate non-resident landlords

The 2019/20 self assessment income tax returns for corporate non-resident landlords (NRLs) will be the final such returns, as from 6 April 2020 the income will be chargeable to corporation tax (CT) rather than income tax.

For income tax it is mandatory to account for property income on a tax year basis (ie, to 5 April). In practice, many taxpayers account to 31 March even though this is not strictly correct. HMRC has announced the following relaxation for corporate NRLs that have been adopting this approach:

“Where a corporate NRL has accounted for property income to 31 March in its income tax returns (ie, where apportionment for 1 April to 5 April at the turn of the tax year is ignored), HMRC will accept this approach for the 2019/20 returns (the last tax return for income tax).

“HMRC will expect the corporation tax return for the period 6 April 2020 to 31 March 2021 to reflect the full 12 months result for the company’s year ending on 31 March 2021 (including the period 1 April 2020 to 5 April 2020).”

HMRC is set to update its guidance (PIM1010) accordingly.

Reminders for corporate NRLs

Each corporate NRL will need:

• a CT unique taxpayer reference (UTR) – unless it already has one for another purpose. If a CT UTR is already held it will be necessary to ask HMRC to cancel the new UTR it will issue;
• where applicable, to authorise their agent for CT by completing a new 64-8 form with the appropriate CT section completed; and
• to inform HMRC if it wishes to use an accounting date other than 5 April. CT notices to file will have a default accounting date of 5 April.

Missing UTRs

HMRC has now issued UTRs to most corporate NRLs. If a corporate NRL client has not yet received their CT UTR, agents should send HMRC a new signed 64-8 form providing agent authority for CT, together with a covering letter. Agents should quote the income tax self assessment UTR on the covering letter but leave the space for the UTR on the new 64-8 blank.

Letters and 64-8 agent authority forms should be sent to: Charities, Savings and International 1, HM Revenue and Customs, BX9 1AU.

Contributed by Caroline Miskin

031. Home office costs

The home office may be a room in the home repurposed as an office for part of the time, or it can be a separate building or ‘pod’ in the garden used perhaps entirely by the business. The extent of business use of the area will affect the costs that can be claimed as business expenses.

A home office that is used for most of the time for the business could be let to that business by the homeowners, even if it is a room inside the main house. Where there is other non-business use of the area, the rental agreement should reflect the non-exclusive use. Exclusive business use could have implications for the main residence capital gains tax (CGT) exemption when the entire property is sold.

The rental charge will create a rental income for the homeowners that would need to be reported on their personal tax returns. Rent-a-room relief cannot be set against this income as the business is not occupying the area for residential purposes. Also, the £1,000 property income allowance will not apply if the homeowners are connected to the business as owners or directors.

As an alternative to rent, the homeowner could charge the business a fair proportion of the home running costs: power, insurance and water charges. The apportionment calculations can get quite complex so it may be easier for the business to pay the homeowners a flat rate allowance.

Employees and directors can be paid the tax-free home working allowance of £26 per month. Unincorporated businesses can use the simplified expenses if they use the home for business for at least 25 hours per month.

Homeworking allowance for employees

Simplified expenses for self-employed

From the weekly Tax Tips published by the Tax Advice Network

032. Guidance on the Finance Act 2020 changes to the intangibles rules

HMRC has published guidance on the special rules for restricted assets within the intangible fixed assets regime.

Finance Act 2020 amended the tax treatment of acquisitions of pre-Finance Act 2002 assets from related parties. These changes applied to acquisitions from 1 July 2020. The relief is limited, however, for three classes of ‘restricted assets’. The new section in the Corporate Intangibles Research and Development Manual explains the operation of this restriction and includes worked examples on the application of the rules.

From the weekly Tax Update published by Smith & Williamson LLP

033. UK group relief restriction incompatible with EU freedom of establishment

The First-tier Tribunal (FTT) has ruled that the UK’s restriction on the surrender of losses of a UK permanent establishment (PE) is an unlawful restriction on the EU principle of freedom of establishment.

A UK PE or branch of a Dutch company incurred losses of approximately £36.5m over three years. These losses were deductible, and were mostly deducted, in the Netherlands. Under UK law, no group relief is available where any part of a UK PE’s losses are relievable in another jurisdiction. The UK companies in the same multinational group as the PE argued that that limit on group relief is an unlawful restriction on the freedom of establishment under EU law.

The question came down to two previous decisions of the Court of Justice of the European Union (CJEU): Philips Electronics and NN A/S. In Philips Electronics, the CJEU had ruled that the same group relief provision was an unlawful restriction on the freedom of establishment. The facts of that case were very similar to the present case. Thus, if not overruled by a later decision, the FTT was bound to follow the Philips Electronics decision. The FTT found that NN A/S did not overrule Philips Electronics. The UK group relief restriction was therefore contrary to the freedom of establishment. The FTT ruled that it was to be disapplied.

VolkerRail Plant Limited and others v HMRC [2020] UKFTT 476 (TC)

HMRC v Philips Electronics UK Limited (Case C-18/11)

NN A/S v Skatteministeriet (Case C-28/17)

From the weekly Tax Update published by Smith & Williamson LLP

034. New R&D requirement for CT returns

A new supplementary page in the CT return is to be introduced for R&D claims.

From 1 April 2021, companies submitting claims for R&D relief will be required to complete CT600L, a supplementary page to the Form CT600. It will apply to claims under the small and medium-sized enterprise R&D regime and the R&D expenditure credit regime. The existing R&D entries in the CT return will still be required. 

From the weekly Tax Update published by Smith & Williamson LLP

035. Corporation tax residence: HMRC wins in Court of Appeal

The Court of Appeal has decided in favour of HMRC in Development Securities Plc and others v HMRC on CT residence, reversing the decision of the Upper Tribunal (UT).

The taxpayer companies were incorporated as part of a tax planning scheme intended to further increase an underlying capital loss to reflect indexation. The Jersey-incorporated companies would acquire the capital assets standing at a loss from a UK group company for consideration equal to base cost plus indexation (ie, more than market value). The companies would then migrate tax residence to the UK, and then crystallise capital losses through commercial sales to third parties.

To succeed, the planning required that the Jersey companies were not UK tax resident on the date of acquisition of the assets. The FTT held that the only acts of central management and control occurred in the UK (by the UK-resident parent company), and thus the companies were UK resident throughout. The UT held that the FTT’s grounds for concluding that central management and control was exercised in London and not in Jersey were untenable, given the facts the FTT had found, and that its decision was wrong in law.

The Court of Appeal has held that the UT had mischaracterised the basis for the FTT’s conclusion. The UT was not justified in setting aside the FTT’s decision for the reasons it gave, and the FTT’s decision was restored. 

From the weekly Business Tax Briefing published by Deloitte

036. Tax easement for cycle-to-work schemes is affected by COVID

A written statement from the Financial Secretary to the Treasury to parliament on 17 December announced that the government will introduce a temporary tax easement on cycle-to-work schemes.

Such schemes benefit from a tax exemption on the provision of bicycles and safety equipment to staff, provided that they are used “mainly for qualifying journeys” (ie, into and out of work).

The Treasury has acknowledged that government-imposed restrictions to combat the coronavirus pandemic have meant that many employees have been required to work from home and not been able to make the qualifying journeys to work. This means that the equipment they received no longer meets the tax exemption requirements and is liable for an income tax benefit-in-kind charge.

To prevent this, the government is temporarily removing the ‘qualifying journeys’ condition for employees who joined and received their cycling equipment on or before 20 December.

The tax easement will remain in place until 5 April 2022. 

Contributed by Peter Bickley

037. Pension deductions and NI 

Before your client’s company reaches another year end, discuss the expected profit for the year with the director and whether that taxable amount should be reduced by paying more salary or pension contributions.

Any employer pension contributions must be paid within the accounting period to be tax deductible for that year. You may not be approved by the FCA to give pensions advice, but you can tell the director how much is available to pay as a pension contribution. The director will have to decide with their financial adviser whether an additional employer’s pension contribution is sensible at this time as an investment.

The director should also be encouraged to check the level of state pension they expect to receive. The individual’s national insurance contribution (NIC) record for their entire working life can be viewed through their online personal tax account (PTA), but you can’t access that as the tax agent. If your client can’t access their PTA online, they can request an NIC statement by phone on 0300 200 3500.

Gaps in the NIC record can arise because the individual’s earnings for that year were too low to pay NIC, or they may have been living abroad and not paying UK NIC. Errors do occur, especially for workers who spend periods working overseas.

It is much easier to challenge these errors before the taxpayer reaches state retirement age than later when the state pension is already in payment. Gaps within the last six years can also be made up with voluntary NI contributions.

How to check your NIC record

Voluntary NI contributions

From the weekly Tax Tips published by the Tax Advice Network

038. National insurance limits 2021/22

The Spending Review confirmed that the government will also use the September CPI figure as the basis for setting all national insurance limits and thresholds, and the rates of class 2 and 3 NIC for 2021/22. This was reiterated in a written ministerial statement by the Financial Secretary to the Treasury on 16 December.

Following this statement, a table of national insurance rates, thresholds and limits for employees and employers was issued by HMRC to software developers on 22 December 2020. The changes will be delivered through secondary legislation and subject to Parliamentary approval. In summary, the limits proposed for employers and employees are as below:

039. Benefits and state pension rates 2020/21

A written statement from the Secretary of State for Work and Pensions to parliament on 25 November announced that state pensions will be increased by 2.5%, in line with the government’s manifesto commitment. The full rate of the new State Pension will now be worth £179.60 per week. The standard minimum guarantee in pension credit will also increase by the same cash amount as the basic state pension, rising by 1.9%.

All other benefits will be increased in line with CPI – which was 0.5% in the relevant reference period. This includes working-age benefits, benefits to help with additional needs arising from disability, carers’ benefits, pensioner premiums in income-related benefits, statutory payments, and additional state pension.

040. Claims to entrepreneurs’ relief showing as claims to investors’ relief

HMRC has identified an issue with some claims to investors’ relief (IR) and entrepreneurs’ relief (ER) (now known as business asset disposal relief) in 2019/20 returns.

The 2019/20 return is the first one to include a box specifically for capital gains qualifying for IR: box 49 on the SA108. Box 50 on the SA108 continues to relate to ER. HMRC has identified that some claims to ER have incorrectly appeared on returns as claims to IR.

Where agents have already filed a return that includes a claim to either of these reliefs, check to ensure the claim has been made correctly. If you identify an error, make an amendment and include a short note to explain the change. For any future claims, ensure that your software is up to date and that any claims are reported in the correct box before submitting the return.

Contributed by Caroline Miskin

041. Consultation on planning law reform

In addition to the new Agriculture Act 2020, which received Royal Assent on 11 November, there are also changes ahead for planning potentials for farmers. The government’s consultation on planning law reform proposes the biggest change to the UK planning system in over 70 years. The Town and Country Planning Act 1947 forms the basis of the current planning system. With so much uncertainty regarding COVID-19 recovery and lockdown together with the recouping of government finances through fiscal measures, there is a current certainty that the ‘hope value’ for inheritance tax (IHT) of gardens, pony paddocks, barns and fields near planning sites will be ‘low lying fruit’ for tax collection.

The cases of Palliser (Palliser v HMRC [2018] UKUT 0071 (LC)) and Foster (Foster v Revenue and Customs Commissioners [2019] UKUT 251 (LC)) establish the principle of the need to include ‘hope value’ for probate purposes. When considering farming probate valuations, it is possible with correct tax planning for ‘hope value’ to be protected by 100% business property relief, however, for small areas of land, such as gardens and paddocks used for pleasure, there is no such relief. With COVID-19 changing working arrangements and an increase in the current passion for large gardens and ‘pleasure’ paddocks there is the possibility of increased development and the current beneficial CGT rates of 20%, however, the possible large ‘downside’ of the potential IHT bill resulting from the probate valuation should not be ignored. In addition to the points raised above, there is also the review of CGT by the Office of Tax Simplification, which proposes many changes for the tax adviser to consider.

There will be much debate as to the quantum of the professional assessment of ‘hope value’ and the possible tax reliefs available by tax advisers and HMRC alike. Farmers will be part of the housing delivery and decision-making will involve ‘hope value’ as well as uncertainty around the future of farming and CGT rates. All tax planning around farm succession and taking advantage of development opportunities needs careful review and updating against this very uncertain background.

Contributed by Julie Butler FCA, Joint Managing Partner, Butler & Co

042. FTT rules that HMRC must follow Supreme Court ruling on contingent consideration

The FTT ruled against HMRC’s refusal to repay stamp duty land tax (SDLT) in respect of unpaid contingent consideration. It found that contingencies associated with features of an arrangement are not to be ignored when deciding whether or not an amount is contingent consideration. In addition, HMRC was estopped from arguing that the consideration was not contingent, because the Supreme Court (SC) had ruled that it was.

In 2018, the SC found that the SDLT anti-avoidance provisions applied to the acquisition of Chelsea Barracks and SDLT was payable. In that decision, the SC ruled that part of the consideration was contingent consideration. SDLT was held to be due on that amount, but subject to repayment if that contingent consideration was never paid. The taxpayer subsequently made a claim for the repayment of £11.64m of SDLT relating to that unpaid contingent consideration. HMRC refused the claim on the grounds that the unpaid consideration was not contingent consideration.

The FTT rejected HMRC’s interpretation of ‘contingent consideration’. It held that the fact that something is a feature of an arrangement does not mean that contingencies associated with that feature are to be ignored. The unpaid amount was therefore contingent consideration. Furthermore, the FTT held that on the basis of the SC’s decision, HMRC was estopped from arguing that the unpaid consideration was not contingent.

Project Blue Limited v HMRC [2020] UKFTT 475 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

043. SDLT: multiple dwellings, multiple complexities

SDLT is not a simple tax. How much you pay may depend on:

• what you are buying (commercial, residential or mixed?);
• how many properties are included in the purchase (‘multiple dwellings relief’ (MDR));
• the use to which you will be putting the property (main home or buy to let?);
• how much you are paying (SDLT rates are tiered);
• where the property is located (Scotland and Wales don’t charge SDLT but have their own taxes with different rules); and
• who you are (a first-time buyer?).

From April 2021, where you live will be added to the list, with the introduction of a 2% surcharge payable on purchases by ‘non-residents’ (for which a special and painfully complicated definition applies).

As regards the first bullet point, SDLT is usually lower if the property purchased is not wholly ‘residential’. This has led to some interesting but often hopeless claims to the lower rates where a house purchased as a main residence includes a ‘work-from-home’ office.

Perhaps more promisingly, where the numbers work, is the use of MDR. This can be claimed if an individual (but not, for the kind of purchase considered in this note, a company) buys more than one dwelling in a single transaction. It works by reducing the SDLT to what it would be if the total price paid were to be allocated equally between the properties.

This can achieve striking reductions. For example, SDLT on a £2m house is (until 31 March 2021) £138,750. But that falls to £57,500 if the house includes a ‘granny annexe’ that can be shown to be a separate ‘dwelling’. Whether that is the case is highly fact-dependent: the question is whether the annexe is such that it could if necessary be occupied independently of the main house. Is any internal communication door lockable? Does it have its own external access? Are utilities separately metered? The recent case of Fiander & Brower v HMRC contains some helpful pointers to what makes (or, in that case, didn’t make) for a separate ‘dwelling’.

In some circumstances, planning goes a bit further. MDR does not require that the ‘multiple dwellings’ in question should be contiguous or in any way related to each other – simply that they are purchased as part of the same (or a ‘linked’) transaction. In principle, therefore, MDR could be claimed in respect of the purchase in a single bargain of an expensive main home together with a very cheap property 300 miles away. And it is easy to envisage situations in which the SDLT saving may be greater than the additional cost of the ‘makeweight’ property.

There is however one point that must not be overlooked. It’s to do with the way in which MDR interacts with the additional 3% surcharge on the purchase of residential properties.

You are exempt from the 3% surcharge if you are buying a replacement main home: but this exemption does not apply if you are buying the main home along with one (or more) other dwellings in a single transaction, unless all the other dwellings are ‘subsidiary’ to the main home. Among other things, this means that they must be within the same grounds as the main home. So, while a granny annexe will almost never deny exemption from the 3% surcharge (assuming the other conditions are fulfilled), an unconnected ‘makeweight’ property elsewhere that is thrown into the deal in order to secure MDR always will.

Thus, if you are attracted to accessing MDR planning by use of a ‘makeweight’ additional property, it will always be necessary to crunch the numbers carefully. And in doing so, bear in mind that on 31 March, the SDLT nil rate reverts to £125,000 from its current £500,000. 

Contributed by David Whiscombe writing for BrassTax, published by BKL

044. Land transaction tax

In its draft budget on 21 December 2020, the Welsh government announced changes to the higher residential rates, and non-residential rates and bands, of land transaction tax (LTT) and confirmed that the temporary increase to the nil rate band of LTT for residential property transactions will end on 31 March 2021.

Higher residential rates of LTT

The higher residential rates of LTT increased by 1% across all bands on 22 December 2020. The following rates and bands apply to transactions with an effective date on or after 22 December 2020.

Non-residential rates and bands of LTT

For transactions with an effective date on or after 22 December 2020:

• the zero-rate band of the tax charged for lease premiums and assignments, and freehold property transfers increased from £150,000 to £225,000; and
• the zero-rate band of the tax charged on the rent element of non-residential leases increased from £150,000 to £225,000.

The Welsh government also announced that it intends to increase the ‘relevant rent’ amount for the annual rent element of non-residential rents from £9,000 to £13,500 in February 2021.

045. UT confirms FTT decision that juice cleanse programmes are supplies of food

The UT has dismissed HMRC’s contention that the FTT erred in law when deciding how to classify juice cleanse programmes for VAT purposes. The ruling confirms that a multifactorial approach is necessary, with consideration of the product itself, how it is marketed and the purpose for which it is bought and used.

The taxpayer produced raw fruit and vegetable juices, which it sold both in meal replacement programmes and as individual items. The taxpayer argued that the supplies should be zero-rated as food, but HMRC argued that the products fell within the exemption for beverages. The FTT ruled in favour of the taxpayer. It considered the way the product was marketed, why it was consumed by the customer, and the use to which it was put. HMRC appealed the decision on the grounds that the FTT erred in law by focusing too heavily on how the product was marketed. The UT dismissed the appeal, finding that the FTT had considered all relevant factors and had not erred in the weighting applied to those factors.

HMRC v The Core (Swindon) Limited [2020] UKUT 0301 (TCC) 

From the weekly Tax Update published by Smith & Williamson LLP

046. HMRC clarifies VAT treatment of school holiday clubs

Revenue and Customs Brief 18 (2020) has been released, setting out HMRC’s response to an FTT ruling on school holiday clubs. In light of this judgement, HMRC will consider requests for corrections of past rulings on similar activities.

In 2019, the FTT ruled in RSR Sports Limited v HMRC that a supply of holiday camp services was exempt from VAT under the exemption for the provision of welfare. In response to this decision, HMRC has issued Brief 18 (2020), which explains the FTT’s findings and the conditions required for the exemption to apply. Businesses that may be due a refund of overpaid VAT are invited to apply for a repayment in the usual way. HMRC will also accept requests for corrections of past rulings where evidence is provided to demonstrate that the conditions identified by the FTT are met.

RSR Sports Limited v HMRC [2020] UKFTT 0678 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

047. Claiming refunds of VAT paid in the EU from 2021

HMRC has published a policy paper setting out how to reclaim VAT charged in the EU from 1 January 2021. UK businesses may need to follow the processes for EU or non-EU businesses, depending on their location and the type of supplies made.

UK businesses may claim a refund of VAT from EU tax authorities using the EU VAT refund system or the 13th Directive process. The EU VAT refund system is available to businesses that:

• are established in or have an establishment in Northern Ireland;
• make supplies of goods in or from Northern Ireland; and
• make EU intra-community acquisitions of goods

Where the EU VAT refund system is not available, the 13th Directive process should be used. It governs refunds of VAT to non-EU businesses, and will therefore be a new process for most UK businesses. It involves a direct application to the tax authority of the EU member state in which the VAT was incurred. Businesses should be careful to adhere to the specific rules and procedures for refunds, which may differ between member states.

UK businesses have until 31 March 2021 to make claims under the current system in respect of periods to 31 December 2020. 

From the weekly Tax Update published by Smith & Williamson LLP

048. Safestore: block insurance policies and self-storage

Insurance taken out by customers using Safestore’s self-storage facilities is generally provided by its captive insurer (Assay, based in Guernsey). If Safestore was acting as Assay’s intermediary as it contended, then it might (under the rules in force at the time) have suffered no input tax restriction on this activity on the basis Assay was outside of the EU, and would only have included its commission (30% of the premium) in its partial exemption calculations.

However, the UT has dismissed its appeal, concluding (as the FTT had done) that the similarities to the block insurance policy arrangements considered in Card Protection Plan were inescapable. As illustrated by its approach to FSMA regulation, Safestore was providing the insurance to its customers under a block policy, and should therefore treat the entire premium as its exempt turnover. 

From the Weekly VAT News published by Deloitte

049. Reasonable excuse and COVID-19

HMRC has set out its views on when there is a reasonable excuse for the late filing of a variety of returns.

Income tax self assessment

HMRC has extended the time limit for appealing late filing penalty notices to three months.

HMRC has also confirmed that the following will be a reasonable excuse for late filing:

• where the taxpayer’s return is late due to pandemic-related delay on the part of an agent; or
• pandemic-related personal or business disruption experienced by the taxpayer. 

Company tax

Where a tax return filing date has not yet passed and a company is having difficulty filing its return on time, it can get in touch with HMRC to request deferral of a late filing penalty.

This guidance is in line with existing practice which is set out in HMRC’s Company Taxation Manual at COM130070. This states that when Companies House grants a company further time to deliver its accounts, the company may also be able to deliver its return later than the filing date without incurring a penalty.

A CT return filing is not complete unless it is accompanied by a signed set of company accounts. As a result of the COVID-19 pandemic, Companies House has extended the deadline for filing accounts that were due to be filed sometime between 27 June 2020 and 5 April 2021.

Due to this extension, some companies may find that they are unable to file their corporation tax returns on time because a signed set of accounts is not available in time.

Where companies have incurred other forms of difficulties in filing their corporation tax returns, which might be a result of the COVID-19 pandemic, companies are reminded that they may request a deferral on the basis that they have a ‘reasonable excuse’ for late filing. 

Interest restriction return

The usual filing deadline for an interest restriction return (IRR) is 12 months from the end of the period of account. This is normally the same filing deadline as the company’s CT return. In both cases, although HMRC does not have discretion to provide any extension to the statutory filing deadline, no late filing penalty will be chargeable, thanks to provisions to be included in Finance Bill 2020-21 with retrospective effect, where the reporting company has a reasonable excuse for missing the deadline, and the return is filed within a reasonable time after the reasonable excuse ends.

Although an IRR may be filed using estimated figures, the figures included in the IRR are usually based on individual CT results. As such, HMRC has confirmed to ICAEW and other representative bodies that it will accept that there is a reasonable excuse for filing the IRR late where the majority of companies within a corporate interest restriction group have obtained a deferral to late filing penalties for their CT returns and the IRR is filed by the same agreed date.

However, HMRC has also reminded companies that it will take into account all relevant facts and circumstances when considering if there is a reasonable excuse for late filing of the IRR.

If a reporting company is unable to file the IRR by the statutory deadline, it should contact its Customer Compliance Manager (CCM) if it has one. If the group does not have a CCM, and it considers that it has a reasonable excuse for filing the IRR late, the Tax Faculty advises that it should include this information when it files the IRR. HMRC can then take account of this before any late filing penalty is issued.

050. FTT finds conduct not deliberate

The FTT has reduced penalties charged on a taxpayer for an inaccuracy in his return by over £20,000. It found that relying on his out of date knowledge of the residence rules was careless behaviour, not deliberate, although he had not taken steps to ascertain the correct position.

The taxpayer, a qualified accountant, though not practising, moved to Monaco in July 2013. He filed his return for 2013/14 on the basis that he was non-resident, rather than claiming split year treatment, as he did not know that the tax residence rules had changed. This inaccuracy meant that a large amount of UK dividend income was not charged to UK tax. HMRC opened an enquiry and, on the taxpayer’s acceptance that the return was incorrect, charged penalties for deliberate behaviour. The taxpayer appealed the penalties on the grounds that his conduct was not deliberate.

HMRC argued that the inaccuracy was deliberate. The taxpayer was not an expert in residence rules, but although aware that it was a complex area he had not sought advice. He was aware that he was required to take steps to ascertain the correct tax treatment, so his conscious choice not to meant that the inaccuracy was deliberate.

The FTT partially allowed the appeal, agreeing with the taxpayer that his out-of-date tax knowledge “was enough to arrive at the wrong conclusion, but not enough to arrive at the correct position”. He had not deliberately sent in an inaccurate document, but acted carelessly in not checking and sending it in at the last minute. The penalties were therefore reduced to the amount for carelessness rather than deliberate behaviour.

Dolan v HMRC [2020] UKFTT 448 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

051. Late filing penalties cancelled for taxpayer who had never been to UK

The FTT has found that a taxpayer who invested in the UK had a reasonable excuse for filing her return late. She had been told by the vendor that no tax would be due, and had made an attempt to comply with her obligations. HMRC’s correspondence had been confusing to a non-resident unfamiliar with UK tax law.

The taxpayer, a Malaysian resident who had never visited the UK, invested in a UK car park. She was told by the vendor’s agents that as the income was below the UK personal allowance, no tax would be due. She was advised to submit a non-resident landlord form to HMRC to prevent tax from being deducted from the rent, and did so. The only income she ever received was £1,600 in 2015/16.

HMRC issued her with a notice to file for 2015/16, which she did late, and on paper. She appealed the late filing penalties. HMRC argued that a choice to invest in the UK carried an obligation to comply with UK laws, and she should have familiarised herself with the requirements, rather than relying on the vendor’s statement that no tax was due.

The FTT, however, allowed the appeal finding that HMRC’s conduct had been confusing. A 2014/15 return was issued and withdrawn with penalties cancelled, and the taxpayer had attempted to file the 2015/16 return, initially sending in only the residence pages rather than the full return. As she had attempted to comply, and was unfamiliar with UK tax law, as well as having received incorrect advice from the vendor, it was reasonable that she had filed the return late, and the penalties were cancelled.

Fei Ling v HMRC [2020] UKFTT 467 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

052. FTT dismisses late payment penalty appeal using COVID-19 as an excuse

A taxpayer company that failed to pay LTT due in January 2020 has lost its appeal against penalties, with the FTT finding that COVID-19 delays could not be a reasonable excuse for penalties charged as early as 4 February.

The taxpayer company purchased a hotel in Wales, and submitted the required LTT return on time. The tax payment due by 5 January was not made, and remained outstanding at the date of the hearing. A late payment penalty was applied on 4 February 2020, and the taxpayer appealed in April following reviews.

The grounds of appeal were that the taxpayer had intended to take out a loan for the ‘stamp duty’, as they had to purchase the property, but the bank had put the application on hold due to the pandemic. A director in India was unable to transfer funds due to lockdown, and the purchased hotel had been closed due to UK lockdown, so no money was coming in to make the tax payment. The Welsh Revenue Authority (WRA) confirmed at the hearing in August that it had now received a time to pay application, and it was being considered.

The FTT dismissed the appeal, noting that if the penalty appeal was on the grounds of special circumstances it must fail, as this ground excludes ability to pay. It equally dismissed the taxpayer’s arguments as a reasonable excuse for late payment, as the tax was due prior to the pandemic interfering with daily life. The taxpayer should have ensured that funds were in place before purchasing the property.

Prime Aesthetics Ltd v The Welsh Revenue Authority [2020] UKFTT 474 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

053. Supreme Court gives judgement on limitation issues in FII GLO

The SC has given judgement in Test Claimants in the Franked Investment Income Group Litigation v HMRC (1) and (2). This is the latest judgement in the Franked Investment Income Group Litigation Order (FII GLO), which concerns long-running litigation on claims brought by UK multinational companies who argued that the (now repealed) advance corporation tax and FII rules imposed higher tax burdens on UK groups with foreign subsidiaries compared to UK groups without foreign subsidiaries, and hence infringed EU law. This particular judgement concerns limitation issues, namely whether s32(1)(c), Limitation Act 1980, which enables claims to be brought outside the normal six-year limitation period, applies to a mistake of law, as well as to a mistake of fact, and when the time limit starts to run.

The Court of Appeal had agreed with the claimants that in their case the limitation period started to run in 2006, when the CJEU gave its judgement in Hoechst. The SC allowed HMRC’s appeal, though for differing reasons.

Four of the seven Justices who heard the appeal held that s32(1)(c) applies to mistakes of law, as well as to mistakes of fact, but that the time limit could run from an earlier stage, (ie, from when the claimants knew, or by undertaking reasonable diligence could have known, that they had a valid claim), rather than from the date of the Hoechst decision. In so doing, they held that the House of Lords erred in its 2006 judgement in Deutsche Morgan Grenfell. Three of the Justices would have held that s32(1)(c) could not apply to mistakes of law.

The judgement could affect both existing and historic remedies sought in relation to a mistake of law. The case will now be remitted to the High Court to determine the ‘reasonable belief’ date on the facts of the case. 

From the weekly Business Tax Briefing published by Deloitte

054. Details of HMRC as a preferential creditor

HMRC has published a policy paper setting out in more detail the new insolvency procedures that began on 1 December.

When a company becomes insolvent, there is a strict order of priority for paying off creditors from the likely insufficient funds. The new measure brings taxes collected by the business on behalf of HMRC up the priority list, to prevent them being used for other payments. These are PAYE and NICs deducted from employees’ wages, as well as VAT, student loan repayments and Construction Industry Scheme deductions. HMRC is now classed for these debts as a secondary preferential creditor, after preferential creditors, creditors with a fixed charge, and the fees of insolvency practitioners.

Plans to introduce this measure were announced in the 2018 Budget, and enacted in Finance Act 2020. It only applies to businesses entering insolvency on or after 1 December 2020. 

From the weekly Tax Update published by Smith & Williamson LLP

055. Advertising Standards Agency tackles tax schemes

HMRC and the Advertising Standards Agency have launched joint action against misleading marketing by promoters of tax avoidance schemes.

They have issued a joint enforcement notice, requiring promoters to be clear about the potential consequences of tax avoidance in any online adverts. Possible immediate sanctions include having paid advertising removed from search engines and follow-up compliance action potentially including referrals to Trading Standards.

HMRC has also published a page for its new campaign against tax avoidance schemes, along with an online form to report suspicious schemes to HMRC. 

From the weekly Tax Update published by Smith & Williamson LLP

056. Digital services taxes: deadlines

A number of countries have introduced new unilateral digital services taxes (DSTs) during 2020. As a reminder, each of the DSTs has a different scope but taxes are typically applied to gross revenues arising from a range of digital activities. The first compliance obligations for many of the new DSTs are due in the coming months, including:

• Italy – payment deadline of 16 February 2021 for 2020 liability and filing deadline of 31 March 2021 for 2020 DST return;
• Kenya – deadline of 20 February 2021 for payment of January 2021 liability and filing associated return.

In addition, further to earlier deferrals, payment of the 2020 French DST liability is due in full in line with the business’s November VAT payment deadline.

Further information

From the weekly Business Tax Briefing published by Deloitte