250. Moving client authorisations to a new agent code

In the past, HMRC has occasionally agreed to transfer client authorisations from one agent code to a different one, for example, when a firm restructures to form a different legal entity, merges or buys a block of fees from another firm. HMRC’s policy is that, in these situations, it needs a new authorisation specifying the correct legal entity authorised to act on behalf of the client. HMRC has confirmed to the Tax Faculty that this policy will now be enforced.

A large amount of administration will be required to set up new authorisations, but it is necessary to comply with GDPR requirements and ensure that correct authorisation is in place, protecting all parties.

Contributed by Caroline Miskin

251. Updating ASA designatory details

HMRC has introduced a process that allows agents to update the postal address, email address and other designatory details associated with the agent services account (ASA).

HMRC is now accepting changes notified by agents, and the Tax Faculty understands that HMRC is working through the backlog of change requests that have been submitted by agents.

Unfortunately, the new process is a manual one. To update ASA details, agents must write to the National Insurance Contributions and Employer Office, HMRC, BX9 1AN, and include the following information:

• name and relationship to the business (letter must be from a director, company secretary, sole trader, proprietor or partner);
• details that currently show in the account that need to change (business name, postal address, email address);
• unique taxpayer reference of the firm; and
• phone number.

The guidance highlights the lack of a single online process whereby agents can update their address or other details.

Contributed by Caroline Miskin

252. Taxpayer wins capital allowances case on potato storage

The First-tier Tribunal (FTT) has found that a potato storage facility was plant and met the requirements for being both a silo for temporary storage and a cold store. Capital allowances were therefore available to the taxpayer.

The taxpayer produced crisping potatoes, a process that involved storing potatoes in precise climatic conditions until needed by the crisp manufacturers. Capital allowances in relation to a new potato storage facility had, however, been denied by HMRC. On appeal, the FTT found for the taxpayer. Based on the specific characteristics of the storage facility, the FTT held that it was not the setting for the taxpayer’s trade, but an integral part of how the taxpayer carried on a qualifying activity. That is sufficient for the facility to be plant. The storage facility was a building or structure, so, as well as being plant, it also had to meet further conditions to be eligible for capital allowances. The FTT found on the facts that the facility was both a silo for temporary storage and a cold store. The storage facility therefore qualified for capital allowances.

JRO Griffiths Limited v HMRC [2021] UKFTT 257 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

253. Farmers’ exit payments

Uncertainty around the tax position of the exit payment is one of the biggest problems to farmers taking advantage of the government’s lump sum exit scheme planned for April 2022.

The lump sum could be treated as trading income – in the same way basic payment scheme (BPS) receipts are taxed – or as a capital gain, which would mean a 10% or 20% tax rate, the same as when selling BPS entitlements. The Department for Environment, Food and Rural Affairs (Defra) is consulting with HMRC on this, with the outcome to be announced in October. The lump sum requires land to be sold, gifted or rented out in order to qualify.

Another substantial logistical problem is that all the parties that currently make the BPS claim have to retire to qualify for the BPS exit payment.

The government has reported that farmers willing to exit the industry will be able to receive the monies that they were due to receive under the BPS as a lump sum. The direct payments are due to be reduced over the next seven years, starting with 5% cuts this scheme year and rising to 50% in 2024 – with increased cuts for larger recipients. Defra has reported that farmers can opt to take the money up front, provided they quit farming, creating opportunities for new entrants and those existing farmers who want to expand.

One of the major tax costs will be the balancing charges on machinery sales. Defra guidelines indicate that farmers will be able to keep their dwelling place and up to 5% of their agricultural land and still qualify. There is still a shortage of details from the government as to how this will work in practice.

For the tenant farmer, an exit strategy – which might include a surrender payment from a landlord, the sale of livestock and equipment, and other pension provision – could be a very useful catalyst. The Tenant Farmers Association (TFA) is disappointed that if an owner-occupier decided to surrender their BPS entitlements and rent out the land under the scheme, Defra was only requiring a minimum-term farm business tenancy of five years. The TFA will ask for a 10-year term in response to the consultation.

The capital tax negatives for the landowners are the lack of business reliefs for capital gains tax and inheritance tax (IHT) caused by retirement with the lack of trading (ie, no longer being in farming). For example, the loss of IHT relief on the farmhouse and development value would be disadvantageous. Indeed, the resulting tax bill could far outweigh the BPS lump sum.

It can be argued that succession and farm tax planning cannot be finalised until the full tax implications of the exit strategy are known. However, the preparation work should be undertaken now, such as understanding farm ownership and what family members are looking for, and ensuring that there is full understanding of the partnership. Tax advisers and farmers must watch out for news of the changes.

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

254. Income from land sales found to be trading income

The First-tier Tribunal (FTT) has found that a taxpayer who sold plots of land from the grounds of her home – a listed building – to fund renovations, was taxable on the proceeds. The plots were changed from a capital asset to trading stock, then sold as part of her trade of building and construction.

The taxpayer sold plots of land in the vicinity of her home. The proceeds were used for the restoration of said home. HMRC sought to treat these proceeds as trading income, or alternatively to apply capital gains tax (CGT) to the gains. The taxpayer held that the plots were part of the garden or grounds of her home, so private residence relief applied and no tax was due.

The taxpayer held that this was not a trade, as it was a one-off transaction with no associated trade. Her husband, the co-owner of the main house, was a builder, but the plots sold had been in her sole name for more than two years. The FTT considered the badges of trade and ultimately found that a trade existed. There were multiple transactions, as six separate plots were sold. The taxpayer had worked for a building firm, although in an administrative capacity, so was found to be carrying on a trade. Although the land was acquired with the purchase of her home as a capital asset, she had appropriated the plots to trading stock, a disposal for CGT, and later sold them in the course of a trade.

Whyte v HMRC [2021] UKFTT 270 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

255. New guidance on repayment of loans to participators 

HMRC’s Company Taxation Manual has been expanded to provide guidance on repayments of overdrawn directors’ loan accounts (DLAs). The first new section notes that HMRC is encountering an increasing number of cases where overdrawn DLAs are said to be repaid, but in fact are not. This is often because debts are moved around between associated companies, or because a debt to one company is satisfied by funds that are borrowed from an associated company. In both situations, it is HMRC’s view that the tax charge on outstanding loans to participators should apply to the original lending company. The second new section explains that HMRC is also seeing transfers of assets from the director to the company used to satisfy overdrawn DLAs. In such situations, the guidance emphasises that it is the market value of the transferred asset that constitutes repayment. If the debt exceeds the market value of the asset, a tax charge on outstanding loans to participators will apply. 

From the weekly Tax Update published by Smith & Williamson LLP 

256. National minimum wage: how do you know you’re getting it right?

On 5 August 2021, the Department for Business, Energy and Industrial Strategy (BEIS) named 191 employers, including some household names, that had failed to pay the national minimum wage (NMW). BEIS also published a summary of the main issues that caused those underpayments. Most NMW breaches are due to technicalities in the regulations or working practices that aren’t visible to payroll departments. This is in line with our experience, but it means employers who fully intend to pay NMW are still being caught out. Employers should ensure their systems and processes can identify potential ‘technical’ breaches of the NMW regulations, so these are avoided and can be corrected outside of an HMRC review. Errors identified during an HMRC review are subject to penalties of up to 200% and naming.

Why NMW reviews matter

All employers have an obligation to pay their employees at least the relevant NMW.

Any failures must be corrected based on current NMW rates, rather than those that applied when the underpayment arose. Penalties of up to 200% of the arrears, capped at £20,000 per affected employee, can be applied. In addition, employers that underpay employees by £500 or more will be named.

The potential financial and reputational impact of an HMRC enquiry may quickly generate interest from the board and other stakeholders (eg, during a transaction).

What employers get wrong

The recent BEIS report highlights two key areas that resulted in employees receiving less than their statutory minimum entitlement:

• deductions or payments from wages that take pay below the relevant minimum rate; and
• unpaid working time.

Some examples BEIS gives of deductions that can lead to NMW breaches have a clear rationale, such as fees for processing attachments of earnings, and deductions for uniforms or for working equipment.

However, some are less clear – particularly those where the employee obtains a personal benefit from the deduction.

Examples include deductions for parking permits, the cost of on-site meals, employer Christmas savings schemes and deductions for benefits provided through salary sacrifice arrangements.

Unpaid working time that BEIS identified as causing NMW underpayments includes where employees are required to change or wait for work purposes (eg, passing through security checks and getting changed into PPE pre- and post-shift), time spent clocking in and out being rounded, employees not being paid for mandatory training, time worked on a sleep-in shift, or carrying out trial shifts.

The BEIS report also highlights NMW underpayment risks for apprentices, including failing to pay for time spent in training and failing to pay the correct age-related rate.

What should employers do?

The recent publication of named employers, and the most common reasons BEIS identified for those underpayments, is a reminder that even those who intend to pay their workers in full can still inadvertently breach the NMW rules.

All employers should therefore review their NMW systems and processes to ensure these are effective, and that compliance monitoring extends beyond the payroll and time and attendance systems and includes working practices that might lead to increased working time or reductions in pay.

Where underpayments are identified, these should be corrected and steps taken to prevent a reoccurrence.

BEIS recently confirmed plans for a new single enforcement body (SEB) for workers’ rights, which will enforce holiday pay and statutory sick pay as well as NMW.

When the SEB will be established has not yet been announced, but the clear signal is that employers should expect even greater scrutiny of NMW and other pay issues. 

We are also seeing the Pension Regulator stepping up enforcement activity in relation to pension auto-enrolment processes, so employers should act now to ensure they are fully compliant.

From KPMG’s Tax Matters Digest 

257. NMW: Apprentice trap 

The government uses the nudge principle to change the behaviour of individuals and businesses. The theory is, if a firm is publicly called out for its mistakes, this is a more effective deterrent of errors than a financial penalty. This is why naming and shaming of employers who have underpaid the national minimum wage (NMW) has recently recommenced, although financial penalties are also imposed.

The breakdown of the type of NMW errors shows that 19% were due to paying the wrong rate to apprentices. This is a big trap, as the NMW apprenticeship rate of £4.30 per hour only applies during the first year of the apprenticeship, or if the apprentice is aged under 19. Once the first year of the apprenticeship has finished, the wage rate must rise to the appropriate level for the worker’s age (see table).

The employer needs to be very clear as to exactly when each of their apprenticeship contracts started and how old each worker is. The highest rate of NMW now applies to workers who are aged 23 and over, not 25 and over, as was the case before 1 April 2021.

If the employer fails to pay the correct NMW rate, and the amount underpaid is £500 or more across the payroll, they will be included on the list of named employers, which is published on gov.uk. The employer also has to pay the underpaid wages to the employee and a penalty of 200% of the unpaid wages is imposed. If all of the underpayment of wages is paid within 14 days, the penalty is reduced by 50%. 

From the weekly Tax Tips published by the Tax Advice Network 

258. UT overturns FTT findings in IR35 case

The Upper Tribunal (UT) has found that the First-tier Tribunal (FTT) was not entitled to make two particular findings of fact based on the evidence before it. This may mean that the FTT’s decision will be overturned; the parties are awaiting a UT ruling in a separate case on similar matters. 

A doctor provided locum medical services to hospitals through his personal service company (PSC). The FTT ruled that the arrangements in relation to one of those hospitals would have amounted to employment if the hospital had contracted directly with the doctor. The implication was that under the IR35 legislation in force at that time, the PSC was liable for income tax and national insurance contributions on the payments made by the hospital. The IR35 rules have since changed and the liability is now on the employing entity. 

The FTT’s decision was based on several findings, two of which were the subject of appeal to the UT. First, the FTT found that the hospital was required to give one week’s notice before terminating the arrangements. Second, it found that there was an obligation on the hospital to provide 30 to 40 hours of work each week. The UT found that the FTT was not entitled to make these findings of fact based on the evidence available. The final question was whether or not these incorrect findings are significant enough that the FTT’s decision should be overturned. The parties agreed that this issue will depend on the outcome in a separate case, HMRC v Professional Game Match Officials Limited. Once that decision has been made, the UT will make its final ruling in this case. 

George Mantides Limited v HMRC [2021] UKUT 205 (TCC) 

From the weekly Tax Update published by Smith & Williamson LLP

259. Woodland found to be part of residential property

The First-tier Tribunal (FTT) has held that a property with 16 acres of grounds was a purely residential purchase for the purposes of stamp duty land tax (SDLT). There was no evidence that an area of woodland in the grounds had a commercial or agricultural use; it was found to be simply part of the grounds.

The taxpayer purchased, in one transaction, a house with almost 16 acres of land and outbuildings. On their SDLT return, they classified it as residential. Later, they applied to amend the return to mixed use, as there was an area of woodland on the land purchased that they considered was agricultural land.

The FTT considered the nature of the land and the evidence presented of its historic uses. It found that there was no evidence that it had ever had a commercial purpose, or any purpose other than that of woodland. It was ‘passively integral’ to the grounds of the house, and as such was part of the residential property.

The How Development 1 Ltd v HMRC [2021] UKFTT 248 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

260. Invalid VAT invoices

HMRC believes that there is a high level of VAT fraud by firms that supply temporary workers or site labourers. Recently, there have been a number of reports of HMRC blocking VAT recovery on the grounds that the invoice was invalid, which is often for the supply of staff or labour.

What must be included on a VAT invoice is set out in reg 14(1), The Value Added Tax Regulations 1995, SI 1995/2518. Most of the requirements are straightforward, but there is room for HMRC inspectors to quibble about the details required in subsections (g) and (h):

(g) a description sufficient to identify the goods or services supplied; and

(h) for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in sterling.

There needs to be enough detail in the description for an independent observer (eg, an HMRC inspector) to identify and quantify the service provided, so the invoice needs to say a bit more than just ‘labour supplied’ or ‘staff supplied’.

An invoice for labour should, as a minimum, give the number of workers, number of hours (or days) worked, the dates of the work and the site address. The HMRC guidance says it may not be reasonable for invoices to include details of the nature of the work undertaken, but it does expect the invoices to cross reference to other documents that may show this detail, such as timesheets that show the workers’ names, or supporting schedules detailing what was done.

In practice, HMRC officers may appear to be ignorant of this advice, so it is worth pointing it out where an invoice is queried. However, to avoid HMRC raising questions about invoices, advise your clients who supply workers to populate their invoices with a little more detail and cross reference where possible to contracts or timesheets.

Contents of VAT invoice

Guidance on supply of labour

From the weekly Tax Tips published by the Tax Advice Network

261. Managing PPI mis-selling claims

Claims Advisory Group Ltd (CAG) helped people submit claims if they had been mis-sold PPI policies, and retained 39% of any successful claims for its services. It argued that its services should be exempt as the services of an insurance intermediary – although it was not introducing customers to an insurer, it was managing the end of their relationship with the insurer. The Upper Tribunal (UT), like the First-tier Tribunal before it, was not persuaded.

The economic purpose and commercial reality of CAG’s services was to pursue a claim for compensation, not to terminate a PPI policy. CAG was not acting as an insurance agent, as it was not introducing a customer seeking insurance to an insurer. In most cases, CAG never had any contact with the insurer – what it did was seek compensation from the intermediary that had earned commission from selling the PPI.

Finally, the UT ruled that CAG’s services were not ‘related to’ the PPI, as they were too remote (they involved the way that PPI was sold by a third party, not the policy itself, and the policy may have ended by the time CAG became involved). Consequently, CAG’s services were not exempt as the services of an insurance intermediary, and its appeal was dismissed. 

From the weekly Business Tax Briefing published by Deloitte

262. New online service and checklist for partial exemption special methods applications

HMRC has launched a new online service for submitting proposals for partial exemption special methods (PESMs). Notice 706 has also been updated with a checklist setting out 43 pieces of information that must accompany a PESM proposal. As well as basic information about a taxpayer’s activities, these include a requirement to compare the proposed PESM with the standard method, a worked example of how the proposed PESM would have operated in the previous tax year, details of overseas establishments, etc. Use of the online service is not compulsory, and proposed PESMs can still be emailed to HMRC. However, in either case, Notice 706 now provides a comprehensive checklist of the information that HMRC will expect to be provided with. 

From the weekly Business Tax Briefing published by Deloitte

263. Burden of proof in inward diversion fraud VAT appeal

In 2011/12, £32m was deposited into Awards Drinks Ltd’s (ADL’s) bank account in cash, at 42 bank branches around the UK. To HMRC, the cash looked like the proceeds of inward diversion fraud (where multiple consignments of alcoholic drinks were illegally imported under a single administrative reference code and then sold for cash). HMRC concluded that ADL had made taxable supplies in the UK and assessed it for VAT. On appeal, ADL failed to convince the First-tier Tribunal or Upper Tribunal that the cash was from selling alcohol to French retailers while it was still in bond (for resale to customers on ‘booze cruises’ to France).

The Court of Appeal (CA) has now confirmed that HMRC never conceded in its pleadings that ADL had sold the drinks while they were in France. The judgement confirms that the burden of proof on the taxpayer to prove its case does not change just because fraud is suspected. HMRC had made an assessment, to the best of its judgement, that the cash was consideration for sales that were subject to UK VAT. Thereafter, it was ADL’s task to show why the assessment was incorrect, and it had failed to provide any coherent explanation for why the money was not consideration for UK supplies. The CA dismissed its appeal. 

From the weekly Business Tax Briefing published by Deloitte

264. Operation of onward supply relief clarified

A taxpayer has lost its appeal over onward supply relief (OSR) because it did not have the necessary authority to transfer or agree to transfer title of the goods. Fiduciary authority did not amount to power to deal with the title to the goods.

The taxpayer was a UK company that had been denied OSR on consignments of goods from China. It did not act directly for the owners of the Chinese goods; a Czech company liaised between the owner and the taxpayer. The First-tier Tribunal first determined how the legislative provisions on OSR should be interpreted, and then examined how they applied to the contractual arrangements. For OSR to be available in this case, there must have been a supply of goods through an agent acting in his own name. ‘Through an agent’ was found to mean that the agent had authority to give rise to a transfer of title to goods to his principal or to cause title to his principal’s goods to be transferred to another. In this case, the taxpayer did not meet that condition. The taxpayer did not have nor did it exercise the relevant authority to transfer or agree to transfer title of the goods. It had fiduciary authority to deal with the goods in a manner that made it an agent, but it was not an agent with power to deal with title to the goods. Furthermore, it did not act in its own name in relation to the supply. The appeal was dismissed.

Scanwell Logistics (UK) Limited v HMRC [2021] UKFTT 261 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

265. Closure of UK customs systems confirmed

HMRC has confirmed the phased move to a single customs platform over the next 19 months. The Customs Handling of Import and Export Freight system will not process import declarations from 30 September 2022 and will close fully on 31 March 2023. The National Exports System will also close on 31 March 2023. From that date, all goods declarations will be made through the Customs Declaration Service (CDS), which currently processes declarations for Northern Ireland and the Rest of the World. 

266. HMRC guidance on operating freeports

HMRC has published two pieces of guidance for those wanting to operate a customs site (also known as a free zone) in one of the UK’s new freeports.

The first piece of guidance outlines the responsibilities of operators of freeport customs sites, giving examples of the conditions that might be included in the site’s designation order, as well as detailing the security the operator is responsible for.

The second piece outlines how to apply to be a freeport customs site operator. It explains what information is required for the application form and how to download the form. It also confirms that HMRC will process applications from 9 September.

Operating a freeport customs site

Apply to be a freeport customs site operator

267. HMRC enquiry is valid if taxpayer’s agent acts upon it

In deciding the Tinkler case, the Supreme Court has ruled that despite HMRC sending an enquiry notice to the wrong address, the taxpayer could not claim the enquiry was invalid as his tax advisers acknowledged the enquiry.

The Supreme Court has ruled that a taxpayer was prevented from denying the validity of an HMRC enquiry into his tax return because his tax advisers had acted upon the assumption that the enquiry was valid.

Mr Tinkler argued that an HMRC enquiry into his 2003/04 tax return was not valid because the initial notice of the enquiry had been sent to the wrong address and he did not receive it.

HMRC opened its enquiry on 1 July 2005, issuing a letter to Mr Tinkler and sending a copy to his tax agent. His agent responded to HMRC on 6 July, wishing to claim a loss for 2003/04 that had been omitted from the return stating that it could not amend the return to make the claim as “the return is now the subject of a section 9A TMA 1970 enquiry”.

The enquiry resulted in a closure notice issued on 30 August 2012 to deny the claim for loss relief, stating that the original tax owed before the enquiry, of more than £700,000, was correct.

The Court of Appeal ruled ([2019] EWCA CIV 1392) on two points. First, it decided that the agent did not have actual or apparent authority to receive a notice of enquiry on behalf of Mr Tinkler. Second, it decided that neither Mr Tinkler nor his tax agent had assumed the requisite “element of responsibility for the assumption made” and, therefore, Mr Tinkler wasn’t estopped from denying the validity of the enquiry under an “estoppel by convention”.

An estoppel by convention arises when parties act upon a common assumption that a given state of facts is true.

HMRC appealed this second point to the Supreme Court ([2021] UKSC 39). Following the five principles governing estoppel by convention outlined by the High Court in Commissioners for HMRC v Benchdollar [2009] EWHC 1310 (Ch), the Supreme Court ruled on 30 July that Mr Tinkler was estopped from denying that a valid enquiry had been opened into his return.

Although HMRC mistakenly represented to the agents that the notice had been served to the correct address, the Supreme Court considered that HMRC was not prevented from raising an estoppel by convention. In its letter of 6 July 2005, the agent indicated to HMRC that it too believed that a valid enquiry had been opened. Thereafter, HMRC relied on the agent’s endorsement of the common assumption that the enquiry was valid and this satisfied the first three principles.

The fourth principle was satisfied because HMRC’s reliance was related to the dealings between the parties, and the fifth was satisfied because HMRC’s reliance on the common assumption was to its detriment, as it did not act to send another notice of enquiry to Mr Tinkler before the expiry of the relevant time limit. HMRC therefore satisfied all the requirements for establishing an estoppel by convention.

The court also opined on two additional issues. First, while there was no transaction between HMRC and Mr Tinkler, it considered that this is not a requirement of estoppel by convention as the mutual dealings between them were sufficient. Second, estoppel by convention in this case would not undermine the statutory protection given to taxpayers by s9A, TMA 1970. 

268. Discovery assessment validity

A discovery assessment was found to be invalid as the taxpayer had taken reasonable care in following HMRC guidance. HMRC should have been aware of the mismatch between the employment income declared on his return and that submitted by the employer, without making a discovery.

The taxpayer lost access to his electronic payslips after being made redundant. He filed a tax return for the year in which his employment had ended, as he believed too much tax had been deducted under PAYE, and was paid a refund. He had not previously filed returns as his income was taxed under PAYE. After HMRC carried out further checks, HMRC found that the refund had not in fact been due, as the correct PAYE was deducted.

The First-tier Tribunal, however, found for the taxpayer that the discovery assessment was not valid. The taxpayer had followed the instructions in HMRC’s online tax return system and deducted £30,000 from the P45 figure for the tax-free redundancy payment, without being aware that his former employer had already taken the £30,000 off the total when preparing the P45. He had therefore not been careless in making the error. In addition, HMRC should have been aware of the discrepancy, as it already had the real-time information on his pay figure from his employer.

Loughrey v HMRC [2021] UKFTT 252 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

269. ESS warning

Electronic sales suppression (ESS) is the modern version of not declaring cash sales. You may be conditioned to look out for under-declared sales in businesses that take a lot of cash, such as hairdressers and market traders, but are you ignoring the electronic risk?

ESS happens when the sales till is programmed to hide or reduce the value of individual sales. For example, the electronic point of sale (EPOS) software may deliberately exclude certain items from the sale records. Alternatively, the EPOS may be operated in a training mode for certain periods, allowing the sale to be rung up but excluding it from the daily takings.

Are your clients doing this? How would you know? The total sales recorded by EPOS should agree with the cash and card sales taken. Perhaps you could do a sense check of stock purchases against sales, product line by product line. Does the amount of stock lost, put down to shoplifting or damage, make sense?

You should warn your clients that HMRC is about to gain new powers to investigate ESS. HMRC will have powers to obtain details of ESS software developers’ source code and the structure of data within an EPOS system. Those making, supplying or promoting ESS software or hardware could receive a penalty of up to £50,000. Those found in possession of ESS software could be fined £1,000, rising to £50,000.

All these powers will be included in the Finance Bill 2022 and will take effect when that Bill is passed in summer 2022. Talk to your clients about ESS. If they admit they have been using some EPOS tricks, now is the time to come clean.

Powers to tackle ESS

From the weekly Tax Tips published by the Tax Advice Network

270. Security for tax

This may seem a subject of limited interest. However, the reason why it is important is because of the unbelievable penalties that arise if security demanded by HMRC is not provided.

HMRC is entitled to seek security from the taxpayer if it considers that it is necessary for the protection of the public revenue – for example, if the taxpayer has failed to comply with their tax obligations in the past or there is reason to believe that they might fail to do so in the future. It is extremely serious because it is a criminal offence to continue to make taxable supplies for VAT if you have not provided the security demanded by HMRC. This means that you must cease to trade if you want to avoid committing a criminal offence.

This is generous compared with the rules for PAYE and NIC. You don’t get out of this penalty by ceasing to trade. It is a strict liability offence. Not paying the amount of security demanded by HMRC is a criminal offence and carries an unlimited fine. There are very few protections given to the taxpayer in this area. Although the decisions in Tower Hire and Sales Ltd v HMRC [2019] UKFTT 0648 (TC) and D-Media Communications Ltd v HMRC [2016] UKFTT 0430 (TC) are helpful, they were contradicted by Blue Chip World Sales and Marketing Ltd v HMRC [2019] UKFTT 0705 (TC), which makes for very uncomfortable reading for anybody interested in safeguards for taxpayers. It is obviously right that HMRC must have the power to protect the public revenue where there is danger of loss to the Crown, but for HMRC to be able to make a taxpayer guilty of a criminal offence without any right of appeal must surely be unacceptable.

At least in connection with VAT the taxpayer can simply stop trading. But this is not a defence to a notice for security for PAYE where the employer and the directors of the employee company are liable. This is incredibly serious for the directors.

Two more decisions on this subject were published recently: FMC Ltd v HMRC [2021] UKFTT 0233 (TC) and Southend United Football Club Ltd v HMRC [2021] UKFTT 0229 (TC).

The essential point in these cases was to explain that the First-tier Tribunal is not permitted to confirm, vary or set aside a security notice as they can in a normal appeal. It is only able to consider whether the decision by HMRC to demand security was properly made as a question of procedure.

In essence, the Tribunal had to determine whether there had been an error of law in the procedure or it was one that no reasonable panel of commissioners could have reached.

Having regard to the history of tax defaults of both taxpayers, the Tribunal had no hesitation in confirming that the decisions satisfied these criteria. One additional point of significance emerged from the case of FMC, where the judge criticised HMRC’s assertion that “there is no right of appeal against quantum”.

Judge Beare said that he regarded this statement as being profoundly misleading. As it seemed to be standard wording adopted by HMRC, he urged HMRC to change its practice.

He said that HMRC cannot just decide that security would be reasonable and then impose any level of security it wishes. If the quantum is excessive, the decision as a whole can be unreasonable and susceptible to a successful challenge. Accordingly, he considered that the right to challenge the reasonableness of the decision encompasses both the decision to require security and the amount of the security demanded.

Contributed by Peter Vaines, Field Court Tax Chambers

271. Legitimate expectation arguments in the FTT

If a taxpayer legitimately expects that HMRC should act in a particular way and it does not, can the First-tier Tribunal (FTT) adjudicate? The FTT is a creature of statute – it has the power to rule on matters listed in s83(1), Value Added Tax Act 1994 (VATA 1994), but it does not have any general supervisory jurisdiction over HMRC. However, appeals against VAT assessments stem from s73, VATA 1994, under which HMRC may (but does not have to) assess a taxpayer.

In KSM Henryk Zeman SP Z.o.o. v The Commissioners for HM Revenue and Customs [2021] UKUT 0182 (TCC), the Upper Tribunal (UT)therefore concluded that any appeal against a VAT assessment involved consideration of HMRC’s discretion.

In such cases, VATA does not exclude public law defences like legitimate expectation – indeed, the UT thought that such defences fell squarely within the subject matter that the FTT should consider.

In the circumstances of this case (which related to a VAT assessment on a Polish company that installed a boiler in the UK for another Polish company), no legitimate expectation arose. However, in some other cases, the UT’s conclusion could allow public law defences such as legitimate expectation to be considered by the FTT, rather than having to be dealt with exclusively by separate judicial review proceedings. 

From the weekly Business Tax Briefing published by Deloitte

272. HMRC’s response to disguised remuneration loan repayment demands

HMRC is aware of repayment demands being made for loans made under disguised remuneration schemes. If the loan charge has been paid in respect of those loans, it cannot be recovered even if the loan is repaid.

In new guidance, HMRC explains that it is aware of some taxpayers receiving demands to repay loans that were created as part of disguised remuneration schemes. The demands usually come from third parties to whom the debt has been sold. The taxpayer may have been told that the loan would never have to be repaid. In many cases, the taxpayer has already paid the loan charge in respect of the loan outstanding on 5 April 2019, or made a settlement agreement with HMRC.

The guidance confirms that the loan charge liability still applies, even if the loan is repaid. The loan charge cannot be repaid, nor can a settlement agreement be altered, although Time To Pay arrangements can be made if the taxpayer is struggling to pay their tax. HMRC expresses its concern over these repayment demands and provides advice on what actions a taxpayer can take in response.  

From the weekly Tax Update published by Smith & Williamson LLP