Practical points

130. MTD ITSA pilot

It is possible to join the Making Tax Digital for income tax self assessment (MTD ITSA) pilot, although it is not being actively promoted by HMRC.

To do so, the taxpayer must maintain digital records and have acquired MTD-compatible software. For now, sign-up is available only via a software developer.

Taxpayers can join the pilot if:

• their accounting period aligns exactly with the tax year (not 31 March);
• they are UK tax resident;
• they are registered for self assessment and have submitted at least one return;
• everything is up to date (eg, no outstanding liabilities or ongoing time to pay arrangement);
• their non-MTD income and claims are on the evolving list for which functionality has been developed; and
• they pass HMRC’s check against a whitelist of taxpayers that are eligible to join.

The pilot currently remains very limited. HMRC has indicated that it expects tens of thousands to join the pilot in 2022/23 and hundreds of thousands in 2023/24.

Contributed by Caroline Miskin

131. How does the £10,000 threshold work for MTD ITSA?

Taxpayers with turnover of £10,000 or less are not required to join Making Tax Digital for income tax self assessment (MTD ITSA). The test is applied to:

• turnover/gross income (not profits);
• turnover from self employment and property only, added together (see below for the specific boxes on the tax return); and
• each taxpayer individually (so where there is income from jointly held property, the individual’s share of that gross income per the tax return is what counts).

The test does not include partnership income or any other income that is not listed below:

132. State pension: how much to declare in tax returns

A person is taxable on the “full amount of the [state] pension, benefit or allowance accruing in that year irrespective of when any amount is actually paid” (s578, Income Tax (Earnings and Pensions) Act 2003).

Most state pensions are paid four weekly. This results in 13 four-weekly payments in a tax year, or 14 if a pensions payday falls on 6 April, or 7 April if the tax year is a leap year. Similar considerations apply for weekly or fortnightly payments.

State pensions increase on the day after the weekly payment day in the first full week of the tax year, not on the first day of the tax year.

So how does one determine the amount accruing in the tax year? 

HMRC’s Employment Income Manual at EIM75700 says: “…the taxable amount is the amount of pension accruing in the tax year. This may be different from the amount actually paid in a tax year.”

HMRC’s guidance How to fill in your tax return at page TRG6 at Box 8 State Pension says: “Use the letter ‘About the general increase in benefits’ that the Pension Service sent you to find your weekly State Pension amount. Add up the amount you were entitled to receive from 6 April 2021 to 5 April 2022 and put the total in box 8…. If your State Pension changed during the year or you only received it for part of the year, multiply each amount by the number of weeks that you were entitled to receive it….”.

So, whereas HMRC’s Employment Income Manual implies that one calculates the amount of taxable state pension on a daily basis, the tax return guidance suggests a weekly basis.

The day of the week on which the pension is paid is the key to working out the number of payment dates in the tax year. For example, 6 April 2021 fell on a Tuesday, and, in 2021/22 as pensions were increased on the day after payday in the following week, those paid on a:

• Monday will have had a 52-week year and received one payment at the old rate and 51 at the increased rate;
• Tuesday will have had a 53-week year so will receive two payments at the old rate and 51 at the increased rate; and
• Wednesday, Thursday, and Friday will have had a 52-week year and received two payments at the old rate and 50 at the increased rate.

Taking a variation of one or two weeks at the old rate plus 50, 51 or 52 weeks at the increased rate depending on the day of the week on which pensions are paid, rather than making a daily calculation, will fit within HMRC’s assessing tolerance.

Contributed by Peter Bickley

133. Taxpayer wins appeal on fixed protection

The First-tier Tribunal (FTT) has restored a taxpayer’s pension lifetime allowance protection, as the event that invalidated it, his auto-enrolment into a pension scheme, had been done without notifying him correctly.

When the taxpayer changed jobs, he asked his new employer not to enrol him in a pension scheme as he was approaching his lifetime allowance. He then applied successfully for fixed protection 2016, which would have kept his lifetime pension allowance at the then level, provided that he did not make further contributions. When HMRC discovered that he had in fact been auto-enrolled into the workplace pension, the protection was revoked.

The taxpayer appealed this decision on the grounds that he had not been given the auto-enrolment information. He had been told by the employer that if he did not sign a payroll deduction form, which he did not, he would not be auto-enrolled. An email was sent to him informing him that he would be enrolled, but he stated that he had never seen this email and produced evidence of IT issues. Alternatively, he pointed out that the wrong date had been included in the email the pension provider supplied as sent.

The FTT upheld his appeal. It found that it was most likely that he had opened the email, not recognised the importance, as it was marked as an external email, and deleted it, which would have counted as appropriate notice to him. It did however agree with him that the wrong auto-enrolment date was on the email, so it was technically an invalid notice.

Moan v HMRC [2022] UKFTT 118 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

134. Homes for Ukraine Scheme

On 31 March, the government announced in a Written Ministerial Statement that it intends to introduce legislation in Finance Bill 2022-23 to ensure that the Homes for Ukraine Sponsorship Payment will be exempt from income tax and corporation tax and that the payment will not be chargeable to national insurance contributions (NIC). The payment will be made by local authorities to sponsors under the Homes for Ukraine Scheme. However, as the payments will be treated as non-taxable income, landlords will be unable to claim a tax deduction for related expenditure.

The legislation will be retrospective with effect from the date first payments to sponsors are made. HMRC will not collect any tax that may have been due before the legislation takes effect.

The statement also confirms that legislation has been introduced to ensure that the payments will be disregarded for the purposes of calculating tax credits. The Homes for Ukraine scheme: frequently asked questions webpage indicates that the payments will not affect benefit entitlement or council tax discounts.

The statement confirms that companies that currently qualify for relief from the annual tax on enveloped dwellings (ATED) and relief from the 15% stamp duty land tax (SDLT) higher rate charge will continue to be able to claim relief while the dwellings are being used under the Homes for Ukraine Scheme, where relief had been claimed on the basis that:

• the dwelling is used in a property development business;
• the dwelling is used in a property trading business; or
• it is let on a commercial basis.

Where residential property is acquired by a non-natural person (eg, a body corporate, a partnership of which one or more members is a body corporate, or a collective investment scheme), a 15% SDLT rate applies if the chargeable consideration exceeds £500,000. The property may also then be subject to ATED.

Reliefs from both charges are available depending on how the dwelling is used. However, for SDLT, this relief may be withdrawn if the criteria cease to be met in the three years following the acquisition.

Companies acquiring property that would otherwise qualify for relief from the 15% SDLT rate, can claim relief if the property is to be temporarily used under the Homes for Ukraine Scheme.

ATED relief for use of the property under the Homes for Ukraine Scheme can be claimed if the property has not previously qualified for relief as a dwelling used in a property development or property trading business or let on a commercial basis.

The legislation, to be included in Finance Bill 2022-23, will have effect from 1 April 2022 for ATED and from 31 March 2022 for SDLT. From those dates, HMRC will not collect any tax that may have been due following a change in the use of the dwelling to be part of the Homes for Ukraine Scheme.

Written Ministerial Statement

The Child Benefit and Tax Credits (Amendment) Regulations 2022, SI 2022/346

The ATED Technical Guidance contains further details at section 41A

SDLTM09652

SDLTM09656

135. HMRC removes Thoroughbred Breeders’ Association agreement on stud losses

HMRC’s guidance in its Business Income Manual at BIM55725 ‘Farming: Stud farms: losses in stud farms’ covers the availability of loss relief in the breeding of horses. It is used by all equine tax advisers. With regard to the application of the hobby farming loss restriction rule to stud farming, a concession was confirmed in a letter sent in 1982 to the Thoroughbred Breeders’ Association (TBA). Prior to an update on 23 November 2020, the text of this agreement was contained in BIM55725 as follows:

“It has always been recognised that some ventures are by their nature unlikely to show a profit by the sixth year of trading and section 397(3) [now either S68(3) ITA 2007 or S49(3) CTA 2010] provides for loss relief to be continued after the fifth year where the claimant is engaged in a particular farming activity of an intrinsically long term profit making nature we have long accepted that the breeding of thoroughbred horses is such a long term venture, and provided that a stud farming business is potentially profit making, we would not normally seek to invoke section 397(1) [now either S67(2) ITA 2007 or S48(2) CTA 2010] until after 11 years from the start of the business.” 

Without warning, this TBA agreement that allowed for 11 years of stud losses was removed from BIM55725 on 23 November 2020 with the reason for the change described as ‘To bring content up to date’.

Stud farm losses are subject to the ‘hobby farming’ rules in the same way as farming. To quote BIM55725:

“The guidance on farming losses at BIM85600 onwards applies equally to stud farming and other long-term ventures. Under self-assessment for the 6th plus (ie 6th, 7th, etc) consecutive year of losses, farmers should assess the reasonable expectation of profit test as set out at BIM85640 and BIM85645.”

The tests concerning a reasonable expectation of profit are found in s68(3), Income Tax Act 2007 (ITA 2007) and s49(3), Corporation Tax Act 2010 (CTA 2010). The Business Income Manual points to evidence of commerciality. To quote again from BIM55725:

“The requirement that the business should be potentially profitable (in other words, the question of whether S68(3) ITA 2007 or S49(3) CTA 2010 is satisfied) is important and should be checked in all cases.”

Such a drastic change indicates that HMRC no longer accepts the ‘long-term’ nature of stud farming. The ability to claim tax relief for losses for 11 years from the start of the stud business becomes even more onerous for both tax advisers and stud farms. It is suggested that the 1982 agreement (now 40 years old) must not be forgotten and argued with determination at a time when HMRC’s attempts to deny sideways loss claims are so vigilant.

Contributed by Lucy Knighton ACA, Managing Director, and Julie Butler FCA, Founding Director, of Butler & Co Alresford Limited

136. Tax credits and restart of migration to universal credit

About 2.1 million tax credits claimants will have received their annual renewal packs from HMRC. Claimants have until 31 July to check their details and notify HMRC of any change in circumstances. The renewal packs also contain a flier to encourage those who would be better off on universal credit to migrate voluntarily, ahead of the managed migration to universal credit by the end of 2024. It is not possible to transfer back to claiming tax credits after claiming universal credit and transitional protection is not available on a voluntary move to universal credit.

137. Debt-free sale of company

We wonder what Michelle McEnroe and Miranda Newman thought when the decision was handed down in their case before the First-tier Tribunal [2022] UKFTT 113 TC. Possibly closer to ‘You cannot be serious!’ than ‘O brave new world that has such people in’t!’

The ladies sold a company. That company owed a debt of about £1.1m to a bank. The Heads of Terms referred to the fact that the sale price of £8m was for the acquisition of the company on a debt-free basis. More importantly, the sale and purchase agreement (SPA) provided that the sale price was to be £8m and that the vendors were obliged to show a deed of release and a redemption statement in respect of the loan.

In the event, it appears that the vendors did not show a deed of release or a redemption statement for the very good reason that the loan had still not been repaid by the time the sale completed. Instead, the buyers paid (via their solicitors) £1.1m to the bank in settlement of the debt and £6.9m to the vendors. Probably the parties took the view that it did not much matter whether the buyers paid the vendors £6.9m and cleared the debt themselves or paid £8m for a debt-free company. Which, in economic terms, it probably did not.

The vendors filed their capital gains tax (CGT) computation on what might be thought the reasonable basis that the amount they had received as consideration for the shares was £6.9m. 

Following enquiry, HMRC insisted that the SPA stated a sale price of £8m; the purchasers had parted with £8m; so, for the purposes of CGT, the consideration for the disposal must be taken to be £8m. The fact that only £6.9m had physically reached the vendors was irrelevant: the explanation for not having received the remaining £1.1m was that the vendors ‘had voluntarily discharged the KCPL debt’ – effectively a capital contribution (we return to that below).

The parties could easily have agreed a variation to the contract to the effect that instead of paying £8m for a debt-free company, the buyers would pay £6.9m for a company burdened with the £1.1m debt. There is no doubt that that would have meant the proceeds for the purposes of CGT would have been £6.9m. The vendors invited HMRC to agree that there had, in effect (and perhaps in law), been such a variation to the contract. An alternative analysis arriving at the same result might have been that in failing to provide the deed of release and redemption statement the vendors had breached the terms of the contract and that the vendors had reduced the amount of consideration payable to them accordingly. Either way the total value receivable by the vendors was £6.9m, not £8m.

The Tribunal found in favour of HMRC, saying: “I accept the factual point that the sellers did not receive £8m. However, it does not follow that they were/are not entitled to it under the contract. I consider two possibilities. Firstly, there is a possibility that both they are entitled to it and all parties to the contract accept this and it will be paid at a later date. I consider this a possibility on the wording of the contract but as a matter of practicalities and surrounding evidence I consider it extremely unlikely. Secondly, there is the possibility that they are entitled to it under the contract as written but all parties agree that this does not reflect what they meant to agree. To the end that this point leads us to a rectification argument that is not allowable before this Tribunal. To the end that this helps in the contractual interpretation I disagree.”

The possibility that the correct analysis was that the vendors not only did not receive £8m but were never entitled to receive £8m does not seem to have been put to the Tribunal. This will surely be remedied should the matter proceed on appeal to the Upper Tribunal.

But one might be forgiven for thinking that even if £8m was the correct disposal consideration and the £1.1m a capital contribution, that would have achieved the result sought by the taxpayers – surely the £1.1m would fall to be deducted as ‘enhancement expenditure’ on the shares?

Not so. Enhancement expenditure counts only if it is ‘reflected in the state or nature of the asset at the time of disposal’. In a Special Commissioners case in 2007, it was held that in general a capital contribution to a company affects neither the ‘state’ nor the ‘nature’ of the shares in the company, and HMRC applies that ruling zealously.

Finally, it may be noted that the case was heard as a default paper case (ie, without a hearing). It is always open to an appellant to insist on a hearing: one wonders whether the outcome in this case might have been different if the Tribunal had had the benefit of hearing full legal argument on behalf of the taxpayers.

Contributed by David Whiscombe writing for BrassTax, published by BKL

138. Deductible expenses

A landlord who had released a previous tenant from a reinstatement obligation was not permitted to deduct the monetary value of the release from the grant of the next lease, a long lease chargeable to capital gains tax (CGT).

The trust granted a 60-year lease on freehold land: a part disposal. It submitted an incorrect tax return initially, treating the grant of the lease as a full disposal, which created a CGT loss in the calculation. It agreed that this was an error, but argued that it should be allowed to deduct a payment from the gain. This was for the monetary value of the obligation they had released the previous tenant from, to restore the property to the condition specified in the lease.

The First-tier Tribunal dismissed the appeal. It decided that forgiveness of an obligation was not expenditure, merely consideration, and the legislation only allows deductions for expenditure.

The Wakelyn Trust v HMRC [2022] UKFTT 23 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

139. Subsidiary not an establishment of its parent

In 2011, Berlin Chemie set up a Romanian subsidiary (BCAM) to deal with marketing, regulatory and legal issues relating to sales of pharmaceutical products in Romania. BCAM did not charge Romanian VAT on its services, on the basis that it was making supplies to Berlin Chemie, which was established in Germany. However, the Romanian Tax Authorities (RTA) assessed BCAM for VAT of €8.9m, interest of €1.3m, and penalties of €799k, on the basis that the human and technical resources used by BCAM (as supplier) also constituted an establishment for Berlin Chemie (as customer) in Romania.

This circular logic would potentially have increased the incidence of subsidiaries having to charge local VAT on invoices to their parent companies in other jurisdictions. However, the Court of Justice of the European Union (CJEU) has not accepted the RTA’s approach. Berlin Chemie might have had an establishment in Romania if it had the power to dispose of BCAM’s human and technical resources as if they were its own. However, even though Berlin Chemie controlled BCAM (it owned it and was its only customer), BCAM was supposed to use its own resources for its own needs. More fundamentally, the CJEU was clear that the resources used by BCAM (as supplier) could not simultaneously determine where Berlin Chemie (as its customer) was established.

BCAM had been right to treat its supplies to Berlin Chemie as cross-border supplies, and not charge Romanian VAT. 

From the weekly Business Tax Briefing published by Deloitte

140. Minimum penalties for old errors

HMRC imposed penalties on Atlas Garages (Morpeth) Ltd for deliberate errors relating to ‘bumping’ (inflating the price of part exchange vehicles), because Atlas had previously been assessed for the same issue and had not fixed its systems, and because, during an HMRC control visit, it had initially denied that any problem existed. The First-tier Tribunal (FTT) has downgraded the penalty to ‘careless.’

Bumping can refer to inflating the price of a part exchange vehicle either to meet finance house minimum deposit requirements or to clear negative equity rolled over from an existing finance deal. The FTT ruled that Atlas and HMRC had been talking about different things, and that Atlas had not tried to mislead HMRC.

The FTT also considered that Atlas deserved full mitigation for ‘telling, helping and giving’, meaning that the penalty was very substantially reduced. However, it endorsed HMRC’s policy of not reducing a penalty below 10% for careless errors that are more than three years old. There was nothing irrational, in the FTT’s view, in HMRC’s decision to restrict the amount of mitigation where there was a long period between the inaccuracy being made and it being corrected. The penalty could not therefore be reduced to nil. 

From the weekly Business Tax Briefing published by Deloitte

141. Unjust enrichment

The Mayor’s Office for Policing and Crime (MOPAC) is entitled to impound cars for breach of road traffic regulations and for criminal offences, and will sell some of these vehicles to scrap merchants. Between 2008 and 2017 it charged VAT of £1.7m on such sales, but it was acting as a body governed by public law operating under a special legal regime and should not have charged any VAT.

MOPAC submitted a VAT claim, which was rejected by HMRC on the grounds of unjust enrichment. MOPAC accepted that the VAT would have been recovered in full by the scrap merchants, but argued that unjust enrichment did not apply, as both MOPAC and HMRC were emanations of the UK government. The transfer of £1.7m from HMRC would, in MOPAC’s view, merely be an internal reallocation of money within the public purse, and it could not be unjustly enriched.

The First-tier Tribunal (FTT) has rejected MOPAC’s arguments. In the FTTs judgement, MOPAC would be unjustly enriched if the £1.7m was paid and its appeal was dismissed. 

From the weekly Business Tax Briefing published by Deloitte

143.VAT on boat trips on the Moselle

Tourists visiting Luxembourg can take an hour-long panoramic boat trip with Navitours on the Moselle, where the river forms part of the border with Germany. In the Opinion of Advocate General (AG) Maciej Szpunar, the trip was a supply of passenger transport for VAT purposes, and was subject to VAT where the transport took place. The waters of the Moselle, however, come under the joint sovereignty of both Germany and Luxembourg. So where should Navitours account for VAT?

In the AG’s opinion, Navitours’ services were potentially within the scope of both Luxembourg and German VAT, and he roundly rejected the Commission’s proposal that the place of supply should (in the unusual circumstances) be treated as taking place where passengers boarded the boat (in Luxembourg). In his view, there was no risk of double taxation because if Luxembourg imposed VAT, then any charge to German VAT would be a charge levied in breach of EU law. In that case, Luxembourg’s actions would effectively mean that Germany lost the power to charge VAT on Navitours’ services, even though they were in principle within the scope of German VAT. 

From the weekly Business Tax Briefing published by Deloitte

143. VAT exemption for private healthcare

Hospital and medical care is VAT-exempt if it takes place in a public hospital or if it takes place under comparable social conditions in a duly recognised private hospital. Germany limited the exemption to private hospitals that were included in the government’s hospital plan, or that concluded care supply contracts with certain public health insurance funds. The Finance Court for Lower Saxony was concerned that this favoured older established private hospitals over new hospitals such as the neurology facility run by I GmbH (which was not included in the government plan until July 2012).

The Court of Justice of the European Union (CJEU) has now ruled that Germany’s operation of the healthcare exemption breached the principle of fiscal neutrality, as it resulted in similar private hospitals that supplied similar services under social conditions comparable to the public sector being treated differently for VAT purposes. The CJEU acknowledged that establishing whether ‘social conditions’ were comparable to the public sector could take into account the regulatory conditions under which private hospitals operated, performance indicators relating to their staff, premises, equipment and management efficiency, and the method for calculating charges for private care. But exemption should not be dependent simply on whether I GmbH had secured a place on a government hospital plan or had managed to conclude a contract with a public health insurance fund. 

From the weekly Business Tax Briefing published by Deloitte

144. VAT claimed found to be dishonest

The First-tier Tribunal (FTT) considered entitlement to input tax recovery for supplies made by an associated company that had not paid the output tax, and refused the claim.

The parent company charged the appellant company management fees that were subject to VAT at the standard rate. The parent company failed to account for the VAT, which was claimed by the appellant company as input tax. After less than a year of operation, the parent company went into liquidation.

HMRC took the view that the input tax claimed was fraudulent in nature and that as the companies shared common directors they would have known that the parent would not account for the output tax due in relation to transactions between the companies.

The appellant appealed against the restriction on the input tax it could recover on supplies made by its parent company on three grounds. These were: first, the parent was established to manage and implement a new payment bonus scheme, so there was no intention to use the company for fraud or abusive ends; second, the liquidator of the parent was pursuing the appellant for settlement of the outstanding amounts as a debtor; third, at the time of the supplies made by the parent it was not known that, due to a serious problem with the contracts being undertaken by the parent, substantial cash-flow issues would occur, so they could have not known about the future liquidation.

The FTT dismissed the appeal on the basis that even though the business was facing genuine commercial and financial pressures, despite being advised to do so, it failed to take the open and honest course of contacting HMRC to explain the problems faced. It was found therefore that the VAT returns were submitted with the knowledge that the parent company would not pay its VAT liability and so were dishonest.

Grantham Ceilings and Interiors v HMRC [2022] UKFTT 99 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

145. Information notices upheld

The First-tier Tribunal (FTT) found that the information specified in notices issued to directors was reasonably required to establish their correct tax position.

The taxpayers owned a company, and HMRC suspected that the employees had received more in wages, subsistence payments, and expenses than was paid by the company. HMRC believed that the taxpayers had paid the difference, and had an undeclared income source from which they had made the payments. The taxpayers stated that the company had made all the payments, directly or indirectly though loans to the taxpayers.

HMRC issued information notices to the taxpayers requesting various details about their financial affairs, including a list of bank accounts and statements for them. The FTT upheld these notices. The information was reasonably required to assess the correct tax position for the taxpayers.

Gilmore & Anor v HMRC [2022] UKFTT 116 (TC)

From the weekly Tax Update published by Smith & Williamson LLP 

146. Third party disclosure

The recent case of Gunfleet Sands Ltd v HMRC and KPMG [2022] UKFTT 94 (TC) is another case on the ability of third parties (like you and me) to get hold of really interesting documents like skeleton arguments, statements of case, replies etc in a case which has nothing to do with us – but might be helpful in connection with a dispute we may have with HMRC. You bet.

I am naturally a bit reluctant to say so, but the idea of getting hold of the skeleton arguments of the best advocates in the land, setting out the detailed arguments of the taxpayer and HMRC, would obviously be of enormous value if you have a case involving similar issues.

I have previously mentioned the case of Cape Intermediate Holdings Ltd v  Dring [2019] UKSC 38 where the Supreme Court explained that third party has no right to access such documents, but the court has power to grant access if the applicant has a legitimate interest and if it would advance the open justice principle.

Lady Hale suggested that a clean copy of the trial bundle may be the most practical way of providing access to third parties – but it is entirely a matter for the court to decide what if any access should be permitted.

This was followed by Fastklean Limited v HMRC and Keith Gordon [2020] UK FTT 511 (TC) where an application was made for the disclosure of a particular email which had been presented in evidence. Mr Gordon claimed a legitimate interest in this email on the grounds that he was interested in related litigation and more generally as a barrister practising frequently in the Tribunal. The Tribunal agreed.

We now have Gunfleet Sands where the applicant said: “The Applicant is currently instructed in another, unrelated, dispute with HMRC in which the same points of law have arisen: it is the Applicant’s understanding that one of the points in issue in the Appellants’ appeal is the question and extent of whether qualifying expenditure for capital allowances purposes should be determined by reference to assets which, when taken together, form a ‘single entity’. This is a live issue in a matter in which the Applicant is currently instructed and the Respondents’ legal arguments in these proceedings are of obvious relevance and interest to that matter”.

The Tribunal was satisfied that a legitimate interest existed and allowed access to the statement of case, the skeleton arguments of both parties and various other documents.

This sounds as though this issue has now been well settled, but unfortunately not.

A recent application by EY for similar disclosure was refused by the First-tier Tribunal, despite a clear and acknowledged legitimate interest, on the grounds that the case in which EY was interested was at an early stage (not yet listed for hearing): Cider of Sweden Ltd v HMRC [2022] UKFTT 76 (TC).

It is difficult to reconcile this with earlier cases, particularly the decision in Fastklean where access was granted merely on the grounds that he was a “barrister practising frequently in the Tribunal with a particular interest in the TMA 1970”.

I am not sure when we are on this now – but clearly there are interesting possibilities here.

Contributed by Peter Vaines, Field Court Tax Chambers

147. New tribunal procedures relating to oral evidence given from abroad

Following the outcome of the Upper Tribunal case ‘Agbabiaka’ (evidence from abroad; Nare guidance) [2021] UKUT 286 (IAC), a new procedure must be followed when a party to a case wishes to rely upon oral evidence given by video or telephone, by a person who is in the territory of a Nation State other than the United Kingdom. The procedure does not apply to written evidence, or to submissions (whether oral or written).

On 29 November 2021, the Foreign, Commonwealth and Development Office established a new Taking of Evidence Unit (ToE). The ToE will ascertain the stance of overseas governments to the taking of oral evidence from individuals within their territory and will then either permit or refuse such evidence to be taken.

To make the process as efficient as possible, HM Courts & Tribunals Service (HMCTS) will contact the ToE on behalf of anyone wishing to give or rely on oral evidence from a person abroad. In some cases, the ToE may need to raise an enquiry with the British Embassy or British High Commission in the territory concerned, which may take months to be responded to. As such, it is recommended that any referrals are made via HMCTS as soon as possible.

The details to be provided to the Tax Chamber of the First-tier Tribunal with the subject line or header ‘Evidence from Abroad’ are:

• the name of the person that they want to give oral evidence from abroad;
• the country that the person would be giving evidence from; and
• what the evidence would be about.

For further details, see here.

Contributed by Richard Jones

148. HMRC wins lead case on advance payment notices

The First-tier Tribunal (FTT) has upheld late payment penalties charged on taxpayers who failed to comply with advance payment notices (APNs). The fact that they had initiated judicial review proceedings was not sufficient reason not to make the payments. This was a lead case for around 500 other appeals.

The taxpayers had entered into tax planning schemes, and were issued with APNs by HMRC. They applied for judicial reviews (JRs) of these, without paying the tax due. HMRC issued late payment penalties and surcharges, and they appealed.

The first ground was that the time limit for payment had never started, so had not run out. If a taxpayer makes representations against the APN to HMRC, payment is not due until 30 days after HMRC responds with a determination. The FTT found that it did not have jurisdiction to review the determinations, which the taxpayers had argued were flawed, so this ground failed.

The FTT also found that the taxpayers’ belief that the JR claim would succeed was not a valid reason not to pay. Their case was not based on an obvious error in the APNs, which was the only reason for the JR to delay payment. The final argument, that interim relief protected them from having to pay, was likewise rejected.

Exclusive Promotions Ltd v HMRC [2022] UKFTT 103 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

149. Personal liability notice upheld on director

The First-tier Tribunal (FTT) has upheld a personal liability notice (PLN) issued to a director who failed to meet his company’s obligations to pay national insurance contributions (NIC) before it was liquidated. This was due to neglect, as it was his third company in that business that had failed while in substantial debt to HMRC.

A company entered compulsory liquidation owing HMRC NIC totalling more than £108,000, plus interest. The director had previously liquidated two similar companies with PAYE and NIC debts. He was issued with a PLN for the newest debt, on the grounds that he had prioritised the company making payments to himself and to related companies rather than settling its debts to HMRC. He argued that the other companies would have failed without the payments, which were for legitimate debts, and that in any case he should only be held liable for debts that arose after a time to pay arrangement broke down.

The FTT dismissed the appeal. The fact that two similar businesses of his had already failed meant that the taxpayer knew the risks inherent in the trade and, as he was aware that NIC was due monthly, he should have prioritised this. Agreeing a time to pay arrangement did not mean that he had acted reasonably.

Eames v HMRC [2022] UKFTT 119 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

150. Settlement opportunity for users of remuneration trusts

HMRC’s settlement opportunity makes reference to tax “avoidance schemes involving remuneration trusts”. However, this relates to a range of arrangements that are designed to provide a ‘tax-free’ environment for the business and the stakeholders they benefit. Depending on the facts and circumstances of the case, HMRC believes that the scheme design may, in some cases, have a fundamental flaw in that there is no valid transfer of funds to the trust and therefore does not have the effect for tax purposes that is intended.

The settlement opportunity is only available to individuals and companies whose remuneration trust scheme meets certain criteria that are set out fully in the settlement terms. The settlement opportunity does not apply to any individual or company under criminal investigation by HMRC and may not be available where an appeal related to the tax consequences of the scheme’s use has been referred to a tribunal.

Anyone wishing to take advantage of the settlement opportunity must complete tax calculations based on the settlement terms applicable to them and send these to HMRC by 31 July 2022.

HMRC may investigate and litigate users of remuneration trust schemes if they do not take advantage of the settlement opportunity.

If, at some point in the future, a court rules that tax is due on an alternative basis, the settlement terms will be withdrawn and HMRC will expect any scheme users who have not already settled to pay tax in accordance with the court’s ruling.

There are two main types of arrangement covered by the settlement opportunity – those relating to companies and those relating to sole traders and partnerships.

Broadly speaking, the company arrangement involves a company setting up a trust (which is not an employee benefit trust or an employer funded retirement benefit scheme) and claiming a tax deduction for contributions to the trust. The contribution is made to a primary administrator rather than a bank account in control of the trustee of the trust. The primary administrator may transfer funds to a scheme user, typically a director or shareholder of the company or a personal management company (PMC) controlled by the director or shareholder. The scheme user uses the money in the PMC as they wish. 

Alternatively, the primary administrator may transfer funds to a secondary administrator who then lends the money to the scheme user.

In the sole trader or partnership arrangement, the only difference is that the scheme user is a sole trader or a partner of the partnership and the funds are made available to the owners of that business.

The disguised remuneration settlement terms 2020 remain open. If a scheme qualifies either under the existing terms or the terms of the new settlement opportunity, the scheme user can decide which settlement opportunity to apply. Note, however, that where general employees benefit from the arrangement, only the disguised remuneration settlement terms 2020 can be used.

There are three different bases for companies to calculate the tax and make a settlement under the remuneration trust settlement opportunity. However, the distribution basis is not available where:

• in HMRC’s view, the facts demonstrate that the money paid by a company through the scheme to its director should be charged as income from employment; or
• the money transferred to directors or shareholders is not in proportion to their shareholding.

In all cases, late payment interest may be due. Penalties may arise where, for example, a return has been filed containing an inaccuracy that was either deliberate or where reasonable care was not taken. Taxes already paid, (eg, on any benefits-in-kind treated as received by the directors), can be offset against the additional liabilities arising. Payment plans can be arranged.

Contributed by Richard Jones

151. HMRC names avoidance scheme promoters

On 7 April, HMRC used its new power to publish information about tax avoidance schemes for the first time. The power, contained in s86, Finance Act 2022, came into force from Royal Assent. The first two schemes named are subject to the disclosure of tax avoidance scheme rules. The details published by HMRC include the scheme reference numbers.

152. Taxpayer wins appeal on treaty residence

The First-tier Tribunal (FTT) has found for a taxpayer that he was treaty resident in the Republic of South Africa (RSA), rather than the UK. On extensive consideration of his economic and personal relations, the centre of his vital interests was held to be the RSA at the time in question.

HMRC assessed a taxpayer to be UK resident in several tax years under the tie-breaker clause in the UK-RSA double tax treaty. He appealed to the FTT, arguing that he was non-resident. The FTT had to determine which state was the centre of his vital interests.

The FTT heard extensive evidence on his life to determine where his personal and economic relations were. He was born in RSA to an RSA family who spent a lot of time in the UK, and undertook part of his education in the UK. As an adult he lived in RSA for some years, moved to the UK for a year, then spent some years in Zimbabwe before returning to RSA. He and his family came to the UK again in 2007 for his children’s education. They acquired a substantial home in the UK, but they retained the RSA home as well and divided their time between these and properties in the US.

The FTT heard evidence on where he played sports (several countries), which clubs he belonged to (in the UK and RSA), where he voted (RSA), where his principal doctor and dentist were (RSA), his voluntary activities in RSA and the UK, and his investments. It considered where he worked from, which was primarily the UK, as first for the RSA family companies and later for his own UK company. He also provided day counts.

The taxpayer’s appeal was upheld. The FTT found that, considering all the evidence, the centre of his vital interests was more likely to be RSA than the UK. His family and friends were primarily in RSA, and his key economic ties were to the RSA. He had habitual abodes in both countries.

Oppenheimer v HMRC [2022] UKFTT 112 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

153. OECD publishes model rules for digital platform operators

From January 2023, the Reporting Rules for Digital Platforms will require digital platform operators to report certain information to tax authorities. That information includes the income realised by taxpayers providing certain goods and services through those platforms. The goods and services include accommodation, transport, personal services, and tangible goods.

Platform operators will need to report to their local tax authorities who will then exchange details of sellers with tax authorities around the world. A consistent approach is therefore required to ensure that all platforms provide information in the same format to authorities.

The proposed standard format is known as the Digital Platform Information (DPI) XML Schema and was developed in close coordination with the European Union, to ensure that it can also be relied upon for the reporting and exchange of information pursuant to the Directive on Administrative Cooperation (DAC7).

The model rules published on 29 March 2022 set out the details of the schema and how it is to be used.

Contributed by Richard Jones