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Practical points 2019 - Tax administration

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in policy, practice and legislation related to the administration of tax, covering: Agents and HMRC; Compliance; Tax returns; Tax payments and debts; and Tax payer rights. These brief practical points are published each month in the faculty's magazine TAXline.

 
  Practical points
135 Tax morale and getting taxpayers to pay their taxes
  OECD published a draft working paper, What is driving tax morale, designated a consultation document, to look at the ways tax morale, which it defined as the intrinsic motivation to pay taxes, can be improved. 

Most tax systems rely on the voluntary compliance of taxpayers for the bulk of their revenues so improving tax morale holds the potential to increase (tax) revenues without a great deal of effort. This points to a more service orientated approach from tax administrations rather than an enforcement approach. 

The working paper was mainly focused on developing countries and noted that two-thirds of least developed countries still struggle to raise taxes equivalent to more than 15% of GDP which is the widely accepted minimum to enable an effective state to function. The working paper also noted that it was countries with larger tax bases where tax morale tended to be higher. 

Despite its focus on developing countries the working paper noted that: “All countries and stakeholders can benefit from a deeper, better understanding of taxpayers’ motivations; it can provide the impetus for a more effective and responsive tax system.” 

The working paper also noted that, so far, tax morale has received comparatively little attention.

The working paper looked at the position of both individuals and businesses. 

It identifies some of the key policy considerations which countries should bear in mind in seeking to improve tax morale, create a more compliant environment and increase their tax takes.  

It did note that there was quite considerable diversity between different continents and between individual countries within the same continent so while the same considerations may apply everywhere they need to be adapted to the facts and circumstances of a particular country. 

There is often a difference in attitude depending on the age, level of education, gender and religion and general trust in government, so tax administrations needed to be able to profile their tax-paying population and tailor their policies to the different parts of their populations. There is clearly a need for more capacity in many tax administrations and a more competent tax authority improves the perception of taxpayers and increases tax morale.  

Making taxes simpler to pay appears to generate more willingness to pay. There need to be more taxpayer education programmes and more information and transparency about the tax system to achieve this. Increased use of technology also offers potential for improvements in tax collection. 

The separate chapter on business tax morale recognises that there is currently little research and not a great deal of data currently available. It notes the recent work of the G20/OECD on tax certainty and suggests that increasing the predictability of the tax environment, which can encourage investment, can also improve tax morale by increasing the willingness of businesses to voluntarily take part in the tax system. 

The working paper identifies a number of opportunities to increase tax morale of business from the technical (eg, refund processes for VAT), to the relational, or the relationships between the taxpayers and tax authorities. But it does note that, even more so than in the case of individuals, the causes of low business tax morale are very different between countries and continents and a tailored country approach is required in order to address the relevant issues. 

Contributed by Ian Young
134 Note of a meeting between HMRC, ICAEW and CIOT concerning Spotlight 47 
 

Following the publication on 4 February 2019 of HMRC’s Spotlight 47. Attempts to avoid an income tax charge when a company is wound up, representatives from the professional bodies (ICAEW and CIOT) sought a meeting with HMRC. This took place on 16 April 2019 with a view to better understanding HMRC’s position. 

HMRC explained that it had seen a change in behaviour since the introduction of the targeted anti-avoidance rule (TAAR), now in s396B or s404A, ITTOIA 2005. Clearances received by HMRC showed instances of people selling off companies rather than liquidating them, in an apparent attempt to avoid the TAAR. 

One professional body rep confirmed that he had been asked to advise on cases where the seller did not think that they were caught by the TAAR, but to reduce any risk of uncertainty had sold their company as a money-box once the business had been disposed of. It was expected that the purchaser would retain the company until there was a purpose for it. The company could be sold for say 95% of the value of the assets, the discount being to cover for the commercial risks that might attach to the old company and potentially also any tax risk.   

The discussion with HMRC concluded with HMRC confirming that it considered that in some cases the TAAR could apply to such disposals. Where the TAAR might not apply, HMRC is of the view that the general anti-abuse rule (GAAR) could apply. Basically, it appears that HMRC considers that selling the company as opposed to liquidating the company would not usually reduce any risk of the TAAR applying. The purpose of the TAAR is to stop someone avoiding income tax when they wind up a company. Looking at the two extremes: 

  • If a business owner wanted to cease running their business and sold their company owning the business as a going concern to a third party and had no intention of working in this area again, then it is likely that the TAAR would not be in point. In such circumstances the sale to a third party would not usually change this. 
  • However, if a business owner wanted to liquidate one business and start a similar business (phoenixism), the TAAR is likely to be in point on liquidation. Attempting to avoid this by disposing of the assets and liabilities, turning the company into a money box, then selling this to a third party, who would liquidate it immediately and use the proceeds to pay the vendor, is likely to lead to HMRC thinking that the TAAR should apply. Then, even were a tribunal to not accept the TAAR applied, HMRC considers that it could invoke the GAAR due to a TAAR being deliberately avoided. 

Between these extremes, HMRC indicated that the result of any case would depend on the particular facts, but we understood that the gist of their feeling was that selling shares in a company as an alternative to liquidation would be unlikely to reduce any uncertainties around whether the TAAR or GAAR would apply.  

HMRC acknowledged that the scope of anti-abuse rules can lead to uncertainties and that ultimately addressing them is a matter for the courts. But it takes the view that the chargeable gains treatment of disposals of shares is in general confined to straightforward sales and company liquidation distributions untrammelled by tax considerations. It follows that it will seek to apply anti-abuse rules in situations where the purpose of the legislation appears to be being circumvented and there is evidence that this is being achieved deliberately through artificial means. 

Alternative views could therefore be given on what the specific will of Parliament was in this area. However, members advising in this area will want to ensure that relevant clients are aware of HMRC’s updated views on this matter.

Contributed by Sarah Ghaffari 

133 Appeals against late filing penalties for monthly CIS returns
 

Contractors in the construction industry scheme (CIS) have to file returns by the 19th day of every month following the tax month and penalties are issued for late returns. In Employer Bulletin 77, HMRC provides some tips on how to appeal a penalty for a late CIS return.

Penalties can be appealed within 30 days of the date on the penalty notice. HMRC advises that the quickest way to appeal a penalty is to use its online service. When using the online appeals service, HMRC suggests:

  • Selecting the reason for the appeal from the drop down menu and avoiding using ‘Other’ if there is a more suitable option. 
  • If no payments were made to any subcontractors for that month, use the reason ‘I did not pay any subcontractors this month’ and HMRC will note that a nil return is due.
  • If a return was required as subcontractors were paid, HMRC will be unable to consider the appeal until the late return has been submitted.
  • If the taxpayer has stopped operating as a contractor, entering the date that they ceased in the additional information box so HMRC can update the taxpayer’s records.
132 Discovery found to be ‘stale’ in residence case
  The FTT has found that a discovery assessment raised by HMRC was not valid, saving the taxpayer £84m. A discovery was found to have been made, but the delay in issuing an assessment made it invalid.

The taxpayer left the UK for Monaco in March 2000, prior to a disposal of shares at a large gain in May 2000, and notified HMRC of his departure. Had he been resident in the UK in 2000/01, the CGT due would have been £84m. He filed a return with no reference to the disposal, and a white space note stating that he was non-resident, but prior to the hearing he accepted that he was in fact UK resident in 2000/01.

HMRC opened discussions with the taxpayer in 2003 following a newspaper article naming him as a ‘tax exile’, but did not issue an assessment until 2007 due to the time taken to gather the information requested. It argued that the discovery was made as part of the information-gathering process. The FTT found that a discovery had been made, but that over three years had elapsed before an assessment was issued, so it was stale. 

Hargreaves v HMRC [2019] UKFTT 244 (TC)

From the weekly Tax update published by Smith & Williamson LLP
131 Self assessment exclusions
  Returns covered by an online filing exclusion should be filed on paper. Ideally, the relevant exclusion number should be prominently marked on the return so that it is diverted to the specialist team that processes returns for exclusion cases. Many of the commercial software packages will state the reason the return cannot be filed electronically and this can be attached to the return. It is a requirement if the paper return is filed after 31 October as part of the reasonable excuse claim.

HMRC has a backup process for paper exclusion case returns that they process incorrectly and for those that are filed online despite an exclusion applying (as some software products allow). Where the initial processing results in an incorrect liability HMRC will issue a revised calculation in due course but this can take some time (we do not yet know when HMRC will issue revised calculations for 2017/18).

The 31 October deadline for filing paper returns is effectively extended to 31 January where the return is covered by an exclusion from online filing. If the return is filed after 31 October a reasonable excuse for not filing an online form, including a statement that an exclusion applies, should be enclosed with the return.

Contributed by Caroline Miskin
122  Applying for a s690 direction
  A concern was raised with HMRC that some s690 applications were being returned without being processed. This was usually when applications are made in advance, or if there is no NINO. Also, where there was no full payment submission (FPS). HMRC has confirmed that the team in Bootle has now been advised to refer any post in respect of a s690 agreement to HMRC’s technical team. This team is experienced in dealing with such post, and so it is hoped that this will resolve the issue of s690 applications being incorrectly returned. 
121  Image rights
 

The taxation of image rights agreements entered into by footballers and those engaged in other sports have been the subject of much professional debate – especially with HMRC. Where the footballer’s image rights are owned by a company, the taxation of the income derived from the image rights agreement is likely to be comparatively low – and of course free of National Insurance contributions. The tax may be even lower if the company or other entity is resident outside the UK.

HMRC sometimes challenges image rights agreements and one such challenge took place in connection with an agreement entered into between Hull City Football Club and Mr Geovanni Gomez: Hull City AFC (Tigers) Ltd v HMRC [2019] UKFTT 0227 (TC).

Mr Gomez was born in Brazil and prior to joining Hull City he had played for various clubs such as Cruzeiro, Barcelona, Benfica and Manchester City. He had also played for Brazil (wow, not a bad CV if you are a footballer, I guess).

HMRC argued that although the image rights agreement was genuine, the realistic conclusion was that the payments to his image rights company were earnings for his services as a footballer and chargeable to income tax.

The FTT decision is lengthy and sets out the background to this subject in a manner which is well worth some careful study (it is interesting to note that there was a general understanding among Premier League clubs about the treatment of image rights by HMRC; however, apparently they were all mistaken as HMRC had never agreed such an approach).

Anyway, the FTT accepted that the image rights agreement granted genuine rights to Hull City to exploit Mr Gomez’s overseas image rights – but the judge went on to find the following fact:

a) There was no clear plan to exploit the rights.
b) There was no reliable evidence about how the club arrived at the figure paid for the rights.
c) They did not obtain any valuation or opinion regarding the value.
d) They did not have the resources to exploit the rights.
e) They did not have any real interest in exploiting the rights.
f) There was little prospect of them exploiting the rights.
g) The rights were never commercially exploited.
h) The rights did not have any commercial value.
i) Nobody at the club could reasonably have believed they had any value.
j) Nobody at the club considered whether the rights could realistically be exploited.

As a result of the above, the Tribunal concluded that the payments were made to secure the services of Mr Gomez as a footballer and formed part of his earnings.

Having regard to the facts found by the Tribunal, this decision seems inevitable. However, had the club been able to demonstrate that it had investigated the potential of the rights, valued the rights, had a business plan to exploit the rights and shown that the payment for them was commercially viable (all of which might be possible in another case), the outcome might have been different.

Contributed by Peter Vaines, Field Court Tax Chambers

116 Interest deductions relief denied in international corporate reorganisation  
  Debits relating to an intra-group debt have been disallowed by the FTT on the basis that the loan was for an unallowable purpose. The loan was taken out as the final step in a group reorganisation, the overall purpose of which was commercial. The final step, however, was found to have been taken for the sole purpose of achieving a tax advantage. 

The taxpayer was a UK company that had been incorporated as part of a wider international group reconstruction exercise. It had acquired preference shares in its immediate US parent company in exchange for issuing a £140m promissory note. The parent company elected under US law for the taxpayer to be treated as a branch for US tax purposes. The interest paid by the taxpayer was therefore not taxable on its immediate parent, but was an expense under UK tax law. Clearance had been obtained from HMRC, confirming that the arbitrage rules in effect at the time would not be violated so long as the taxpayer disclaimed 25% of the interest expense. HMRC subsequently disallowed the full amount of the debit on the basis that the loan had been taken out for the purpose of obtaining a tax advantage. Under UK law, arrangements with the main or one of the main purposes of obtaining a tax advantage are for an unallowable purpose. As this anti-avoidance provision was outside the scope of the arbitrage clearance, HMRC was not prevented from making the disallowance.  

The FTT found that the loan did give rise to a tax advantage because the debits generated a loss in the taxpayer that was surrendered to another group company. It also found that the securing of a tax advantage was the sole purpose of the loan. Although the overall reorganisation had a commercial purpose, that purpose had been achieved by the prior steps in the arrangement. The final step of taking out the loan was done to ensure that sufficient UK debits were created to offset the UK income that would arise under the first seven steps. The principal and interest on the promissory note were calculated to offset that income exactly. The spread received by the taxpayer between the dividends and the interest expense was a means of justifying the step, but not the driving force behind it. Since the entire debit expense related to the unallowable purpose, the debit was entirely disallowable. The appeal was denied. 

Oxford Instruments 2013 Limited v HMRC [2019] UKFTT 0254 (TC)

From the weekly Tax update published by Smith & Williamson LLP
115  FTT upholds surcharge on unauthorised withdrawal from a pension scheme 
 

A taxpayer who withdrew funds from her pension via a loan scheme has been ordered to pay the unauthorised payment surcharge, as well as the surcharge, a total of 55% on the withdrawal. This was held to be “just and reasonable” despite her genuine belief that the scheme was compliant and the subsequent collapse of the company holding her pension. 

The taxpayer transferred £51,000 from her pension into a self-invested personal pension (SIPP), which invested in a company that made a ‘loan’ to the taxpayer of about half the funds. The scheme literature was on the basis that there would be no tax consequences, but she did not seek independent advice, and the scheme provider had become insolvent, resulting in the possible loss of the remaining funds. HMRC issued an assessment on the grounds that this loan was an unauthorised payment. 

The taxpayer accepted the 40% charge applied by HMRC on the withdrawal, but appealed the 15% surcharge. She argued that it was neither just nor reasonable, as she had relied on assurances given by the loan providers and did not have funds to pay HMRC. The FTT upheld the surcharge, as although she believed that the scheme was compliant, this was not reasonable in the circumstances. She had taken no independent advice. HMRC removed the penalty (15% of the charges) prior to the hearing. 

Franklin v Revenue & Customs [2019] UKFTT 232 (TC)

From the weekly Tax update published by Smith & Williamson LLP

114 FTT determines technical point on calculation of top slicing relief 
  The First-tier Tribunal (FTT) has found that HMRC’s methodology in a top slicing relief calculation was incorrect, reducing the tax assessment by over £22,000. 
The taxpayer had failed to declare a chargeable event gain, as she believed that no tax was due. It was common ground that the amount was sufficient to reduce her personal allowance to nil. HMRC’s calculation of top slicing relief, where tax is calculated as if income had been spread over the years the bond was held, therefore did not include the personal allowance. The taxpayer argued that the additional income would not have resulted in a reduced personal allowance when spread  over the 21 years held, so the full amount should be included in the hypothetical calculation. 

The FTT held that top slicing relief was intended to grant relief to persons who have taken income over a number of years when tax is charged in just one year. The only reason the taxpayer had lost her personal allowance was due to the chargeable event gain increasing her income in that year. The appeal was substantially allowed. 

Silver v HMRC [2019] UKFTT 263 (TC)

From the weekly Tax update published by Smith & Williamson LLP
113 Obtaining a UTR
  HMRC has been advised of difficulties in obtaining a unique taxpayer reference (UTR) when the individual does not have a National Insurance number (NINO) and/or there is no real time information (RTI) available. 

HMRC has created a statement that can be used in that situation. HMRC’s Operations team have been informed that if they receive any requests with a statement similar to the outline below, it should be clear that no RTI submission is expected, and therefore a standalone self assessment record (and UTR) can be created:

“We are applying for a UTR for our client and enclose the necessary signed forms SA1 and 64-8.

***Taxpayer Name *** was an inward assignee to the UK. ***Taxpayer Name*** was in receipt of taxable earnings for UK workdays in (***Tax Year***) and needs to submit (a) self assessment return(s). PAYE was not operated on his/her earnings and as such a standalone SA record is required. Please let us have the UTR and notice(s) to file for ***Tax Year*** only (*or multiple years**).”

*Amend as appropriate
108 Anti-money-laundering fees from 1 May 2019
 

HMRC has updated its guidance on Fees you’ll pay to register for money laundering supervision to reflect an increase in the fees from 1 May 2019.

These fees apply to accountancy service providers who are not supervised by a professional accounting or tax body for anti-money-laundering (AML) purposes. They are required to register for supervision with HMRC. This should not be necessary for ICAEW members since ICAEW is a supervisory authority for the purposes of the money-laundering regulations.

Among other things, details of AML supervision are required in order for an agent to set up an Agent Services Account with HMRC.

HMRC has been consulting on how fees should be charged for AML registration and supervision, and published a summary of responses on 4 April 2019. In this document HMRC said that it will:

  • increase fees from £130 to £300 per premises from 1 May 2019;
  • introduce a small business fee of £180 for businesses with a turnover less than £5,000 from 1 May 2019;
  • increase the cost of the ‘fit and proper’ fee (which applies to firms that are trust or company service providers) from £100 to £150 per person from 1 May 2019;
  • remove the one-off application charge from January 2020; and
  • not introduce a late renewal fee, but consider appropriate safeguards for the online system.

ICAEW has published plenty of guidance for members on AML: see Anti-money laundering guidance for the accountancy sector.

107 Direct recovery of debts
  HMRC has published a report on the direct recovery of debts (DRD). This reviews DRD recovery action between April 2016 and December 2018.

The key policy objectives of DRD, as stated in the report, are “reducing tax debt owed by securing payment in full, ensuring a fairer tax system and providing better value for money”. In its review, HMRC looked at the effectiveness of DRD in collecting tax debt and its impact on debtors, including vulnerable taxpayers

In the period April 2016 to December 2018, HMRC considered 22,667 cases for DRD. A total of £178m was collected.

Interestingly, HMRC reached the final stage of deducting payment from the bank account in just 19 cases, representing tax recovered of £361,678. Most of the debtors paid up at an early stage, after getting the initial warning of DRD action. This indicates that DRD has a significant deterrent effect and suggests that it has been correctly targeted at deliberate non-payers.

When DRD was first proposed there was considerable concern that it could be used against the wrong targets, including those who genuinely could not afford to pay or who had struggled with the tax system. After consultation and strong representations from ICAEW and other bodies, the government agreed to strengthen the safeguards in both legislation and guidance. 

Safeguards we pressed for include that before exercising DRD, HMRC must consider whether the person is at a “particular disadvantage”, ie, a person who is vulnerable and/or at risk of hardship. And before commencing formal DRD action HMRC must make a face-to-face visit, at which it can identify such people; they will be offered support and taken out of the DRD process. 

Out of the 22,667 debtors considered for DRD, just 42 were identified as vulnerable, which again would suggest (assuming that all vulnerable people have been identified) that DRD is correctly targeted at the ‘won’t pays’ rather than the ‘can’t pays’.

A taxpayer can raise a formal objection to DRD action, and then (if HMRC does not accept this) appeal to the County Court. In the period under review, HMRC received eight objections, seven of which were not upheld. One was upheld, because the debtor was able to provide additional evidence of hardship.

ICAEW members are unlikely to have clients whose affairs get to the stage of DRD action. But if you do have any feedback on the how the process is operating, we would like to hear from you: contact Caroline Miskin.
106 The ‘Pay now’ button for paying tax
  You may wish to remind clients that they can pay their self assessment (SA) liabilities and employers’ PAYE quickly by using the green ‘Pay now’ button on the How to pay SA and How to pay PAYE webpages on gov.uk

This facility was made available for corporation tax from February 2019 (see the Pay your Corporation Tax webpage).

From 31 March 2019 it was extended to: 

  • construction industry scheme (CIS) late filing penalties; 
  • PAYE late payment or filing penalties; 
  • class 1A NIC;
  • PAYE settlement agreements;
  • simple assessments;
  • machine gaming duty; 
  • miscellaneous penalties; 
  • stamp duty land tax; 
  • soft drinks industry levy; and 
  • pension scheme administrators. 

By using the ‘Pay now’ feature your clients will automatically be offered various payment options to choose from and the information they need to pay HMRC. Payment options are: 

  • direct debit;
  • bank transfer by Faster Payment, BACS or CHAPS, using their own banking software or applications;
  • debit card; or
  • corporate credit card (credit card payments are charged a non-refundable fee).
105 Personal liability notice dismissed for lack of evidence
  A personal liability notice that conferred 50% of a company’s penalty liabilities onto a director has been dismissed by the FTT. HMRC’s evidence was not sufficient to prove that the director knew that the CIS returns submitted by the company contained deliberate omissions and that his acts or omissions brought about the errors.

In Neil Anthony Farrow v HMRC (2019) TC07048, the taxpayer was the director of a company that provided recruitment services to the construction industry. It was registered as a contractor under the CIS, made gross payments to all service companies, and filed nil CIS returns. The correct treatment was only to make gross payments to service companies that held gross payment status under the CIS and to declare those payments in the CIS returns. HMRC therefore cancelled the gross payment status of the company, imposed penalties and issued personal liability notices (PLNs) to the directors, making them each personally liable for 50% of those penalties. PLNs are only effective if the penalty is in relation to a deliberate inaccuracy that was attributable to the actions or omissions of an officer of the company.

The FTT examined the circumstantial evidence put forward by HMRC. This included the taxpayer’s role as operations director, with full control over the daily activities of the company, and the fact that several suppliers of the company had been liquidated with outstanding VAT debts. It was also argued that the involvement of service, or umbrella, companies in the supply chain suggested that the company activities were suspicious. The FTT held that personal knowledge by a taxpayer may be established by circumstantial evidence. It disagreed, however, that the evidence before it was sufficient to establish personal knowledge of that taxpayer. The mere fact someone is a director is not conclusive evidence of knowledge of the correct CIS treatment. The PLN was set aside.

From the weekly Tax update published by Smith & Williamson LLP
104 HMRC has no jurisdiction to accept a voluntary return
 

The FTT has struck out an appeal against HMRC’s rejection of voluntary returns. The taxpayer can apply to HMRC again when the draft legislation regarding voluntary returns comes into force.

In Raison v Revenue & Customs (2019) TC07047, the taxpayer had paid tax under PAYE, with no allowance for expenses, and submitted five voluntary returns to reclaim tax when he became aware that his personal expenses were deductible. The returns were submitted within the time limits applicable to pre-2012/13 returns, so would have been accepted had he received a notice to file, but he was out of time to make an overpayment claim.

HMRC refused the returns on the grounds that a voluntary return is not a tax return under the meaning of the legislation. The FTT determined that its jurisdiction does not include voluntary returns, so struck out the appeal. It also confirmed that the PAYE coding notices under which the problem has arisen were not appealable after the year to which they applied, as they were not assessments to tax.

The tribunal noted that legislation in Finance Act 2019 (at that time in draft, but since enacted) would give HMRC powers to accept voluntary returns as though a notice to file had been issued. The judges said the taxpayer had the right to request that HMRC reconsiders its decision once the legislation is in force; however, these powers are at HMRC’s discretion.

From the weekly Tax update published by Smith & Williamson LLP

103 Silent agreements
  Where an amount of tax is disputed and HMRC puts forward calculations, the tax bill becomes finalised if both sides can agree to those figures. This offer (the tax calculation) and the taxpayer’s agreement form a contract between HMRC and the taxpayer, and the tax is said to be determined by agreement.

However, to reach this determination the taxpayer has to actually accept HMRC’s offer stating the tax due. A failure to reply or silence from the taxpayer cannot be taken as an agreement, although HMRC investigators may try to skip this vital stage and record an agreement when none has been achieved.

A recent case concerning CGT has made it clear that where the taxpayer has failed to respond, HMRC cannot read that as acceptance of the tax due.

This was recently illustrated in H Kaura v HMRC TC07032. In 2014 HMRC discovered that Ms Kaura had not declared a number of property transactions in the years 2005 to 2013, and issued discovery assessments after she failed to reply to an information notice. In 2015 Ms Kaura was diagnosed with cancer and did not give her full attention to her tax affairs. In January 2016 HMRC sent her calculations of the gains and tax due. In July 2016 HMRC wrote to Ms Kaura explaining that her lack of response was taken as agreement to the tax figures.

The FTT determined that Ms Kaura’s failure to respond could not be taken as agreement, and she was permitted to appeal against the discovery assessments.

From the weekly newsletter of the Tax Advice Network
094 CIS refunds
  If your client is a limited company subcontractor and they have paid too much tax or NIC, they can claim a repayment for construction industry scheme (CIS) deductions. 

Claims for repayment can be made online, though they have to be submitted by post if the company wants HMRC to pay an agent or other nominated representative. More information and the online form can be found at Claim a refund of Construction Industry Scheme deductions if you’re a limited company.

In Agent Update 71, HMRC notes that it will only start processing CIS overpayment requests for the tax year 2018/19 from 24 April 2019. It can take up to 40 working days to process an application to allow time for the contractors to submit all their returns. Agents are asked to wait until 19 June (40 working days from 24 April 2019) before chasing your client’s overpayment application.
089 HMRC support for those who need extra help
 

HMRC has published details of the support it offers to taxpayers and tax credit and child benefit claimants who need extra help – the service commonly known as HMRC’s Needs Enhanced Support (NES) Service. Details are in the 3 April 2019 policy paper HMRC support for customers who need extra help getting their tax right.

The service was introduced when HMRC enquiry centres closed about four years ago. It initially focused on helping with income tax, tax credit and child benefit problems, including debt; it now has a national insurance helpline and a VAT line. The advisers providing this support have more time to deal with callers, and local face-to-face appointments can be arranged where necessary.

The service is now trialling offering assistance with inheritance tax, probate, employer and construction industry scheme taxes and corporation tax. HMRC is also hoping to develop a referral route to and from HMRC compliance, though the assistance that HMRC can offer with a compliance check obviously cannot be independent.

There is no direct telephone route into the service; the model is that HMRC contact centres identify cases where extra support is needed and transfer the call to the second-tier NES service. Although it is primarily aimed at individuals, agents may wish to consider seeking the assistance of the service, for example, for a vulnerable client with a debt problem or a client who can no longer afford to engage the agent.

HMRC has also published guidance on Dealing with HMRC if you have additional needs. This would apply, for example, to those who:

  • are deaf or hearing-impaired;
  • have a speech impairment;
  • are blind or partially sighted; 
  • do not have English as a first language;
  • find it difficult to fill in forms (for example, because of dyslexia);
  • process complicated information (for example because of anxiety or stress); or
  • cannot use the internet or phone (for example, because of a disability).

Contributed by Caroline Miskin

088  The PCRT has been updated
  The Professional Conduct in Relation to Taxation (PCRT) guidance has been updated, making it easier to navigate with a new digital structure. This edition is effective from 1 March 2019.

With the launch of the digital version in 2018, the PCRT is now split into a core section and supplementary guidance in the form of helpsheets. The core section of the PCRT consists of the fundamental principles and the standards for tax planning which members must follow. There is no change to the core section and the substance of the PCRT is unchanged – the recent changes are to update the helpsheets.

In 2018, after creating the core section, the remaining sections of the PCRT were retained as helpsheets but pending a further review to assess their relevance and usefulness. Following this review, new criteria have been established for inclusion as a helpsheet: it must directly support the core section and relate to professional standards and conduct and not be in the nature of general guidance. Not all of the helpsheets met these criteria, and consequently those that did not have been removed from the PCRT. Those helpsheets that have been retained have been revised to bring them up to date and make them more user-friendly. It is hoped that this revised version will support the underlying purpose of the PCRT and make it easier to understand and navigate.

Now that the professional bodies have established new criteria for inclusion of material in the helpsheets, we will be considering whether members might find further helpsheets useful where they support the application of professional judgement and conduct as set out in the fundamental principles and standards. If you have any comments and suggestions please send them to Frank Haskew.
085 Carelessness: UT overturns FTT
  In HMRC v William Ritchie and another [2019] UKUT 0071 (TCC), the UT found that the FTT had erred in law in holding that the issue of the carelessness of the taxpayers’ adviser had been adequately pleaded. Based on the material before it, the matter was not reasonably open to be considered. The decision on carelessness was therefore overturned. The case concerned private residence relief (PRR) but this issue was not revisited.

The taxpayers had disposed of their home, the surrounding land and a large shed in 2007. They took professional advice and believed the gain would be exempt under PRR. The gains were not disclosed on their tax returns. In 2013, HMRC made discovery assessments of capital gains tax (CGT) on both taxpayers.

The FTT considered two issues: first, were the discovery assessments valid? and second, were the assessments to CGT correct? Since the discovery assessments were made more than four years after the year of the disposal, they could only be valid if the taxpayers had been careless or deliberate in their error.

It held that although the taxpayers had not been careless; it was sufficient that their adviser had been careless. The discovery assessments were therefore held to be valid. The amount of CGT assessed was, however, significantly reduced.

HMRC appealed to the UT on the basis that the FTT had erred in its application of the PRR provisions. The taxpayers appealed against the FTT’s findings on carelessness. 

The UT held that HMRC had not raised the question of the carelessness of the adviser; the carelessness of the taxpayers was the only submission. The FTT raised the point after the close of evidence without providing the adviser, who was a witness, with the opportunity to contest the finding. It decided that it was too late to revive the question, so the case was not remitted back to the FTT. The taxpayers’ appeal was allowed and the CGT assessments were dismissed.

The question of PRR was no longer in point and so was not considered further, which was disappointing. The FTT decision had allowed a just and reasonable apportionment where land was bought on which a property was subsequently built. 

It would have been useful to have this point considered further and a precedent set at the UT.

From the weekly Tax update 

Published by Smith & Williamson LLP
084 HMRC’s powers to require security 
 

HMRC currently has powers to require a security deposit from businesses where it thinks a tax liability will not be paid. Currently these powers can be used for VAT, PAYE, NICs and various other levies and duties. From April 2019 they will be extended to corporation tax (CT) and construction industry scheme (CIS) deductions.

The Tax Faculty is seeking members’ feedback about how HMRC operates these provisions in practice and whether there are any issues we should take up.

HMRC’s current powers

HMRC currently has powers to require a security deposit in respect of VAT, PAYE, NICs and various other levies and duties.

The VAT security rules are in para 4, Sch 11, VAT Act 1994. The PAYE and NIC security rules are found in s85, Finance Act 2011 and Part 4A of the PAYE Regulations 2003, and were introduced from 6 April 2012.

Extension to CT and CIS payments from April

Under s82, Finance Act 2019, the above security requirements have been extended to include CT and CIS deductions. This extension applies with effect from 6 April 2019. The extensions to CT and CIS were proposed in a consultation document published on 13 March 2018.

How the powers are used

All of the security provisions adopt a similar approach. The formal power is triggered by the issue of a notice, but HMRC will normally first send a warning letter. Taxpayers have 30 days to appeal against any notice and can ask for a review. It is an offence not to provide the requested security, so the provisions are draconian in nature in that failure to comply with them can lead to a criminal conviction.

According to HMRC’s 2018 consultation document, the cases where a security may be demanded fall broadly into two categories:

  • Non-compliant businesses, for example where there is a history of persistent late filing or payment, or a failure to pay a large tax liability on time, and the business has not requested time to pay or does not respond to contact from HMRC to discuss possible ways of managing debt. In 2016/17 this type of situation covered about 85% of cases where security was demanded.
  • Cases of ‘phoenixism’ where there is evidence that a person responsible for the operation of a current business was actively involved with a previous business or businesses that ceased to trade leaving behind tax debts. Around 15% of cases fall into this category.

It appears that about 4,500 businesses a year are potentially subject to the security provisions. According to HMRC, the issue of the warning letter results in the business paying the outstanding tax in about 75% of cases. Of the remaining 25%, a formal notice will be issued, and of those about 10% may result in prosecution; that is, about 2.5% of all potential security cases proceed to prosecution.

We want your help

Members have recently raised some concerns about the way in which HMRC operates these provisions. Given the extension of them to CT and CIS, we would like to have a better understanding about how these provisions are operated in practice and whether it is something we should take up with HMRC.

Please send your comments to Frank Haskew.
073  Lender acceptance of tax calculations and overviews
  HMRC has published an updated list of mortgage providers and lenders who accept a SA302 tax calculation and a tax year overview.

Although the recent update is only minor – the Cambridge Building Society has been added to the list – this provides an opportunity to remind readers about this list and where to find it.

Many mortgage providers and other lenders have agreed with HMRC that, as evidence of income, the lenders will accept tax calculations and tax year overviews that taxpayers or agents have printed from commercial SA software or online tax accounts. The list relates to the documentation needed as evidence of income in a loan or mortgage application.

Lenders on this list will accept either a copy of the tax calculation (SA302) or a tax calculation printed from commercial software used to submit returns, plus a tax year overview.

If you encounter any lenders on the list who are not following the process please email details to caroline.miskin@icaew.com so that this can be taken up with HMRC and the lender.
072 Update on payments on account for 2018/19
 

HMRC has provided an update on the online agent forum about missing 2018/19 payments on account. 

Failure of HMRC’s systems to generate payments on account has occurred in previous years but is much more widespread this year. In previous years HMRC has been able to rectify the problem before 31 January but for reasons that are currently unclear has been unable to do so this year.

The update from HMRC states:

  • HMRC helpline advisers have been provided with guidance to enable them to create the missing 2018/19 payments on account only if the payment is held on the customer’s SA account at 31 January 2019.
  • Agents do not need to notify HMRC of any further cases where 2018/19 payments on account are missing. However, if they specifically wish the 2018/19 payments on account to be created the payment should be already on the customer’s account at 31 January 2019. Where that is the case they can ask for the 2018/19 payments on account to be created.
  • It is possible that payments intended for the 2018/19 first payment on account may be repaid if the 2018/19 return is submitted, 2018/19 payments on account have not been created and a repayment is claimed on the return. However, there would be no interest implications providing the 2018/19 liability was paid in full by 31 January 2020.
  • Where 2018/19 payments on account should have been created but have not, any liability due for 2018/19 will be due as a balancing payment in January 2020.
  • If the 2018/19 first payment on account has been paid in full by 31 January 2019 then no interest should be charged even if the 2018/19 first payment on account was actually created after this date. HMRC is happy to review cases where interest has been charged on 2018/19 payments on account due on and paid by 31 January 2019. Please send the unique taxpayer references to the mail box: agentforum.wt@hmrc.gov.uk
  • Taxpayers can make payments in advance on their statement of account if they wish as they will have a higher 2018/19 balancing payment to pay in January 2020 (note that it may be necessary to ask HMRC to set the ‘no repayment’ flag on the account to prevent repayment).
  • HMRC can confirm that it is currently working to ensure that 2018/19 returns will correctly create 2019/20 payments on account.
  • HMRC apologises for any inconvenience caused by this issue.

ICAEW and the other professional bodies on the Issues Overview Group have made representations to HMRC on this issue. We are concerned that SA receipts for the exchequer in January and July 2019 are lower than they should be and that higher than expected SA demands in January 2020 may result in some taxpayers getting into debt.

Contributed by Caroline Miskin

069 HMRC is recruiting agents with additional support needs
 

HMRC is seeking to recruit agents with additional support needs to help it test digital services for agents – both for Making Tax Digital (MTD) and possible future services.

This would include agents with:

  • lower digital confidence;
  • any enhanced needs through disabilities; and
  • digital accessibility needs.

If you can assist, please contact Fia Virtala at HMRC at inger.ann.sofie.virtala@digital.hmrc.gov.uk. Please pass this message on to any colleagues or tax agents in your network who may have additional support needs.

068 TAXconnect: the new name for our Referral Scheme
  Do you ever need a quick answer to a question but don’t know quite where to look? You think a rule has changed, but did it? And if so, when? Perhaps you are the only tax manager in the office today and you really need to talk through your understanding of something now. Sometimes all we need is clarity.

This is where the Tax Faculty’s TAXconnect could be the answer. This exclusive member benefit was previously called the Referral Scheme; the new name is intended to give a better idea of what the service is, and a more modern feel. The service continues to provide consultants, specialists in their field, to help you with specific technical tax issues. Whether your problem is VAT, property, an HMRC enquiry, a question on domicile or some other tax matter, there will be someone to help.

TAXconnect consultants provide advice over the phone exclusively to Tax Faculty members for a nominal fee of just £25. For more information, visit icaew.com/taxconnect

If you would like to become a consultant, we would be delighted to hear from you. Please send a copy of your CV with covering letter to taxfac@icaew.com.
066 Guidance reminds companies of duty to prevent tax evasion
  Companies can now use the UK’s government gateway system to self-report a failure to prevent the facilitation of tax evasion offence online, and new guidance from HMRC reminds businesses of their duties to prevent tax evasion.

From 30 September 2017, businesses can be criminally liable if their employees, agents or third parties facilitate tax evasion while acting on their behalf. Companies will not be liable if they can prove that they had reasonable prevention procedures in place or that it was not reasonable in the circumstances to expect there to be procedures in place. (An article by Jason Collins in September 2017 TAXline explained the rules.)

HMRC has recently published updated guidance for companies to help them understand how to self-report a failure to prevent the facilitation of tax evasion leading to an offence under the Criminal Finances Act 2017.

As 17 months have passed since the offences were introduced, HMRC will expect a business to have conducted a comprehensive risk assessment and introduced new and enhanced controls to reduce the scope for facilitation of tax evasion by its employees and those providing services in its name. The new guidance should remind companies that they should have control procedures in place. The reminder is particularly apt given that HMRC has recently begun its first criminal investigations under these offences.

Beyond conducting a risk assessment, businesses would also be expected to have provided tax evasion training to staff, including what action to take if suspicion of facilitation of tax evasion arises.

Given the time that has passed since the offences became law, many businesses should also be considering reviewing the effectiveness of enhanced controls implemented in response now to the initial risk assessment. HMRC has been clear that it expects businesses to be regularly reassessing their risks – a one-off risk assessment is not enough.

HMRC has said that in its first criminal investigations under the offences it asked employees about their employers’ tax evasion prevention procedures. This again highlights the importance of training staff and that a business will not be able to rely on a defence of having reasonable prevention procedures if procedures have not been fully communicated across the business and sufficient training has not been given to staff.

Self-reporting under the law is voluntary and, in line with HMRC guidance, companies should seek professional advice before taking this route.

Successful prosecution under the offences could result in unlimited financial penalties, ancillary orders such as confiscation orders or serious crime prevention orders, and serious reputational damage. A successful criminal prosecution may also prevent a company from bidding from public sector contracts.

By Penny Simmons, writing in Out-Law published by Pinsent Masons LLP
065 Territoriality and Sch 36 notices
  In the case of Jiminez v FTT and HMRC [2017] EWHC 2585, the High Court held that an information notice under Sch 36, Finance Act 2008 sent to a person in Dubai was unlawful because it was issued to a person outside the jurisdiction. (See practical point 34 in February 2018.)

The court explained that unless the contrary is expressly enacted or plainly implied, there is a presumption that parliament does not enact statutes to operate on its subjects beyond the territorial limits of the UK. 

The matter has now come before the Court of Appeal, which has held that the legislative grasp of Sch 36 does indeed extend beyond the jurisdiction and that such an interpretation does not offend international law (The Queen on the application of Tony Michael Jimenez and the First Tier Tribunal (Tax Chamber) v HMRC [2019] EWCA Civ 51).

It was acknowledged by HMRC and by the court that neither the notice, nor any penalty, could be enforced – and some may wonder whether parliament would really have enacted legislation that cannot be enforced. The answer seems to be that the legislation can be enforced if the recipient comes to the UK. 

The unanimous judgement of the Court of Appeal set out in great detail the principles involved in determining the wide territorial reach of Sch 36 and would seem to put the law on this subject beyond doubt.

Contributed by Peter Vaines, Field Court Tax Chambers
064 Removal of HMRC fax facility
  HMRC no longer offers the option of faxing documents in compliance cases. Previously, the option to fax letters/documents to HMRC (quoting the CFS/CFSS reference number and using numbers 03000 587 501 and 03000 587 502) was available to individuals and their agents. 

Although delivery and processing of documents may have been considered immediate when using this option, it actually created delay due to the scanning process used by HMRC. For this reason and to support HMRC’s digital policy, its Customer Compliance Group made the decision to withdraw this facility. 

The fax numbers above will therefore show as unavailable if dialled and an alternative method such as post or, if available, email should be used.
046 Delay in issuing SA late filing penalty notices
  The deadline for filing a 2017/18 self assessment (SA) tax return online was 31 January 2019. Taxpayers who missed this deadline could normally expect to receive a fixed £100 late filing penalty notice in late February, but this year the notices will be issued later. This decision is part of HMRC’s EU Exit contingency planning which is intended to free up staff in its call centres and back office for EU exit related work.

HMRC has said in Agent Update 70 that the notices will be issued before the three month daily penalty begins to accrue, so before the end of April, but they will go out sooner if the EU Withdrawal Agreement is agreed.

The late filing penalty is £100 for a tax return filed up to three months late, after which a daily penalty of £10 per day accrues for up to 90 days (to a maximum of £900). Further penalties are charged for later returns.

2017/18 tax returns that were filed on paper, not only after 31 October 2018 but also after 31 January 2019, will already be more than three months late. HMRC is expected to issue these penalty notices in the usual timeframe.

Contributed by Anita Monteith
044 Agent services account now available to overseas agents and group tax managers
 

In February, HMRC released the functionality to allow overseas tax agents to set up an agent services account (ASA). Group tax managers working in internal tax departments can now also set up an ASA.

An ASA is needed for the following HMRC services:

  • MTD for VAT including signing up clients to MTD for VAT and a new online process for authorising new VAT clients;
  • MTD for income tax; and
  • the trust registration service which is used to register trusts and estates.

In most cases an agent setting up an ASA needs to provide:

  • the income tax self assessment UTR or corporation tax reference associated with their registration for UK tax and the associated postcode; and
  • details of the firm’s anti-money-laundering supervisor.

This has meant that overseas agents and group tax managers were excluded from being able to set up an ASA; the new functionality means they can now do so.

MRC guidance on how to apply for an agent services account if you are not based in the UK includes details of the information that is required for overseas agents and explains that the application is subject to approval by HMRC.

Group tax managers who require an ASA are advised to contact their customer compliance manager (CCM) to obtain specific assistance with setting up the account.

The process for group tax managers of companies that are not large enough to have a CCM is not clear at this stage. The Tax Faculty would be interested to hear of cases where this is an issue. Please email Caroline Miskin. 

Contributed by Caroline Miskin
040 Disclosure in tax appeals
  The recent case of Addo v HMRC TC06700 provides some welcome relief to taxpayers who seek disclosure of documents which are to be relied on by HMRC in an appeal hearing before the tribunal.

HMRC had various documents on which it was obviously intending to rely (at least indirectly) at the appeal hearing, being part of the witness evidence, but said that the taxpayer should not be permitted to see them. HMRC did not claim privilege but just said that the documents contained confidential and sensitive material.

The taxpayer could hardly be in a position to challenge the witness evidence if he or she was unable to see, or have access to, the documents on which the witness based their evidence. Given that the tribunal is charged with the responsibility under the tribunal rules “to deal with cases fairly and justly” and that both parties are under a duty to assist the tribunal in meeting this obligation, it is difficult to see how the stance of HMRC could be justified. The FTT ordered disclosure.

HMRC claimed that it did not rely on the documents – a difficult argument if it is relying on the evidence of a witness who is relying on those documents. HMRC also claimed that the documents were not relevant to the appeal – if so, why was the witness giving evidence about them in the first place?

Further, HMRC said that the appellant had not explained how the documents were relevant (well, no – that would be a tad difficult under the circumstances).

It can hardly be fair for HMRC to pursue a case for the charging of tax without having to disclose its evidence to the taxpayer. The very suggestion should be repugnant. Naturally one can understand that the disclosure of some documentation in the possession of HMRC may be relevant to other taxpayers and may prejudice the position of HMRC in other cases. However, this is always a risk with evidence in any proceedings, not only in tax cases. If the evidence or documentation it wishes to adduce is too sensitive, then HMRC might have to get along without it – just like the taxpayer would have to do, if he or she had documents which were commercially sensitive.

The tribunal said that sensitivity should not be a reason for non-disclosure because it might easily become a cloak to disguise an unwillingness to disclose documents that are unhelpful to a party’s case. However, the tribunal was sympathetic to the possibility that genuinely confidential information might be contained within the documentation and allowed such confidential information to be redacted.

This case does provide an unfortunate reminder of the case of Qureshi v HMRC TC06372 (see point 98 in May 2018 TAXline), where HMRC was claiming that it did not have to produce evidence because “HMRC has an understanding with the Courts and Tribunals”. That argument was condemned in the strongest terms and although the approach in Addo is not quite the same, it is clearly of the same regrettable character.

Contributed by Peter Vaines, Field Court Tax Chambers
038 HMRC senior accounting officer personal penalties
 

HMRC is continuing to issue significant numbers of personal penalties to the senior financial executives at big businesses. The latest figures show that another 125 penalties were issued by HMRC under its senior accounting officer (SAO) regime in the year ending 31 March 2018, up from 115 a year earlier. Just five years ago, only 46 penalties were issued by HMRC under the regime.

The SAO regime was introduced in 2009. It requires large companies, defined as those with either £200m in turnover or a total balance sheet of £2bn, to appoint an individual director or officer as personally accountable for that company’s tax accounting arrangements. The SAO, who is usually the company’s chief financial officer (CFO) or similarly senior executive, can be personally fined £5,000 for failing to maintain adequate tax accounting arrangements or failing to disclose any issues identified to HMRC.

There are two types of personal penalty that can be issued under the SAO regime: first, for failing to take steps to ensure the company’s accounting arrangements are adequate; and second, for failing to provide an annual certificate either confirming the arrangements are adequate or disclosing details of the deficiencies. Accounting arrangements are considered adequate if they enable all relevant tax liabilities to be calculated accurately in all material respects. Businesses can also be fined under the regime for failing to provide the name of their SAO to HMRC.

As HMRC is showing no sign of letting up on CFOs, finance directors need to be aware that they are personally in the tax authority’s sights if their businesses make errors in accounting. That can be particularly galling if they had no personal knowledge of the errors; HMRC will simply say that it was their responsibility to know.

Given how complex the tax affairs of a high turnover business can be, a CFO cannot reasonably be expected to have personal oversight of every detail. It is absolutely critical to put in place policies, procedures and monitoring for tax.

HMRC has been criticised by the tax tribunal for its heavy-handed approach to imposing penalties under the SAO regime. The tax tribunal has even overturned SAO fines imposed by HMRC including, in one case, a fine imposed on a CFO long after he had left the business and no longer had access to evidence with which to defend himself (Kreeson Thathiah v HMRC TC06043).

The increased number of fines is likely to have been driven by HMRC’s increased focus on employment tax compliance, particularly in relation to what it deems ‘disguised employment’. HMRC is treating claims of self-employed status in some industries with much more scepticism than it may have done in the past, and finance directors may be deemed to have been responsible if it determines that the company did not have adequate arrangements in place to prevent de facto employees being treated as contractors. HMRC’s increased focus on this area could lead to more SAO penalties for SFOs that use a large number of contractors, especially through personal service companies, in the coming years.

From Out-Law, published by Pinsent Masons LLP

036 Input tax recovery on contingent management fees
  In W Resources v HMRC TC06879, the FTT found that no input tax could be recovered on contingent management fees.

In 2011/12, W Resources acquired two subsidiaries with a view to exploring for tungsten in Spain and Portugal. It incurred consultancy fees which would be recharged to the subsidiaries when they started generating revenue. HMRC denied input tax recovery on the basis that the proposed recharges were uncertain, and there was therefore no direct link with an economic activity.

The tribunal, with some hesitation, dismissed W Resources’ appeal. Input tax recovery has previously been denied in cases where there was just a vague intention to recharge something, or where a recharge was only nominal. Here, however, the only uncertainty was whether the subsidiaries would generate revenue. Nevertheless, the FTT decided that the existence of the contingency was all that was required to break the link between supply and consideration. 

From the Weekly VAT News published by Deloitte
032 Correspondence scanning: avoiding delays
 

The most recent issue of HMRC’s Trusts and Estates Newsletter provides some tips on how to send forms and documents to HMRC to make sure they do not get delayed in the post scanning operation.

All paper correspondence is scanned onto HMRC’s systems in its scanning centre. However, HMRC regularly receives items that cannot be scanned and original items that have to be returned. It may take longer to deal with your form IHT400 or letter if you include one of these items. To avoid delays HMRC advised that you do not send: 

  • cheques – HMRC prefers you to pay electronically;
  • documents and valuations with any sort of binding – send an unbound copy;
  • original documents of any sort, including building society passbooks, unless HMRC has specifically asked to see these; or
  • oversized documents, larger than standard A4 size.

If you do pay by cheque you should send it separately to:

HM Revenue and Customs 
Cheque Banking Team 
CAT 1, Room B1-25/26 
St Mungo’s Rd 
Cumbernauld 
G67 1YZ 

HMRC also advises that you can assist processing by:

  • sending double-sided copies; and
  • placing any IHT405 forms and valuations of houses, buildings and land at the very back of the documents you are enclosing.
026  Corporate partnerships
  For those who are dealing with tax returns of corporate partnerships, here are two pieces of information: one a warning and the other a reassurance. In what follows, ‘partnership’ should be taken to include a limited liability partnership (LLP), and ‘corporate partner’ is used as a shorthand to include any non-individual partner.

The warning

In any corporate partnership (by which we mean a partnership involving at least one corporate partner), it’s necessary to consider the potential application of the ‘mixed member’ rules. Not only do these apply, as you might expect, to mixed member partnerships (that is, where the partners include both individuals and corporates); counter-intuitively, they can also apply to partnerships where all the partners are in fact corporates (see s850D, Income Tax (Trading and Other Income) Act 2005), but only where it is “reasonable to believe” that the partnership would have been (or would have remained) a “mixed member” partnership but for the introduction of the “mixed member” rules.

In either case, the rules may apply where, very broadly, what would otherwise have been the profit share of an individual partner has been diverted to a corporate member. The point to bear in mind is that the application of the rules is self-assessed, so failing to take them into account can lead to the imposition of penalties.

The reassurance

The filing date for certain partnership tax returns may not be quite as imminent as you had thought. Where at least one member of a partnership is a company, the filing date for an electronic return is one year after the end of the partnership’s accounting period. So if, in such a case, the partnership draws up its accounts to 31 March, the 2017/18 partnership return is not late if it is filed by 31 March 2019.

Does this mean that you can in future gain an extra couple of months on your filing deadline by introducing into a partnership of individuals a company with a profit share of £1? Well, yes, in principle: though whether it’s worth the extra effort is questionable.

By David Whiscombe, writing in Brass Tax, published by Berg Kaprow Lewis LLP

022 Employee pay and tax details 
 

In 2017 HMRC adopted the policy not to give out employees’ pay and tax details over the phone to tax agents, even if the individual had authorised the agent to act. The argument was that a digital solution would be put in place to allow those details to be accessed without the need for a phone call.

That digital solution was an API embedded in tax return software which is supposed to suck the relevant pay and tax details out of HMRC’s computer and pre-populate the individual’s SA return. However, there have been operational problems with this API solution as the data was not always available for the taxpayer concerned. Some agents have reported on the Agent Forum that the API does not download data for two out of three clients.

HMRC changed its policy on providing these details over a year ago, but neglected to advertise this fact. HMRC will now provide details of pay and tax to an authorised agent over the phone, as long as that agent already holds one of the following for the taxpayer:

  • an employment history letter; 
  • other HMRC correspondence with the pay and tax details provided; or
  • information from the taxpayer’s employer such as P60/P45 or payslips. 

HMRC will also disclose the following to an authorised agent regarding a person’s PAYE code:

  • actual underpayments;
  • potential underpayments; 
  • State Pension; and 
  • expenses including FRE, PSUB and EYA.

Note that you need to go through two-step verification with your tax software in order to use the API to pull data from HMRC systems, and that verification process needs to be renewed every 18 months.

From the weekly newsletter of the Tax Advice Network

021  Details required to set up an agent services account
 

HMRC has changed the information it requires when setting up an agent services account. 

Agents will now be asked for their money laundering supervisor details, including: 

  • their supervisory body’s name; 
  • their membership number; and 
  • the date their membership expires. 

It is no longer a requirement to be authorised to act for one client in self assessment.

Detailed information about the agent services account is available on the ICAEW MTD hub Agent Services Account page.

Contributed by Caroline Miskin

019 Schedule 36 notices
  A notice under Sch 36, Finance Act 2008 is a statutory notice to require the taxpayer to provide information and documents which are “reasonably required by the officer for checking the taxpayer’s tax position”. It does carry penalties for non-compliance.

The power to seek such information is important to HMRC to enable it to obtain the necessary information to ensure that a taxpayer’s affairs are correct – particularly in the context of self assessment.

However, as with any statutory power, there is the risk of it being used inappropriately. The taxpayer can appeal in the normal way if he or she considers that the requirements for the issue of such a notice are not satisfied – which is often because the information or documents requested are not reasonably required for checking the taxpayer’s tax position. Two recent cases throw an interesting light on such notice. In both cases, HMRC considered that the taxpayer’s lifestyle gave it grounds to believe that there had been omission from their tax returns.

In one case, Newton v HMRC TC06682, the FTT decided that the request for information was unjustified and it was set aside (with incidental reference being made to the relevant time limits which seemed to preclude a notice anyway). In the other case, Holmes and Knight v HMRC TC06824, the tribunal decided that the statutory notice was justified (although interestingly no reference to the time limit was made in this case).

Although the facts in each case were different (of course) there are sufficient similarities to suggest that the reasoning may be flawed in one of them. The question is, which one?

Contributed by Peter Vaines, Field Court Tax Chambers
018 Stale discoveries
  The possibility that a discovery can become stale, causing it to go out of time – even if the statutory time limit has not expired – and thereby precluding HMRC from raising a discovery assessment, continues to engage the attention of the courts.

It can now reasonably be concluded that a discovery can become stale and that HMRC cannot just “sit on it and do nothing for a number of years before making an assessment just before the end of the limitation period” (Pattullo v HMRC [2016] UKUT 270 (TCC)). This follows the UT decision in Charlton v HMRC [2013] UKUT 770 (TCC) that the assessment must be issued while it retains its essential newness.

In Gordon v HMRC TC06537 the tribunal found that the discovery was stale and that a delay of two years was too long for the discovery to retain its essential newness. 

Similarly, in Tooth v HMRC TC05452 the tribunal held that HMRC must act expeditiously in issuing an assessment when it has made a discovery.

However, despite all this, HMRC is undeterred. In the case of Beagles v HMRC [2018] UKUT 380 (TCC), faced with a delay of two and a half years from making the discovery to raising the assessment, HMRC simply argued that all these cases were wrong. But this argument failed and the UT found for the taxpayer. 

It would seem that in the absence of a Court of Appeal decision to the contrary, this matter must surely now be settled in principle. It will of course depend upon the facts whether or not an assessment is stale in any particular case.

The Beagles case does, however, highlight an unsatisfactory feature. No matter how many cases are stacked up against it, it seems that HMRC will continue to argue on the basis that everybody else is out of step. But if HMRC can say that all the cases with which it disagrees are wrong, there is no reason why the taxpayer should not do the same. That will give rise to an explosion of unmeritorious litigation which will be in nobody’s interests. A more balanced view from HMRC, based on established legal principles, must surely be preferred to an intolerance to any view contrary to its own.

For the tax authorities to insist that their view must always be accepted (even if the courts disagree) is as short-sighted as it is abhorrent – and hardly likely to engender the respect and the compliance which has been a treasured hallmark of the UK tax system.

Contributed by Peter Vaines, Field Court Tax Chambers
004  Athletes as workers
  Hot on the heels (or perhaps wheels) of plumbers, Uber drivers and others, it is reported that Olympic cyclist Jess Varnish is asserting her rights as a ‘worker’ in order to pursue a claim against UK Sport and British Cycling for unfair dismissal and sex discrimination.

Yet again, the unschooled media is confusing workers with employees, with concerns being expressed that if Varnish were to win, UK Sport would have to account for national insurance contributions (NICs) on grants. Not so: a ‘worker’ may be an employee or may be a self-employed – or limb (b) – worker: for the purposes of the claims being advanced in cases such as Varnish’s, the distinction is not material.

One expressed concern that is valid, however, is the potential taxation impact should athletes grant-aided by UK Sport be found to be workers. Let me explain.

Some athletes are plainly employees: this would include, for example, Premier League and other professional footballers. But for most athletes, their activity is accepted by HMRC as being no more than a hobby. This may remain the case even if lottery-funded Athlete Personal Awards (APAs) are received; these awards do not normally of themselves bring into existence a source of income for tax purposes. It is only if an athlete’s activities demonstrate the usual badges of trade that they will constitute a trade.

Of course, once you’ve become an internationally successful Olympian and you are enjoying sponsorship and endorsement deals, receiving attendance and performance fees, making paid TV appearances and so on, you are trading and all income is brought into account in computing profits (including APAs, though since these are means-tested they are unlikely to be received by top professionals). But exactly where on the journey from pounding round the cinder track on a cold dark February morning to training in the Florida sunshine you move from hobby to trade is, in HMRC’s words, “very much a question of fact and degree”.

However, wherever that point lies, it is difficult or impossible to reconcile the notion of a hobby outside the scope of tax with that of being a worker with all the protections that that affords. So, a finding that grant-aided athletes are self-employed workers would be very likely to bring many more activities within the charge to income tax than at present. For the sake of the community of athletics, Varnish would do well to be careful what she wishes for.

Contributed by David Whiscombe, writing in Brass Tax, published by Berg Kaprow Lewis LLP
003 Directors’ tax returns
  It has long been an irritation to accountants that HMRC insists all directors must register for self assessment and complete a tax return, even if there is no income to report. This requirement is not imposed by law, but it is endlessly repeated by HMRC because it has been included in HMRC’s guidance.

The position of a ‘no income’ or a ‘no income other than PAYE’ director has been tested in several cases before the First-tier Tribunal (FTT). For example, in the case of Karen Symes v HMRC TC06320, HMRC insisted that she complete a tax return for the tax year in which she became a director, but she received no dividends or income from the company in that year.

The tribunal judge said: “No one has a statutory obligation to do anything in relation to income tax simply because they are a director of a company which is not a not-for-profit company.” He went on to say: “Being a director per se does not entitle a person to dividends… If dividends from the company of which a person is a director fall within the higher rate band or above [for 2015/16], then there was a liability to notify, but not because of being a director.”

The good news is that HMRC has finally changed its guidance on directors’ tax returns. The tool on GOV.UK that helps a person decide whether they need to complete a return now results in “You do not need to send a self assessment tax return” even if the person is a director, as long as their income is below £50,000 and they have no other taxable income. The wording could be improved around whether a director works for themselves (the Tax Faculty has raised this with HMRC).

Also, the GOV.UK guidance on directors’ responsibilities no longer refers to completing a personal tax return. Hurrah!

From the weekly newsletter of the Tax Advice Network
002 SA online exclusion list for 2017/18
 

In December 2018, HMRC published an updated list (version 3.0) of the exclusions from online filing of 2017/18 self assessment returns. This replaces the version published in May 2018. Interim versions have been shared with software developers.

Seven new exclusions have been added. These are numbered 91-97 and relate to the following circumstances:

  • #91: Dividends received by Lloyds underwriters.
  • #92: Claims for relief for property finance costs where the personal allowance is reduced due to a marriage allowance claim.
  • #93: Claims for relief for property finance costs on the foreign income pages where there are losses brought forward (a workaround to allow the return to be filed online is suggested).
  • #94: Certain Scottish taxpayers claiming the remittance basis.
  • #95: Certain Scottish taxpayers with taxable savings and dividend income.
  • #96: Certain Scottish taxpayers claiming relief for pension contributions and gift aid. HMRC is still considering the intent of the relevant legislation and this exclusion is not being implemented at this stage; it has been retained on the list as it has previously been shared with software developers.
  • #97: Certain higher rate taxpayers receiving taxable redundancy lump sums.

Exclusion number 80 has been withdrawn but is retained on the list to allow those who thought it applied to file a paper return.

The 31 October deadline for filing paper returns is effectively extended to 31 January where the return is covered by an exclusion from online filing. It is advisable to file paper returns as soon as possible; there were considerable delays to HMRC’s processing of 2016/17 paper returns for exclusion cases. HMRC seeks to identify and correct calculations where an exclusion case is filed online rather than on paper but the correction may take some time. 

Contributed by Caroline Miskin