Practical points: December 2021

309. R&D claim fails for lack of expert evidence

The First-tier Tribunal (FTT) has been unable to conclude that expenditure was incurred in respect of research and development (R&D) activities because of a lack of expert witness. The burden of proof falls on the company to demonstrate that the claim meets all the legislative requirements, including that the activities amount to R&D.

A company had engaged software developers to create a digital platform to match individuals with online learning providers. HMRC denied R&D relief in relation to those costs on the basis that the expenditure did not meet the definition of R&D as set out in the Department for Business, Innovation and Skills guidelines. The burden of proof falls on the taxpayer to demonstrate that the expenditure meets that definition.

The FTT dismissed the appeal on the grounds that it did not have sufficient evidence to conclude that the activities fell within the scope of that definition. The known facts showed that the activities could meet that definition. But, equally, they might not. The company had failed to provide its witness statements on time and they were therefore inadmissible before the FTT, leaving the company with no supporting expert evidence. This case reiterates the importance of being able to substantiate R&D claims, particularly with the evidence of competent professionals working in the field.

Grazer Learning Limited v HMRC [2021] FTT 0348 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

310. Mutuality principle: taxpayer wins in Upper Tribunal

The Upper Tribunal (UT) has allowed the taxpayer’s appeal against an assessment to corporation tax in Medical Defence Union v HMRC.

The Medical Defence Union (MDU), which provides a range of benefits to its members who work in the medical profession, arranged for its members to obtain insurance cover from third-party insurance companies against risk of claims for professional negligence. Because of its large membership, the MDU was able to negotiate favourable terms, including an arrangement under which premiums payable in later years could be reduced or rebated if claims in earlier years were lower than expected.

The proceedings concern the tax treatment of the ‘premium element adjustment’ arising under that arrangement for the years 2007 to 2014. The First-tier Tribunal agreed with HMRC that it was a taxable receipt. Applying the case law on mutual trading, the UT agreed with the taxpayer that the income was not taxable. In so doing, the UT set out five principles derived from case law that expand on the basic requirement as set out in Lord Macmillan’s speech in Municipal Mutual Insurance Ltd v Hills, that “all the contributors to the common fund must be entitled to participate in the surplus and all the participators in the surplus must be contributors to the common fund. In other words, there must be complete identity between the contributors and the participators.”

From the weekly Business Tax Briefing published by Deloitte

311. National minimum wage: types of worker

The Department for Business, Energy and Industrial Strategy (BEIS) has comprehensive guidance, Calculating the minimum wage. Included is a checklist of common causes of minimum wage underpayment.

The checklist includes most of the pitfalls cited in practical points 256 and 257 from the October issue of TAXline, but there are two others, namely:

• failing to distinguish correctly between different types of worker (salaried, time, output and unmeasured); and
• failing to pay for excess hours worked by salaried-hours workers beyond their basic set hours, causing underpayment of minimum wage, typically in the last pay reference period.

To avoid the first pitfall, as calculations of national minimum wage (NMW) and national living wage (NLW) are based on an hourly rate, remuneration packages of different types of worker need to be converted to an equivalent hourly rate. To avoid the second pitfall, the worker must be paid at not less than NMW/NLW for not only contracted hours worked, but also hours worked over and above hours contracted for.

How to properly calculate NMW/NLW is explained in BEIS guidance, Working hours for which the minimum wage must be paid. Detailed guidance on how to avoid the two pitfalls cited above, with example calculations, is in the sections on Types of work and Salaried hours work respectively.

Contributed by Peter Bickley

312. Some accommodation costs allowed as deduction from employment income

The First-tier Tribunal (FTT) has allowed a claim for a proportion of accommodation expenses as a deduction from employment income. The taxpayer was only allowed to deduct the expenses of accommodation for specific nights, such as when he was on call.

The taxpayer, an experienced dental surgeon from Southampton, chose to take a four-year course to train as a maxillofacial surgeon in London. He rented modest accommodation locally and claimed the cost against his employment income while on the course. HMRC denied the claims, arguing that he was not required by his employment contract to live near the hospital and he did not work from home. HMRC argued, therefore, that he did not incur the expenses in the performance of his duties and derived personal benefit from the accommodation. To claim expenses against employment income, they must have been incurred wholly, exclusively and necessarily for the purposes of the employment.

The taxpayer explained that London was the only available location to take the course and his family could not move. He had found that the commute from Southampton left him too exhausted to discharge his obligations as a doctor safely. He was also required to spend two nights a week and one weekend in six on call, when he had to be able to reach the hospital within 30 minutes. He was telephoned by the hospital on most other nights for advice. He had returned to the family home on his free weekends, using the accommodation only to study and sleep.

The FTT partially allowed the claim. It noted that the taxpayer’s obligations as a doctor to his patients were also obligations of his employment as a doctor. He had to live close to the hospital when on call and the FTT agreed that it was unreasonable to expect him to move his family or to use hospital accommodation with undergraduates when he was a mature student. The proportion of the accommodation costs related to the nights that he was on call was allowed, along with time taking telephone calls from the hospital and visits to the hospital on nights that he was not formally on call. As he did not need to be close to the hospital for the rest of the time, that proportion was not allowed, as it was for his private benefit. Waiting at his accommodation for a call was not part of the performance of his duties.

Kunjur v HMRC [2021] UKFTT 362 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

313. NIC holiday for employers of veterans

For 2021/22, employers employing a veteran during their first 12 months of civilian employment will need to pay secondary class 1 national insurance contributions (NIC) as normal and make a retrospective claim. HMRC has confirmed it will accept retrospective full payment submissions for 2021/22 containing the new veteran’s category V from 6 April 2022.

As the NIC holiday applies only for the first 12 months of civilian employment, HMRC’s checks may find a veteran who has been on national insurance (NI) letter V for longer than they should have been. In this circumstance, HMRC will use the existing generic notification service message functionality within its real-time information service to warn employers that they are using NI letter V for longer than they should be. For users of HMRC’s basic PAYE tool, HMRC will also be building some front-end validation to prevent application of the letter V for longer than the allowed period.

Contributed by Peter Bickley

314. NIC exemption in freeports

From 6 April 2022, a zero rate of secondary class 1 national insurance contributions (NIC) will be available for employers with physical premises in a freeport tax site for newly hired employees who spend 60% or more of their working time within the freeport tax site. This will be available for all eligible new hires up to an earnings threshold of £25,000 per annum for up to 36 months per employee.

Employers will be able to choose the NIC table letter (and accompanying exemption) that delivers the best advantage to them. For example, the general zero rate of secondary class 1 NIC for employees under the age of 21 is more generous than the freeport zero rate, as a £25,000 threshold applies with the freeport zero rate.

The freeport zero rate runs for a maximum of 36 months from the start of employment with the employer, not from the start of work in the freeport. Therefore, employers will need to log the start date and ensure that the employee changes category following the end of the 36-month period.

Continuing eligibility for the zero rate also needs monitoring throughout the 36-month period, as the employer must evidence a reasonable assessment of the employee spending at least 60% of their hours in the freeport tax site.

Contributed by Kate Upcraft, Kate Upcraft Consultancy Ltd

315. Employments not aggregated for NIC

The First-tier Tribunal (FTT) has dismissed the appeal of a taxpayer that his two employments should have been aggregated for national insurance contributions (NIC). Although both companies employed him to drive ambulances to the same hospitals, they were organisationally separate and provided different services. NIC on the two employments calculated separately were insufficient to entitle him to claim employment and support allowance.

Following health problems, the taxpayer, an ambulance driver, tried to claim employment and support allowance. HMRC informed him that two years of work were non-qualifying, as he had paid insufficient NIC. He had had two separate employments, on which the NIC were calculated separately and as the income from each was low, the total NIC was insufficient. He appealed in relation to 2014/15 on the grounds that the earnings from the two employments should be aggregated, so more NIC should have been deducted.

Originally, the taxpayer worked for a company (A) providing patient transport services and ambulance services to the NHS. A then lost the contract for patient transport to another company (B). Part of the taxpayer’s contract was transferred to B and he then worked for both companies driving their respective vehicles for the same hospitals. They did not share vehicles or premises.

The FTT found that the companies had not been carrying on business with each other, so the employments could not be aggregated for NIC. They provided distinct, although complementary, services and were completely separate organisations, although both working with the NHS.

Long v HMRC [2021] UKFTT 338 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

316. Appeal allowed on private residence relief

The First-tier Tribunal (FTT) has found that a taxpayer was entitled to private residence relief (PRR) on an annexe to his home that was converted to a flat capable of being a separate dwelling. After the conversion, although friends stayed on an informal basis, it was regarded as part of the main home.

The taxpayer converted an annexe to his home into a flat. The annexe and his home had been purchased as one transaction. He later sold it to his partner, who shared his home, but he did not report the disposal, as he considered the annexe to be part of his dwelling.

The FTT analysed the period between the conversion of the annexe and the sale. Initially, it was used as storage space, then friends of the couple had lived there for a small charge, without a formal tenancy agreement. During their stay, the taxpayer continued to use it to store items, and for relatives to stay in when the ‘tenants’ were away. After they left, it was made available as a holiday let.

The FTT found that, although capable of being used as a separate dwelling, the annexe formed part of the main home until the holiday letting began to be advertised. The friends had used it on an informal basis that did not negate its being part of the main home. PRR was therefore available. Although the holiday letting was not continuous and some family use continued, from the time it was advertised it could not be regarded as part of the home.

Crippin v HMRC [2021] UKFTT 0351 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

317. Political gifts: taxpayer loses in Court of Appeal

The Court of Appeal has dismissed the appeal of Mr Arron Banks against the Upper Tribunal’s decision that nearly £1m of donations to UKIP made by Mr Banks and companies controlled by him in the run-up to the 2015 general election did not pass the statutory tests in s24, Inheritance Tax Act 1984 (IHTA 1984) to be exempt political gifts, as no UKIP MPs were elected in the previous general election. Instead, the gifts gave rise to an immediate 20% tax charge.

Lord Justice Henderson, with whom the other two judges agreed, held that the only relevant respect in which s24, IHTA 1984 discriminated against Mr Banks was on the ground of his status as a donor supporting a party without an MP at Westminster elected at the last general election before the donations were made. He had “no hesitation in concluding that HMRC [had] discharged the burden of establishing justification in relation to the difference in treatment on the ground of Mr Banks’s status as a donor to a political party with no MP elected to Westminster following the 2010 General Election.”

Lord Justice Henderson’s judgement contains some interesting commentary on the history of the inheritance tax exemption for political party donations and how to determine discrimination. 

From the weekly Business Tax Briefing published by Deloitte

318. Change in VAT treatment of construction self-supply charge

HMRC has revised its policy on the meaning of ‘entire interest’ for the purposes of the construction self-supply charge following the Supreme Court’s judgement in the Balhousie Holdings case.

In Revenue and Customs Brief 13 (2021), HMRC has amended its policy on the VAT treatment of the construction self-supply charge and what it considers constitutes a disposal of an entire interest.

A zero rating of VAT is available on four classes of supplies made in connection with the construction or conversion of buildings intended to be used for relevant residential or charitable purposes, including use as a care home.

However, a claw-back can arise via a self-supply charge where, within 10 years, the taxpayer disposes of their entire interest or there is a change of use of the building.

This legislation has recently been the subject of a judgement in the Supreme Court following a sale and leaseback of a recently constructed care home where HMRC sought to apply the self-supply charge (Balhousie Holdings Ltd v Commrs for HMRC [2021] UKSC 11).

The Supreme Court decided that a sale and leaseback did not amount to a disposal of an entire interest.

As a result, in Revenue and Customs Brief 13 (2021), HMRC has now revised its policy and considers that a disposal of an entire interest will not occur when the following four conditions are all met:

• a qualifying property must have been purchased;
• when the property is sold, there must be an immediate lease in place, which is a seamless transaction with no time lapse;
• the lease must be for the remaining term of the 10 years from the original purchase date, or longer; and
• the property must be continually used or operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback.

319. DIY housebuilders can reclaim VAT on blinds and shutters

HMRC has updated its guidance on the DIY Housebuilders’ Scheme, confirming that manual window blinds and shutters are allowable building materials and eligible for a VAT refund.

It also confirms that this policy has applied from 5 October 2020. The amendment follows a First-tier Tribunal ruling in October 2020 that such items did fit the description of ‘building materials’ under the VAT Act 1994 and the publication of Revenue and Customs Brief 5 (2021), which clarified HMRC’s approach to the VAT liability of manual blinds and shutters more broadly for the zero rating of the construction of residential property.

320. Sales between EU bonded warehouses and the fallback provisions

If a Belgian supplier dispatches goods to a warehouse in the Netherlands, then acquisition VAT accounting typically takes place in the Netherlands. The customer will normally quote its Dutch VAT number, but it could (pre-Brexit) have provided its UK VAT number. It just needed to be aware that (under the ‘fallback’ provisions) HMRC could have collected UK VAT, unless it could be shown that Dutch VAT had been accounted for.

In Ampleaward, the Court of Appeal has considered further complications that arise when the goods involved were alcoholic drinks transferred between bonded warehouses in the EU. The Court of Appeal thought that, under the Principal VAT Directive (PVD), EU Member States were only able to exempt sales in bonded warehouses in their own territory. The fallback provisions gave the UK competence to tax transactions that took place elsewhere, but could not extend the exemption to them. This meant that UK legislation, if it allowed exemption, went further than it should have done.

HMRC suggested three ways that the VAT Act 1994 should be read, so as to conform with the PVD. However, the Court of Appeal rejected all three, on the basis that the Marleasing principle of interpretation could not be used to rewrite legislation laid down by Parliament. HMRC’s appeal was dismissed. 

From the weekly Business Tax Briefing published by Deloitte

321. Liability arguments resurface in VAT penalty appeal

The First-tier Tribunal (FTT) struck out Dhalomal Kishore’s appeal against a missing trader intra-community (MTIC) fraud assessment in 2015, but his appeal against an associated misdeclaration penalty continues.

HMRC tried to strike out Mr Kishore’s reasonable excuse defence, on the basis that it challenged whether Mr Kishore had been liable for VAT, and that question had already been conceded in the first FTT appeal. The Court of Appeal has endorsed the Upper Tribunal’s (UT’s) decision to allow the reasonable excuse defence to be heard. In its judgement, the UT had correctly applied a broad merits-based approach to whether issues conceded in the first appeal that had been struck out could be re-opened in the penalty appeal and it had not been required to identify a special reason to allow the appeal to proceed. It was relevant to consider whether Mr Kishore had conceded the original appeal because of a lack of funds or because he was not on notice of any potential additional penalty.

Unless HMRC seeks permission to appeal further, the proceedings will now return to the FTT to test whether Mr Kishore can indeed demonstrate a reasonable excuse. 

From the weekly Business Tax Briefing published by Deloitte

322. Directive claim dependent on valid VAT invoice

In 2012, Wilo Salmson (based in France) bought tooling from ZES Zollner Electronic in Romania, as part of an agreement for Zollner to manufacture goods for Wilo Salmson there. Wilo Salmson’s Directive claim for Romanian VAT of €92,000 on the tooling was rejected, partly on the basis that the invoices supporting the claim were defective. In 2015, Zollner therefore cancelled and reissued the invoices, and Wilo Salmson submitted a second Directive claim. The Court of Justice of the European Union (CJEU) has confirmed that there must be a material defect in an invoice (rather than a breach of invoicing formalities) to justify rejecting a Directive claim. Wilo Salmson therefore had to argue that the original invoices issued in 2012 were invalid, or the second claim would have been time-barred.

The CJEU confirmed that time limits for Directive claims could not be reset by the simple expedient of cancelling and reissuing VAT invoices if they were originally valid. It also noted that the requirement for an invoice meant that a Directive claim might not be repaid to a customer until some time after the supplier had to account for output tax – in this case, three years. The referring court will therefore have to determine whether the invoices in 2012 were materially defective (in which case the 2015 claim should be paid) or could have been rectified (in which case the 2015 claim was a duplicate and would be time-barred). 

From the weekly Business Tax Briefing published by Deloitte

323. Rectification of Directive claims

CHEP Equipment NV, based in Belgium, bought pallets in Hungary that it leased to other group companies. As it was not established in Hungary, it submitted a Directive claim for VAT of €1.1m. The Hungarian tax authorities, after requesting and reviewing the associated purchase invoices, paid three-quarters of the claim. The balance related to invoices that had already been claimed or invoices that showed less VAT than CHEP had included on its claim schedule and there was no argument about these adjustments. However, Hungary also refused to adjust the claim upwards where the invoices showed more VAT than CHEP had included on its schedule.

In the Court of Justice of the European Union’s judgement, this was not consistent with the principle of good administration. Hungary was entitled to audit the claim, but needed to recognise the importance of Directive claims (which are equivalent to a taxpayer’s entitlement to recover domestic input tax through a VAT return). The discrepancy in the claim arising from understating VAT on some invoices was capable of rectification (ie, it did not require a new claim, which would have been time-barred) and the principle of sound administration required that Hungary give CHEP an opportunity to correct its claim. Although CHEP should, in principle, bear the consequences of its own administrative behaviour, simply paying the reduced claim was a disproportionate response by Hungary to CHEP’s error. 

From the weekly Business Tax Briefing published by Deloitte

324. Premium in lease and leaseback subject to VAT

Polo Farm Sports Club entered into an agreement with Canterbury Christ Church University to develop a new indoor sports centre. Each of them contributed £2m to the development and the university would subsequently pay £250,000 annually for priority access in daytime during the week. The university’s payments were made through a lease and leaseback: it leased the centre from the club for 65 years for £250,000 pa, with an initial premium of £2m, and leased it back to the club for a peppercorn. The club then used the premium and its own funds to develop the centre. This was not therefore a typical financing transaction, in which an initial advance might be repaid as rent over the term of the lease.

However, the First-tier Tribunal has ruled that the premium was still a payment under the lease. It considered various arguments about how to define ‘premium’ but ruled that the only question for VAT purposes was whether the £2m was consideration for the grant of the lease. It concluded that the premium was consideration and should therefore have been subject to VAT, and it dismissed the club’s appeal against an assessment for £308,883. 

From the weekly Business Tax Briefing published by Deloitte

325. FTT issues ruling in respect of ‘building materials’

The taxpayer substantially lost its appeal regarding certain goods supplied with and installed in a new care home.The taxpayer was part of a corporate group that developed and sold new care homes. The taxpayer company acquired a site and developed the care home. The completed care home was then leased to another group member, which operated it.

The First-tier Tribunal (FTT) considered two issues. First, to what extent the taxpayer is prevented from claiming input tax on those items of furniture, fittings and equipment that are incorporated into the building, but not considered to be ‘building materials’ for the purpose of zero rating. The FTT set out a comprehensive analysis and ruled that most of the items considered were subject to the ‘builder’s block’, on which the taxpayer could not reclaim VAT.

Second, the FTT considered whether the supply of loose furniture, fittings and equipment by the taxpayer to the care home operating company was a separate supply and therefore subject to VAT, or whether it was a single supply, being part of the zero-rated lease. The FTT decided that there was a separate supply, which was subject to VAT.

Silver Sea Properties (Leamington Spa) SARL v HMRC [2021] UKFTT 350 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

326. Self assessment daily penalties

In addition to the statutory warning in the £100 penalty notice, it is HMRC’s usual practice to send further reminders to late filers that they are running up £10 per day late submission penalties. However, changes to the penalty timing for 2019/20 tax returns meant that HMRC was unable to issue taxpayers with reminders of their accruing penalties for 2019/20. 

In Donaldson v HMRC [2016] EWCA Civ 76, the Court of Appeal decided that:

• a generic policy decision taken by HMRC to charge penalties was sufficient to satisfy the requirement of para 4(1)(b), Sch 55, Finance Act 2009 (FA 2009) that HMRC must ‘decide’ that a penalty is payable (the decision does not have to be made for each individual taxpayer);
• the notices given by HMRC to the taxpayer were sufficient: all HMRC must do is inform the taxpayer that, if their return is three months late, daily penalties would be charged for up to 90 days; and
• even though the notice did not specify the period in respect of which the penalty is assessed (as required by para 18(1)(c), Sch 55 FA 2009), applying the override in s114(1), Taxes Management Act 1970, the omission did not affect the validity of the assessment, as the taxpayer could be in no doubt as to the period to which the penalty applied and the omission was of form rather than substance and did not mislead the taxpayer.

Based on this decision, it is HMRC’s view that the statutory warning provided is sufficient to enable daily penalties to be charged.

Contributed by Caroline Miskin

327. Annual Tax on Enveloped Dwellings (ATED) penalties

There have been a number of Tribunal cases about the power of HMRC to impose daily penalties where a company fails to comply with its ATED obligations.

One such case was Heacham Holidays Limited v HMRC [2020] UKFTT 406 (TC) where the taxpayer submitted their ATED return late and HMRC imposed penalties. This included the daily penalty, which arises when the return is three months late.

However, in Heacham Holidays the Tribunal drew attention to s55(4), Finance Act 2009, which requires HMRC to issue a notice to the taxpayer specifying the date from which the penalty is payable. This places HMRC in a difficult position because it will almost never know that a company has failed to file their first ATED return until they actually do so. HMRC cannot then issue a penalty notice for daily penalties because the return has already been submitted.

For these reasons, the First-tier Tribunal (FTT) held that the daily penalties were not validly charged.

This decision followed the case of Advantage Business Finance Limited v HMRC [2019] UKFTT 30 (TC), which had held that the daily penalties were invalid for the same reason.

HMRC did not appeal against either decision, but issued a statement saying it did not agree and that the Tribunal in both cases was wrong.

OK, it’s a point of view – but if it was wrong, why not appeal? It seems that HMRC took the view that the cases were only decisions of the FTT and were not binding – so they could be ignored – and HMRC could carry on charging daily penalties in the face of these decisions and continue to seek enforcement of such penalties that had already been imposed.

It is beyond unsatisfactory for a taxpayer to be charged penalties by HMRC on a basis that the Tribunal has said (more than once) is wrong. The taxpayer might reasonably expect that if a number of decisions of the Tribunal are wholly and indisputably in his favour, this ought to be respected – and not ignored – by HMRC. Otherwise, the publishing of the decisions of the FTT serves only to mislead the taxpayer.

The issue has now been thrown into confusion by the decision in the case of Priory London Limited v HMRC [2021] UKFTT 0282 (TC). In Priory London, the Tribunal considered the earlier cases and the extensive and authoritative analysis they contained, but it just said they were wrong. The daily penalties were therefore upheld.

One might reasonably ask two questions:
1) Does HMRC have the power to issue a daily penalty in these circumstances? Not a clue. The cases are totally contradictory. As to which is right, who knows?
2) Do the decisions of the Tribunal on this matter assist the taxpayer (or anybody else) in understanding what the law is on this issue? No. They are of absolutely no assistance to anybody.

We need a decision from the Upper Tribunal to provide a binding authority to resolve this issue. It is regrettable that HMRC chose not to appeal against the decisions where it lost and has taken another case to the Tribunal, presumably in the hope that it might have better luck next time – which it did. But what purpose does that achieve?

I think that taxpayers are entitled to better than this.

Contributed by Peter Vaines, Field Court Tax Chambers

328. Penalty for failure to supply information

The Upper Tribunal (UT) has imposed a penalty of £350,000 on a taxpayer who did not comply with an information notice. It was calculated by reference to the tax believed to be underpaid. This type of penalty is reserved for serious cases of non-compliance, which here amounted to a failure to provide HMRC with any information about an offshore trust.

HMRC believed that the taxpayer had settled an offshore trust of which he was the sole beneficiary, and as such was subject to anti-avoidance legislation, including the transfer of assets abroad rules and the settlement rules. The taxpayer did not provide any of the information requested by HMRC about the trust, even after an information notice was issued. Discovery assessments were issued, and HMRC applied to the UT to impose a tax-related penalty for non-compliance with the information notice. This is reserved for cases of serious non-compliance, and the taxpayer argued that the criteria to issue the penalty were not met.

The UT agreed and imposed the penalty, although at a lower level than requested by HMRC. The taxpayer had met the condition of failure to comply with the notice, even after the initial penalties were imposed, though the information was in his possession. He had been uncooperative and it was his personal obligation to comply with the notice, so he could not leave it to an accountant. HMRC had reason to believe that tax had been underpaid, but could not establish the amount without the information requested. The UT was satisfied that it was appropriate for a penalty to be imposed but gave a 50% reduction from the penalty requested by HMRC for various reasons, including that no dishonesty was alleged.

HMRC v Mattu [2021] UKUT 245 (TCC) 

From the weekly Tax Update published by Smith & Williamson LLP

329. Inadvertent time-limit extension

The recent First-tier Tribunal (FTT) case of Shinelock [2021] UKFTT 320 (TC) ranged over a large number of issues. But what caught our eye in particular was a point of potentially wide application regarding the making of claims to relief.

All claims to tax relief are subject to a time limit. Sometimes it is specified in the claim: if not, a ‘default’ time limit applies. In the case of some claims (but by no means all), HMRC is given the power to extend the time limit – commonly but perhaps confusingly often referred to as ‘admitting’ a late claim. There is no right to appeal against HMRC’s refusal to extend the time limit: it can be challenged only by way of application for judicial review.

The reason that terminology such as ‘admitting’ a late claim is unhelpful is that, at least in theory, agreeing to extend the time limit for making a claim and agreeing the substantive validity of the claim are different. In principle, it is open to HMRC to say: “Yes, we will extend the time limit for you to make a claim to such-and-such a relief, but no, we do not agree that you satisfy the conditions for the relief. In practice, however, the two are in our experience always elided: yes, we will grant you the relief even though your claim to it is out of time.”

In Shinelock, the claim in question – which happened to be a claim under s459, Corporation Tax Act 2009 to offset a non-trading loan relationship deficit (NTLRD), but nothing hangs on that – had to be made by 31 March 2017 or ‘within such further period as an officer of Revenue and Customs allows’. The claim was made on 22 June 2018: it was plainly late. However, HMRC did not simply reject it on that basis. Instead, HMRC explained that it did not agree that there was an NTLRD at all (as well as rejecting other arguments that had been put forward to dispute the assessment). It appears that HMRC identified the lateness of the claim only when preparing for the FTT hearing in 2021.

The question for the FTT was whether HMRC had, by its conduct, done what it was permitted but not required to do under s460(1)(b): namely, allowed the claim to be made outside the time limit (albeit that it had not agreed its substantive validity).

Somewhat surprisingly, the FTT held that HMRC had done so: “HMRC was maintaining a position that there was no NTLRD. There was no mention of the need to claim such a deficit to use it in the current year, the time limit or that no mention had been made by Shinelock of the use of such a deficit until after the expiry of the two-year period set out in s460(1)(a). Significantly, there was no rejection of the claim on the express basis that it was made late.

“I have concluded on the facts that HMRC has allowed the claim to be made to use a NTLRD (assuming that it existed) after the expiry of the two-year period required by s460(1)(a), in circumstances where HMRC did not make a deliberate decision to this effect.”

This is only an FTT decision. It has no value as precedent and it may be reversed on appeal, but it is potentially helpful nonetheless. On the basis of Shinelock, it is not necessary for HMRC to say the words ‘we extend the time limit’ for a claim: it may be possible to argue that it has inadvertently extended the time limit simply by addressing the substance of the claim.

It did not, by the way, help Shinelock in the end: the FTT agreed with HMRC that there was no NTLRD to be relieved.

Contributed by David Whiscombe writing for BrassTax, published by BKL

330. Damages claim for revoking duty registration

The First-tier Tribunal (FTT) has limited jurisdiction in some matters. For example, it can instruct HMRC to reconsider an unreasonable decision to revoke a Warehousekeepers and Owners of Warehoused Goods Regulations (WOWGR) registration (to deal in duty-suspended alcohol), but it cannot remake the decision nor can it award damages or compensation.

In 2010, HMRC revoked Booze Direct’s registration because some of its sales were connected with inward diversion fraud. Booze Direct was not implicated in the fraud and HMRC’s review decision was flawed. The FTT directed HMRC to reconsider the decision in 2014 and the registration was eventually restored in 2017. In December 2019, Booze Direct claimed damages of £2.4m from HMRC because it had been unable to trade in duty-suspended drinks for seven years, alleging misfeasance in public office by HMRC.

The High Court (HC) has dismissed its claim. Section 16, Finance Act 1994 gave exclusive jurisdiction to the FTT over the approval and revocation of WOWGR registrations, but the relief the FTT could provide was not the same (and not closely approximate) to the remedy sought in the HC. Therefore, there was no bar on Booze Direct running HC and Tribunal proceedings in parallel. Booze Direct could have tried to sue HMRC for damages in 2010, but by 2019 it was prevented from doing so by the six-year time limit in the Limitation Act 1980.

From the weekly Business Tax Briefing published by Deloitte

331. Disclosure of documents

The Upper Tribunal (UT) has agreed with the First-tier Tribunal (FTT) on its analysis of what documents could be disclosed to one shareholder to assist his appeal, in circumstances where some of the documents were about another shareholder’s personal tax affairs but might be relevant. It struck a balance between privacy and relevance, as only some documents were disclosed.

Following an HMRC investigation, two companies went into liquidation while in debt to HMRC. HMRC issued personal liability notices to two of the shareholders (M and B), on the basis that HMRC held they were responsible for deliberate inaccuracies in the companies’ tax affairs. Their appeals against these were directed to be heard together. B’s case was that M was solely responsible for the running of the companies, and M’s that he was not responsible.

In HMRC’s statement of case for the appeal, it referred to previous investigations into M’s tax affairs, including accusations of fraud. B asked HMRC to disclose documents relating to these to him, but M objected. HMRC applied to the FTT for a direction permitting them to disclose the documents to B, and M applied asking for the documents to be excluded from evidence at the hearing.

The parties had agreed to classify the documents as various levels of confidentiality and the FTT allowed both applications in relation to some documents, but not others. M and B both appealed, but the UT upheld the FTT decision. Essentially, documents that were irrelevant were excluded. Of the relevant evidence, some should be excluded where the relevant material came with a lot of irrelevant and prejudicial material.

Mitchell and Bell v HMRC [2021] UKUT 250 (TCC) 

From the weekly Tax Update published by Smith & Williamson LLP

332. Telebetting business moved to Gibraltar: transfer of assets abroad

The Court of Appeal (CA), by a majority, has partly allowed HMRC’s appeal against the decision of the Upper Tribunal (UT) in favour of the taxpayers in Peter Fisher, Stephen Fisher and Anne Fisher v HMRC.

This is a complex case concerning the sale and transfer in March 2000 of a telebetting business by a UK resident company called Stan James (Abingdon) Ltd (SJA) to a Gibraltar company named Stan James Gibraltar Ltd (SJG). Points considered include the application of the income tax anti-avoidance rules on transfer of assets abroad (the TOAA rules) and the relevance and compatibility of the TOAA rules with EU freedom of establishment and free movement of capital rights.

The UT found that the TOAA rules were not engaged, since the transfer from SJA to SJG was a transfer made by SJA and not by the shareholders or directors as quasi-transferors, as was found by the First-tier Tribunal (FTT).

In brief, the CA allowed HMRC’s appeal as regards two of the appellants, Stephen and Peter Fisher, concluding that they were quasi-transferors, as the FTT had found. However, it agreed with the UT that the FTT had been mistaken in regarding Anne Fisher as a quasi-transferor to whom the TOAA rules applied. This was in essence because Anne was a director and shareholder, but she played no active role in the business and entrusted all of her responsibilities to Peter and Stephen.

The Court cited the UT’s statement that “‘procure’ means ‘doing something positive to bring something about’”. The CA also held that there is no requirement for income tax to be avoided; that the motive defence was not available to Stephen or Peter; that the TOAA rules were not incompatible with EU law in any relevant way (Gibraltar being part of the UK for EU law purposes); that none of the income of SJG that was the subject of the assessments is to be regarded as too remote from the transfer of the business; and that the 2005/06 and 2006/07 assessments on Stephen were not defective.

Philips LJ did not consider Anne, Stephen or Peter to be quasi-transferors and would have dismissed HMRC’s appeal in its entirety. 

From the weekly Business Tax Briefing published by Deloitte

333. Accelerated Payment Notices and PAYE

The Court of Appeal (CA) has found that Accelerated Payment Notices (APNs) can be issued validly in respect of PAYE determinations.

A company entered into a marketed income tax and national insurance avoidance scheme in relation to the remuneration of two of its directors. An APN was later issued by HMRC. The company argued that an APN could not be issued validly in respect of a PAYE determination because PAYE is a collection mechanism rather than a tax in its own right. The First-tier Tribunal and the Upper Tribunal (UT) dismissed the appeal.

The CA upheld the UT’s ruling that tax due under a PAYE determination could be demanded through an APN. Although the PAYE system does not impose a charge to tax, amounts subject to PAYE determinations nevertheless fall within the meaning of ‘disputed tax’. The judgement sets out a detailed examination of the legislation and its correct interpretation.

Sheiling Properties Limited v HMRC [2021] EWCA Civ 1425 

From the weekly Tax Update published by Smith & Williamson LLP

334. High Court refuses mistake rectification claim on tax scheme

The High Court (HC) has refused an application by a family to set aside transactions involving a tax scheme on the grounds of mistake and restore the assets transferred into the scheme to the claimants. Although the family members were mistaken as to the consequences of the scheme failing, which will result in up to 90% of the investment being lost, they understood the consequences of the initial transfers. While the introducers had sold a scheme they knew to be evasive, the taxpayers had looked into it carefully before investing.

The family invested in a complex scheme using an employee benefit trust. They later became aware that the scheme would result in them only recovering 10%-20% of the assets transferred. They then applied to the HC to unwind it by effectively negating the initial transfers into the scheme on the grounds that they had made a mistake.

The HC considered the case law on equitable mistake. Although highly critical of the introducers, who sold the family a scheme they knew to be evasive and made dishonest claims about it, the judge refused the application. The family had taken a careful and painstaking approach to the investment and they were aware that the funds were to be transferred into a trust for non-existent employees, as a sham. They miscalculated the consequences of the failure of the scheme, as they had believed that it could be reversed, but this did not mean that the transfers had been made in error. In dismissing the claim, the judge commented: “[The claimants] gave no thought to the point that the transactions they freely entered into were not things writ in water and reversible at will, but proper transfers of their property that could only be reversed if certain conditions were met. That, in my judgement, is not a mistake.”

Bhaur & Ors v Equity First Trustees (Nevis) Ltd & Ors [2021] EWHC 2581 (Ch) 

From the weekly Tax Update published by Smith & Williamson LLP

335. Commission rescinds decision to refer UK to CJEU over Gibraltar State aid

The European Commission has rescinded its decision of 19 March 2021 to refer the UK to the Court of Justice of the European Union for failures by Gibraltar to fully recover illegal State aid of up to around £100m, granted via a corporate tax exemption regime for passive interest and royalties in Gibraltar between 2011 and 2013. The UK was responsible for Gibraltar’s international relations for State aid purposes. The 19 March 2021 decision related to failures to comply with the Commission’s earlier State aid finding of December 2018 that the Gibraltar exemption regime, as well as five tax rulings, were illegal under EU State aid rules. The Commission ordered recovery of the illegal aid in full from the beneficiaries. The Commission states that by 14 July 2021, Gibraltar had completed the recovery of the aid. 

From the weekly Business Tax Briefing published by Deloitte

336. Five European countries and the US agree transitional approach to DSTs re Pillar One

On 21 October 2021, the governments of the UK, Austria, France, Italy, Spain and the US published a new joint statement announcing a compromise agreement on a transitional approach to phasing out the five European countries’ existing digital services tax (DST) regimes.

This follows on from the agreement in early October between 136 countries of the Organisation for Economic Cooperation and Development/G20 Inclusive Framework on the two-pillar solution to address the tax challenges arising from digitalisation. Pillar One of the solution would reallocate taxing rights in favour of market countries coordinated with the removal of all DSTs. The five European countries will continue to collect their DSTs during the interim period prior to the commencement of Pillar One. However, for the largest and most profitable multinationals (ie, those in the scope of Pillar One’s ‘amount A’ rules), the countries will subsequently allow a credit for ‘excess’ DST over their amount A tax in the first year. This credit will be set against the amount A tax liability in the same country.

As part of the agreement, the US will terminate the trade tariffs in relation to the European countries imposed (but currently suspended) in response to their DSTs.

Other multinationals will continue to pay DSTs in the interim period. Once Pillar One is implemented, these multinationals will no longer be subject to DSTs, and neither will they be in scope of amount A. 

From the weekly Business Tax Briefing published by Deloitte