Tax Update provides you with a round-up of the latest tax developments. Covering matters relevant to individuals, trusts, estates and businesses, it keeps you up-to-date with tax issues that may impact you or your business. If you would like to discuss any aspect in more detail, please speak to your usual Smith & Williamson contact. Alternatively, Ami Jack can introduce you to relevant specialist tax advisors within our firm.
1.1 Budget 2020 - Analysis and commentary
The first Budget of the new Chancellor is scheduled to be delivered at 12.30pm on Wednesday 11 March. Smith & Williamson will be publishing analysis and insights throughout the afternoon and the following days.
Our commentary on the Budget can be found using the link below. We will be updating this page regularly, and you can sign up to receive alerts as new material is published.
1.2 HMRC clamps down on footballers and football clubs
The BBC has reported that the number of investigations by HMRC into football tax affairs has reached a record level.
It has been reported that HMRC has opened investigations into 330 professional footballers, 55 football clubs and 80 football agents. In response to a Freedom of Information request submitted by the BBC, HMRC has confirmed that £25m was recovered from players and agents between 2017/18 and September 2019. Issues under investigation include image rights, VAT, agents’ fees and dual representation of clubs and players by agents. This increased focus on footballers follows a football compliance project initiated by HMRC in 2017.
1.3 CIOT urges the Chancellor to take a strategic approach to tax
The CIOT, Institute for Fiscal Studies and Institute for Government have issued a joint letter to the Chancellor. It calls for several specific steps to be taken to ensure that the UK tax system is managed strategically.
The letter highlights the need for the UK tax system to be internationally competitive and for the current administrative burdens to be reduced. The authors make five suggestions to achieve these goals:
- uphold the Government’s commitment to having one primary fiscal event each year;
- set out a strategic approach to tax policy;
- continue with the road-map approach to determining tax policy as set out in the Corporate Tax Road Map of 2010;
- prioritise consultations in respect of tax reforms; and
- systematically evaluate tax reliefs to ensure they are effective.
2. Private client
2.1 UT allows taxpayers’ appeals on transfer of assets abroad
The UT has overturned an FTT decision, finding that the transfer of assets abroad (TOAA) code did not apply to a transaction where the business of a company was transferred to an overseas company, as the shareholders in this case did not procure the transfer. It also considered the application of EU principles of freedom of establishment and free movement of capital for an EEA national and her UK national husband.
The taxpayers transferred their gambling business from a UK company to a Gibraltar company, as it was commercially advantageous to offer customers a reduced rate of betting duty. The UK resident taxpayers, a family group, were directors and shareholders of both companies, so paid tax in the UK on salary and dividends. HMRC sought to tax them on the entire profits of the transferee company, in proportion to their shareholdings, on the grounds that they had made a transfer of assets abroad. Much of this profit had been reinvested in the business.
At the previous hearing, the FTT found for HMRC for two of the taxpayers, who were UK nationals, and against for the third, who was a UK resident Irish national. It held that an Irish national was entitled to rely on the principles of freedom of establishment and freedom of movement of capital, but that these could not be claimed by UK nationals on transfers to Gibraltar, as Gibraltar and the UK were not separate states for this purpose. The UT found that the principles should extend to one of the UK nationals, the husband of the Irish national, as interference with his freedoms would impede hers, but agreed that the adult son of the parties could not rely on the defence.
However, the UT overturned the decision on other grounds, finding that the TOAA code did not apply to this transaction. The taxpayers had not made a transfer, as the assets were the property of the company which transferred them. Although this would not be the case if assets had been put in a company just as preparation for moving them offshore, in this case the transferor was a genuine company that had been trading for many years. In addition, the taxpayers had not procured the transfer, as none of them had a controlling interest.
The UT also found that had TOAA applied, the taxpayers had a valid motive defence. It noted that the TOAA code could apply to avoidance of any tax (here betting duty), not just income tax, so tax avoidance was a motive, but in this case the transaction was made for the purpose of saving the business, as customers were using overseas competitors to benefit from the lower betting duty rate.
Fishers v HMRC  UKUT 0062 (TCC)
2.2 FTT quashes technical appeal from film partners
Two members of a film partnership have lost their challenges to the validity of closure notices, with the FTT finding that earlier letters advising them of changes to the partnership return were not closure notices. A deemed enquiry into a partner’s return, opened with the enquiry into the partnership tax return, has to be treated separately.
The taxpayers argued that letters notifying them of a change to the partnership tax return made by HMRC were closure notices, and that as such the later official closure notices denying their loss claims had no effect. They contended that the advance payment notices (APNs) were also invalid, as the appeals were not on the basis of tax advantage, but on the validity of the assessment.
The FTT found that the letters advising the taxpayers of changes to the partnership return did not constitute closure notices. The FTT refused permission for the taxpayers to bring judicial review proceedings on this point. It also found that the APNs were valid, as the taxpayers were making the appeal in connection with HMRC seeking to deny a tax advantage. The technical detail of the appeal was not relevant, and the applications for judicial review on this point were dismissed.
1) Mark Reid 2) Simon Emblin v HMRC  UKUT 61 (TCC)
2.3 Follower notice penalties reduced
Penalties for failing to comply with follower notices by the deadline have been upheld by the FTT, despite the taxpayers agreeing HMRC’s position shortly after the deadline. The penalties were, however, reduced to account for their cooperation.
The taxpayers were issued with follower notices requiring them to take corrective action within three months. They requested additional information from HMRC, which was received five days before the deadline. As the taxpayers were away, their agent’s response to HMRC was sent eight working days late. The agent agreed with HMRC’s position, but did not comply with the requirements of the legislation for corrective action, such as amending the returns. No tax was payable, as HMRC had retained repayments.
HMRC issued penalties for non-compliance of 30% of the disputed tax. The FTT upheld the penalties, finding that the taxpayers had no reasonable excuse, but reduced the penalties to 20% to acknowledge the taxpayers’ cooperation.
Unsworth & Anor v HMRC  UKFTT 94 (TC)
2.4 Taxpayer wins on late pension protection claim
The FTT has found that it is likely that a taxpayer posted a pension protection claim to HMRC 12 years ago. Although HMRC had no record of receipt, his late notification should have been accepted as he had adequate proof of making the original notification.
The taxpayer asserted that, in 2006, he had sent a notification form to HMRC to claim enhanced protection of his pension, and had made no further pension contributions. In 2018, following his retirement, he discovered that HMRC had no record of receiving the form, and HMRC rejected his attempt to make a late notification at that point.
The taxpayer appealed. He had taken independent pension advice in 2006, and kept a photocopy of the completed signed form, although 12 years on he had no proof of postage. HMRC argued that his letter noted that he would receive a certificate of protection, which he never received. Having never received the certificate, he had no reasonable excuse for not ensuring that the notification was correctly made.
The FTT allowed the appeal, noting that it was improbable that the taxpayer had not made the notification, and that on discovering the error he had acted promptly to rectify it. The late notification was accepted.
Hayes v HMRC  UKFTT 92 (TC)
2.5 Taxpayer challenge to assessment amounts dismissed
The FTT has dismissed a taxpayer’s appeal on the amounts of assessments, upholding the HMRC estimates as he did not supply evidence to disprove them. It accepted that much of his documentation had been lost during a period of homelessness, but found that in the six years since the compliance check began he had had the opportunity to obtain third party records.
The taxpayer, a market trader, formerly owned a number of rental properties that had been repossessed. He did not supply sufficient evidence during an HMRC compliance check to support his income position, so HMRC issued assessments for a number of years. He explained that he was currently homeless, so had lost much of his documentation, and argued that the HMRC estimates were excessive.
The tribunal accepted that the HMRC assessments were estimates based on a formula, and not necessarily accurate, but found that they were not ‘arbitrary or wholly unreasonable’. There were inconsistencies in the taxpayer’s evidence, and as the compliance check had begun in 2014, he had had the opportunity to obtain third party records to support his position, but had not done so. The penalties were also upheld.
Okusanya v HMRC  UKFTT 83 (TC)
3. PAYE and employment
3.1 Another off-payroll working win for HMRC
The FTT has found that a project manager for Nationwide Bank was subject to the off-payroll working ‘IR35’ legislation. He was therefore subject to IT and NICs as an employee.
The taxpayer was engaged by Nationwide as a project manager on a contractual basis through an intermediary company. He worked almost continuously for Nationwide for seven years under a series of contracts with similar terms. The FTT upheld HMRC’s decision that the taxpayer was caught by the IR35 legislation and should have been taxed as an employee. Had there been a direct contractual relationship between Nationwide and the taxpayer, it would have been a contract of employment. There was sufficient mutuality of obligation, and the right of substitution that existed was very limited. Nationwide also exercised sufficient control over the actions of the taxpayer, despite him having substantial freedom over how he managed his projects. The FTT held that this freedom was consistent with a highly-skilled employee and did not amount to the control exercised by a self-employed person. The appeal was dismissed.
Northern Lights Solutions Ltd v HMRC  UKFTT 0100 (TC)
4. Business tax
4.1 HMRC loses £83m case on a procedural error
The FTT has ruled that closure notices were invalid because HMRC failed to issue a notice of enquiry. Had the enquires been valid, the FTT found that it would have upheld the closure notices. The additional tax payable by the group of companies would have been approximately £83.1 million.
Bank Payroll Tax (BPT) was a temporary tax that broadly applied to bonuses paid to banking employees that exceeded £25,000. It was withdrawn in 2010. The taxpayers had submitted a consolidated BPT return but had excluded deferred variable remuneration of senior staff under a particular award scheme. The BPT position had been discussed with HMRC, and HMRC had been made aware of the deferred variable award. A new HMRC officer subsequently took over the case and incorrectly assumed that a notice of enquiry had been issued to the taxpayer in respect of the BPT return. A closure notice was then issued, increasing the BPT liability to account for the deferred variable awards.
The FTT found that the closure notices were invalid because a notice of enquiry had not been issued. The judgment provides a helpful list of ten propositions concerning enquiry notices that are drawn from established case law. The FTT went on to find that, had the enquiries been upheld, BPT of approximately £83m would have been payable on the deferred variable awards.
Credit Suisse Securities (Europe) Limited and others v HMRC  UKFTT 0086 (TC)
4.2 Foreign exchange losses allowed by CA
The CA has ruled in favour of three companies that deducted foreign exchange losses arising on a change in functional currency. The judgement confirms that the ‘fairly represents’ test does not apply where the foreign exchange losses were included in the Statement of Total Recognised Gains and Losses (STRGL), and these losses are subsequently brought into account on the disposal of the loan relationship.
The taxpayers were subsidiary companies that had made significant loans denominated in sterling to another group company. The group was restructured, which resulted in the taxpayers having a new parent company. Since the functional currency of the new parent was US Dollars, the taxpayers changed their functional currencies from sterling to US Dollars. Foreign exchange differences for each taxpayer arose and were included in the STRGL in the restated accounts. The next day, the loans were disposed of as part of the group restructuring and the foreign exchange losses were brought into account as a debit in the taxpayer’s profit and loss statements. HMRC denied tax deductions for the loan relationship debits, but the FTT and the UT ruled in favour of the taxpayers.
The primary issue on appeal was how the exchange differences of approximately £675m should be brought into account. The law on loan relationships includes a test of whether or not the debits and credits to be brought into account ‘fairly represent’ the profits, gains and losses of the company. HMRC argued that the foreign exchange losses did not fairly represent the position of the taxpayers, even though the debits were compliant with GAAP. The CA found that, based on the wording of the regulations governing foreign exchange debits and credits, the ‘fairly represents’ test did not apply. Where exchange gains or losses have arisen from a loan relationship that is disposed of, the resulting debit or credit is brought into account in the period of that disposal without reference to the ‘fairly represents’ test. The CA thus upheld the UT’s decision, but for a different reason: the UT had ruled that the ‘fairly represents’ test applied and was satisfied.
5. Tax publications and webinars
The following client webinars are coming up over the next few months.
- 17 March 2020: S&W Sessions: The Budget
6. And finally
6.1 Tax evaders in purple, white, and green
For better or worse, most UK residents accept, however grudgingly, that HM Government has a right to tax them. After all, if we happen to dislike the Chancellor’s ideas we can express our feelings at the ballot box. Imagine, however, the frustrations of a world in which you had no say in the Government, nor its taxes – and you will sympathise with the Women’s Tax Resistance League.
Established in 1909 as part of the campaign for universal suffrage, the league had a simple motto – No Vote No Tax – and expressed their feelings through non-payment of tax, excellently advised by the first female registered accountant in the UK. Though beset by difficulties including bailiffs and, presumably, increasingly cross letters from tax inspectors, the league continued its activities until female suffrage was granted, achieving much publicity for their cause.
It also campaigned for independent taxation of married women, at that time included in the Taxes Acts definition of incapacitated persons, being ‘Any infant, married woman, lunatic, idiot or insane person’. Tis was not granted until 1990, long after the league ceased to exist.
To mark the week of International Women’s Day, why not celebrate these noblest of tax evaders? (NB: And finally does not endorse non-payment of tax to our enlightened present-day HMRC.)
|ATT – Association of Tax Technicians
|ICAEW - The Institute of Chartered Accountants in England and Wales
|CA – Court of Appeal
|ATED – Annual Tax on Enveloped Dwellings
|NIC – National Insurance Contribution
|CIOT – Chartered Institute of Taxation
|ICAS - The Institute of Chartered Accountants of Scotland
|CJEU - Court of Justice of the European Union
|CGT – Capital Gains Tax
|PAYE – Pay As You Earn
|EU – European Union
|OECD - Organisation for Economic Co-operation and Development
|FTT – First-tier Tribunal
|CT – Corporation Tax
|R&D – Research & Development
|EC – European Commission
|OTS – Office of Tax Simplification
|HC – High Court
|IHT – Inheritance Tax
|SDLT – Stamp Duty Land Tax
|HMRC – HM Revenue & Customs
|RS – Revenue Scotland
|SC – Supreme Court
|IT – Income Tax
|VAT – Value Added Tax
|HMT – HM Treasury
|UT – Upper Tribunal
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.