Weekly Tax Update 18 November 2020

The newly published Office of Tax Simplification (OTS) report on CGT makes a number of recommendations that it considers will reduce distortions in the tax system. These include aligning the rates of IT and CGT, with some allowance for inflationary gains, cutting the annual exempt amount (AEA), restricting the CGT uplift on death, abolishing Investors’ Relief (IR) and tightening the conditions for Business Asset Disposal Relief (BADR).

In July, the Chancellor asked the OTS to conduct a review of CGT in relation to individuals and smaller businesses. The OTS does not advise on policy, but this first part of the review considered areas where the current rules do not meet the original policy intent, or can distort taxpayer behaviour.

The key recommendations include:

• closely aligning the rates of CGT and IT, so that taxpayers do not prioritise a beneficial tax position over business and personal needs. The OTS suggests this should go hand in hand with reintroducing relief for inflationary gains, allowing more flexible use of capital losses, and addressing the issue of different taxation if investments are held personally or in a company;
• considering how the accumulation of retained earnings within smaller owner-managed companies and share-based rewards from employment should be taxed;
• reducing the AEA, and reforming the chattel exemption along with improving the online service to report capital gains in real time, and requiring investment managers to report client gains to HMRC;
• removing the CGT free uplift on death on assets to which an IHT relief or exemption applies. Alternatively, abolishing it altogether with all assets inherited at their historic base cost. Assets could be rebased to 2000, and gift holdover relief extended to a broader asset class;
• modifying BADR to be more focussed on retirement, possibly by increasing the minimum qualifying shareholding, increasing the holding period, and introducing an age limit; and
• abolishing IR, based on feedback that was it is not being used, and taxpayers had almost no interest in it.

Our full article on the report can be read at the link below.

https://smithandwilliamson.com/en/insights/simplifying-capital-gains-tax/

www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-by-design

The FTT has found that a taxpayer had a reasonable excuse for the lateness of his claim for pension protection. He had engaged a competent adviser, who had not informed him of the need to make an election, and when he realised he had missed the deadline there was no unreasonable delay in making the election.

The taxpayer had several pension plans, including a defined benefit pension.  His adviser, who had full details of the plans, did not inform him that he was close to meeting the lifetime allowance, and incurring the lifetime allowance charge, as he had overlooked one element, though the taxpayer was in regular contact with him. The taxpayer had always used financial advisers to manage his affairs, and engaged a qualified adviser from a reputable firm, on a friend’s recommendation. The taxpayer realised the error when he received a letter from a pension provider. He complained to the adviser, and after going through their complaints process engaged another adviser, and made his late claim through them about a year after becoming aware that one was needed.

The FTT found that the taxpayer should be allowed to make a late election, as he had a reasonable excuse. He was entitled to rely on the adviser he had carefully selected, and had remedied the failure without unreasonable delay once he was aware of it.

Gibson v HMRC [2020] UKFTT 439 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2020/TC07916.html

The FTT has found that the whole of a payment under a settlement agreement was taxable employment income. The payment had arisen from the taxpayer’s claim for unpaid overtime and allowances, so although the settlement agreement provided for some to be paid to lawyers and insurers, it did not change the character of the payment.

The taxpayer, along with a number of colleagues, took legal action against his employer over unpaid overtime and hardship allowances. The employer settled, so the taxpayer received a payment consisting of costs and a settlement. The costs were agreed to be tax free, but he filed a return on the basis that the settlement was also not income. HMRC raised discovery assessments covering the eight tax years to which the legal action had related.

The taxpayer appealed, stating that two of the three elements of the settlement were not earnings, as they had been used to pay the lawyers and insurers. HMRC argued that the entire payment had arisen from the employment, and the FTT agreed, dismissing the appeal. It found that the terms of the settlement agreement made it plain that the payment related to the claim for underpayment, so as the overtime and allowances would have been taxable earnings so was the settlement payment. Although some was diverted to pay lawyers and insurers, the settlement agreement just set out an order of priority of to whom to pay the amount, without changing its character as employment earnings.

Murphy v HMRC [2020] UKFTT 461 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2020/TC07936.html

The FTT has found that arrangements by a loan charge scheme operator were notifiable under DOTAS. The company concerned did not attend the hearing, but the judge made the finding based on HMRC’s case and the standardised documentation.

HMRC applied to the FTT for a declaration that arrangements were notifiable under the DOTAS regulations. The taxpayer did not attend the hearing, but the judge proceeded as he found that it had been notified.

The taxpayers involved in the arrangements became partners in an Isle of Man partnership. An Isle of Man company was the managing partner. The business of the partnership was to provide services to third parties under service agreements. A company engaged the partnership for each participant’s services as a consultant, but they often continued to work for the same party that they had been working for before entering into the arrangements. Each taxpayer had access to a loan facility through this company. The partnership received money from the end employers for services, channelled through the company, and paid it to the individuals as a loan or drawings.

On consideration of the documents and testimony from participants, who confirmed that they had understood they would not be paying back the loan, the FTT found that the arrangements met the criteria to be notifiable under DOTAS, and that the respondent was a promoter. The arrangements were a standardised tax product, designed to produce an income tax advantage as the main benefit.

HMRC v White Collar Financial Ltd [2020] UKFTT 459 (TC)

www.bailii.org/uk/cases/UKFTT/TC/2020/TC07934.html