Weekly Tax Update 3 September 2019

The latest tax update and VAT round up for the week.

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Ami Jack
Published: 04 Sept 2019 Updated: 31 Jan 2023

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. General

1.1 Information notice upheld by FTT

The FTT has determined that discrepancies between payments made by a company to a director and his reported taxable income were sufficient grounds for HMRC to suspect inaccuracy. The information notice requiring personal bank statements was therefore valid.

HMRC issued an information notice to a director, requiring evidence to support the figures on his return, and documents including bank statements to check for other income. He supplied some details, but refused to divulge his personal bank statements, arguing that as HMRC did not have sufficient information to suspect any inaccuracy the notice was invalid.

HMRC pointed to large cash movements between the company and personal bank accounts, that exceeded the taxpayer’s declared income from the company. The FTT rejected the taxpayer’s contention that ‘wages’ recorded by the company included amounts other than salary, and upheld the information notice.

Matharu v HMRC [2019] UKFTT 528 (TC)


2. Private client

2.1 HMRC loses Transfer of Assets Abroad case

A taxpayer has succeeded in his appeal against an assessment under the transfer of assets abroad (TOAA) rules. The FTT found that he was not the person who procured the transfer of assets, as he organised receipt of the assets but not the disposal to an offshore company. Alternatively, the assessment was contrary to EU rules on free movement of capital, although he did not have a sufficient motive defence.

The taxpayer, a non-domiciled UK resident, decided to purchase 50% of his company (A) from his business partner in order to sell on 100%. This needed to be funded by loan, as he did not have sufficient funds; so as consideration for the sale was dependent on future performance, he was concerned for his position if the acquiring company (C) failed. To reduce the risk, he established a company (B) to take out the loan and purchase the additional 50%. Shares in B were wholly owned by a trust, and the beneficiaries were the taxpayer and his family. Both B and the trust were resident in the taxpayer’s home country, but B was incorporated in the British Virgin Islands for privacy reasons at the insistence of the lender. His brother acted as director and trustee.

HMRC assessed the taxpayer to tax on two dividends under the TOAA rules. These were paid by A to B prior to the sale to C. HMRC argued that he had the power to enjoy the income and had procured the transfer. Alternatively, the £10 he had transferred to his home country to establish the trust was a TOAA by him, and all other transactions were associated operations.

The FTT agreed with the taxpayer, finding that he had no power to compel his business partner to sell his 50% of shares in A to B. Orchestrating the purchase side of the transaction did not mean that he had procured the transfer. Considering the other arguments, the FTT found that his motive defence was insufficient, as he had a tax avoidance motive in addition to commercial purposes, but that the TOAA rules would in this case contravene the EU rule on free movement of capital. The £10 point was rejected as it would bring all non-resident trusts established by UK residents into scope, which could not have been intended by Parliament.

Rialas v HMRC [2019] UKFTT 520 (TC)


2.2 Yacht chartering LLP found not to be trading commercially

Loss relief has been denied to a member of an LLP for losses of the LLP’s trade on the grounds that the trade was not commercial. The yacht chartering business was carried on with a view to profit, but as there was no realistic method of attaining a profit this was not a commercial business.

The appellant, an LLP, owned a yacht which was leased by customers. Losses were made in five trading years, which a member deducted from his personal income. HMRC disallowed the claim, holding that he was not entitled to the losses as the trade was not being carried on commercially with a view to profit. The business had never made a profit, and family members had been permitted to hire the yacht in peak season, though at market rate.

The FTT analysed the history of the business, including meeting notes and the efforts made to realise a profit. It concluded that the LLP had been carrying on a trade with a view to profit, but disallowed the claims, finding that the trade was not commercial. The income would never have been able to cover the expenses, and the manner in which the trade was conducted was not akin to a commercial business.

Roulette V2 Charters LLP v HMRC [2019] UKFTT 537 (TC)


2.3 Company’s preparatory activities found to be trading

A taxpayer has been permitted to claim a capital loss on an irrecoverable loan, to a company that HMRC had claimed was not trading. The FTT determined that although its intended lottery had never been launched, the preparations undertaken were operational activities incurring a financial risk, and thus trading.

The taxpayer personally guaranteed a loan for a company. He reimbursed the lender when the company entered administration. The second guarantor became bankrupt, leaving him with the full loss of £17.5million. The payment could only be claimed as a capital loss if the company had been trading.

The company had planned to launch a lottery Preparations funded by the loan was undertaken for 16 months. It was unable to secure fresh funding after exhausting the loan entered administration. The assets were sold to another company, which launched the lottery using all the preparatory work such as marketing materials and infrastructure. The first company delayed the launch due to difficulties with obtaining a gambling licence. The taxpayer had a 22% shareholding, because of his previous conviction for a serious fraud; the Gambling Commission had reservations over his suitability as a controller. Arrangements were being made to exclude him from control to the satisfaction of the Commission, but at the time the company entered administration, the process was not complete.

HMRC argued that the lack of a gambling licence meant that the company was not trading, as a lottery business cannot be run without one. The company had never reached the point of being able to offer a service. It had accepted that for the purposes of corporation tax all expenditure was pre-trading, and the Administrator’s report had noted that there was no actual trade.

The FTT agreed with the taxpayer that the preparations were in the course of a trade. They were extensive, and the funds had been expended with a view to obtaining ticket income, so were therefore operational activities in which it incurred a financial risk. This was sufficient for it to have commenced trading. The loan made to the company was a qualifying loan to a trader, and the taxpayer’s payment under a guarantee in respect of it was a capital loss.

Hunt v HMRC [2019] UKFTT 515 (TC)


2.4 ‘Wild, extravagant and unreasonable’ HMRC assessments quashed

HMRC assessments covering 12 years have been cancelled by the FTT on the grounds that the inferences used were so unreasonable that the assessments were not raised for the purpose of making good a loss of tax, so were invalid.

HMRC found the taxpayer listed as a ‘principal’ on a website dealing in second hand cars. The inference was drawn that he was a trader, and income tax assessments for 12 years issued, plus penalties, amounting to over £340,000. This was based on an estimate of sales for one year, with assumed profit of 50%, multiplied over 12 years with an allowance for inflation.

The taxpayer appealed, as he explained that he had never dealt in second hand cars. He suffered from permanent ill health that prevented him from working, and had difficulty in dealing with the investigation. His father explained that car dealing was a sideline of his own company, but that the profit margin was extremely small.
The FTT overturned the assessments and penalties, finding that the conclusions HMRC had drawn did not meet the criteria of fair inferences or best judgment. The assessments were ‘so wild, extravagant and unreasonable that they were not raised for the purpose of making good to the Crown a loss of tax’ and were therefore invalid.

The taxpayer was also criticised, as he had failed to deal with the HMRC correspondence or explain his ill health.

Cussens v HMRC [2019] UKFTT 543 (TC) (20 August 2019)


2.5 Inaccuracy penalties cancelled for return with provisional figures

Penalties for deliberate inaccuracy were cancelled for a return that clearly stated that the figures were provisional. The taxpayer lost her appeal to claim large agent fees as a deduction. Although the recipient, her former partner, worked as an agent in the relevant industry there was no contract between them, so it was not proved that the payments did not relate to their domestic relationship.

HMRC disallowed self-employment expenses on three returns due to a lack of evidence. Prior to the hearing, it had been conceded that profits were significantly understated. The principal issue was the agent fees claimed, which HMRC contended were not paid for work as an agent. The taxpayer contended that she had no control over the sums taken by her financially exploitative former partner for work as an agent. He had instructed her to declare net income as turnover and that the expenses claimed were allowable. She had since left the relationship due to his abuse of her and obtained a restraining order, but had difficulty responding to HMRC’s queries whilst in hiding.

The FTT refused to allow the agent fees, as there was no evidence that any duties had been undertaken. The taxpayer’s former partner was in receipt of the funds due to their domestic relationship rather than in his work as an agent, and coercion did not affect that. Some other expenses were allowed in part.
Penalties for deliberate inaccuracy were cancelled for one of the returns in question, as it clearly stated that the figures were provisional. This made it clear that the document was not intended to be relied on as accurate. Penalties were upheld for the other two returns, as no similar note was made. A letter from her accountant clearly described deliberate behaviour in those two years, but as it was ‘disarmingly candid’ the FTT directed that the penalties should be recalculated, with greater reductions for assisting HMRC.

LD v HMRC [2019] UKFTT 526 (TC)


2.6 Early filing of LBTT returns can lead to higher late payment penalties

A taxpayer’s appeal to reduce a late payment penalty has been dismissed, despite early filing of the return, resulting in an increased penalty. Payment of Land and Buildings Transaction Tax (LBTT) is due on the day the return is filed, which may be earlier than the filing deadline. A late payment penalty will therefore be greater if the return is filed early.

The taxpayer had purchased a residential property and filed her LBTT return before the filing deadline. She did not, however, pay the tax liability until several weeks later. RS issued a penalty for late payment, which was due on the same date as the return was filed in line with the statutory rules. The penalty was therefore calculated from the date the return was filed, rather than the date the return was due.

The taxpayer argued that the penalty should have been calculated from the filing deadline. A lower penalty would have been imposed if she had not filed her return early, which was, in her view, unfair. The FTT for Scotland dismissed her appeal. The wording of the statue was clear, and the timeframe allowed for filing does not affect the requirement that the tax be paid at the same time that the return is filed. There was no reasonable excuse or special circumstances, and the penalty was upheld.

Ruth Anne Munro v RS [2019] FTSTC 6 (TC)


2.7 Taxpayers warned of inaccurate savings income figures in PAYE codes

HMRC’s estimated figures for savings income in PAYE codes are often carried forward from previous years, and not corrected later. Taxpayers not in self-assessment have been warned to check that the figures are accurate.

The Low Incomes Tax Reform Group (LITRG) has reminded taxpayers to check the savings income figure in their PAYE codes. PAYE codes are based on estimated figures, but in some cases HMRC has not updated the figure post year end, resulting in an incorrect amount of tax being paid.

If an automatic correction has not been made for a taxpayer who is not in self-assessment, they can apply to HMRC for a refund for years going back to 2015/16. If more than an insignificant amount of tax has been underpaid they should contact HMRC. Taxpayers in receipt of PPI compensation should remember that they are taxable on the interest element in that year as a one-off.


2.8 HMRC writing to occupiers of enveloped property

HMRC has written to those resident in properties owned by overseas entities, requesting a large amount of information. This is purportedly to check compliance with the non-resident landlord (NRL) rules, but the information could be used more widely. There is no obligation to respond.

HMRC has been writing to occupiers of property that is owned by overseas companies. The purpose is ostensibly to verify compliance with the NRL rules, which require tax to be deducted by a letting agent or tenant from rent paid to an NRL if they are not registered with the NRL scheme. The information request is on a voluntary basis, so whether or not to respond should be discussed with the client.

The information requested varies. An example we have seen was as follows:

  • Who occupies the property – full name, and previous names, NI number, UTR, date of birth, contact details, residence status.
  • Date the occupier moved in.
  • Details of the rent, and reasons for any amount less than market value.
  • Relationship to owner/trust/company.

If owned by a trust:

  • Name of the trust.
  • Trust Registration Service number.
  • Names and addresses of settlors, trustees, and beneficiaries.
  • Date of settlement.
  • Date of acquisition of the property by the trust, and method.
  • Trust Deed.


3. Trust, estates and IHT

3.1 Trust shares not subject to minimum holding period for Entrepreneurs’ Relief

Taxpayers who held an interest in possession (IIP) in a trust that held shares for under a year have succeeded in their entrepreneurs’ relief (ER) claims. The FTT found that the requirement to hold an interest for a year (increased to 2 years in 2018) did not apply when the shares were held through a trust of which the taxpayer was a qualifying beneficiary.

The three taxpayers were each granted an IIP in three separate settlements in July 2015. A relation gave an equal number of trading company shares to each settlement in August 2015, and the trusts disposed of them less than four months later. The three taxpayers were qualifying beneficiaries for ER, as they were officers of the trading company, and their holdings were sufficient to meet the personal company rules. They therefore claimed ER on the disposals, which HMRC rejected on the grounds that the shares were held for under one year.

The taxpayers argued that, on a proper reading of the legislation, it was sufficient for them to have an IIP at the time of the disposal, and that the requirement to hold an interest for a year before disposal did not apply to IIPs. The FTT agreed, finding that the statutory provisions on the time period applied only to shares held directly.

The Quentin Skinner 2005 Settlement L & Ors v HMRC [2019] UKFTT 516 (TC)


3.2 HMRC Trusts and Estates Newsletter

The August edition of the HMRC Trusts and Estates Newsletter has been released, with an update on the Trust Registration Service (TRS) and the £100 savings income concession.

A selection of the news is as follows:

  • A new TRS feature has been released, allowing online registration of certain will trusts.
  • The concession under which trusts and estates with small amounts of savings income do not have to report this to HMRC has been extended to 2019/10 and 2020/21. This applies where the only source of income is savings income and the tax liability is below £100, and will be reviewed in the longer term.
  • Additional functionality for the TRS will be released later this year, allowing amendments to be made. There will be a new online authorisation process for agents to access TRS clients, allowing clients to use Government Gateway to confirm an authorisation request.


4. PAYE and employment

4.1 Travel deductions denied for employments under separate contracts

The FTT has agreed with HMRC’s decision to deny deductions for travel expenses on the basis that the taxpayer was travelling to permanent workplaces. Although the employer had treated the worksites as temporary workplaces, the facts of the case were found to show that the employment was under successive contracts. Each contract was for a specific site, which amounted to a permanent workplace.

The taxpayer was a technician employed to work at various nuclear power stations around the UK. He was engaged under a ‘offer of temporary employment’ when he commenced work at a new site, and was paid a daily lodging allowance for the period of the engagement. The employer also paid him a mileage allowance for his travel to and from his home at the commencement and end of each contract, and on his days off. This allowance was less than the mileage allowance approved by HMRC, and the taxpayer claimed tax deductions for the difference. HMRC denied these claims on the grounds that they were expenses of ordinary commuting, not travel to a temporary workplace. The taxpayer argued that the workplaces should be treated as temporary workplaces.

The FTT found for HMRC on the basis that the taxpayer was employed under a series of separate contracts. Each contract required the taxpayer to work at a particular power station, and each power station was a permanent workplace. The travel expenses were therefore not deductible.

Paul Nowak v HMRC [2019] UKFTT 0511 (TC)


4.2 ICAEW warns against disproportionate reporting for the Employment Allowance

The ICAEW has expressed concern regarding the administrative burden for small businesses claiming the Employment Allowance after April 2020. To be eligible, employers must ensure the claim will not cause them to exceed their minimum State Aid threshold. Determining the State Aid position of a small business and its associated enterprises can be onerous, and may outweigh the benefit of the tax relief.

The Employment Allowance (EA) provides an annual £3,000 deduction from an employer’s Class 1 Secondary NIC liability. As of April 2020, eligibility for the EA will be restricted to employers that, together with their associated enterprises, had a total Class 1 Secondary NIC liability of less than £100,000 in the prior year. Employers must also be able to claim the full EA without exceeding their minimum State Aid threshold. It can be difficult for small businesses to obtain this information, and may result in the benefit of the EA being eroded by the costs of claiming it. The ICAEW has urged HMRC to provide clear guidance to assist employers with this process.


4.3 HMRC publishes guidance on off-payroll working rules

Several new and updated webpages have been published, providing taxpayers with guidance on the new off-payroll working rules. These rules will come into effect on 6 April 2020.

The off-payroll working rules are intended to bring the taxation of employees of intermediaries into line with that of employees directly employed by the intermediary’s client. They currently apply to employers in the public sector, and will be extended to include private sector employers on 6 April 2020. The new and updated guidance sets out the rules, and how they will apply to each entity involved in a contracting arrangement.

5. Business tax

5.1 Capital allowances denied on uranium enrichment facility

The FTT has upheld HMRC’s decision to deny capital allowances on safety structures at a uranium processing facility. While the structures in question provided essential safety functions, that did not prevent them from being ‘buildings’ and therefore ineligible for capital allowances.

The taxpayers operated facilities in Cheshire that processed radioactive material as part of the wider group’s trade of producing enriched uranium for the civil nuclear industry. The construction of the facilities cost approximately £1bn. HMRC had denied capital allowances on part of this expenditure. The issue before the FTT was whether or not the expenditure in question was on the provision of plant.

The FTT examined each of the safety structures in turn to determine whether the asset functions as plant, is expenditure on the provision of a building, and if so whether an exemption applied. A majority of the assets provided safety functions of shielding, containment and protection against seismic events. The FTT noted that the business processes could theoretically be carried out without the safety structures, though in reality this would not meet regulatory standards. It was held that expenditure cannot be regarded as part of the cost of installation of plant merely because the plant could not be used safely without it. Some of the assets were found to have plant-like functions, but these were also found to be part of a building and thus did not fall within the definition of ‘plant’. The exemptions for expenditure on machinery, manufacturing or processing equipment and the alteration of land for the purpose only of installing plant or machinery did not apply. The expenditure had been on the installation of machinery and equipment, not ‘on’ machinery or equipment itself, and it did not involve the alteration of land. The appeal was dismissed.

Urenco Chemplants Limited and another v HMRC [2019] UKFTT 0522 (TC)


5.2 Mid-sized business tax strategy report released

HMRC has published a report examining the tax behaviours of mid-sized businesses. The research aims to improve HMRC’s understanding of decision-making, behavioural factors, and the role of agents in the tax activities of mid-sized businesses. It found that such businesses are typically focused on growth and their tax activities tend to follow the business strategy rather than be a priority in their own right.

The report sets out the findings of interviews with senior staff at businesses with a turnover exceeding £50 million. It found that tax events are rarely considered ‘key events’ of such companies. They tended to be reactive rather than proactive in relation to changes in tax legislation, but were generally proactive regarding changes in tax compliance and tax efficiency. Nearly all businesses used an agent, and approximately half had written a tax strategy.


6. VAT

6.1 FTT finds claiming PPI compensation is a standard-rated supply

The FTT has upheld HMRC’s decision that fees received in exchange for the services related to claiming PPI compensation are not exempt from VAT. The taxpayer had not accounted for VAT on the basis that its supplies were exempt supplies of insurance. It was found that making compensation claims for customers did not fall within this exemption.

The taxpayer recovered compensation on mis-sold payment protection insurance for customers, in exchange for 39% of the recovered amount. It did not account for VAT on this income on the grounds that the supplies fell within the exemption for insurance and reinsurance transactions. HMRC considered that the supplies were standard-rated.

The FTT first considered whether or not the supplies provided were insurance contracts. The taxpayer argued that the contractual terms and conditions conferred on the taxpayer the authority to terminate insurance contracts on behalf of its customers. Termination of insurance was, it argued, the supply of an insurance transaction. The FTT disagreed: while the termination of an interest in land might be a transaction in land, the termination of an insurance contract did not amount to intermediary service related to an insurance transaction. The taxpayer did not enter into a contract for insurance with its customers; the nature of the service was the making of compensation claims on behalf of customers.

Second, the FTT found that the taxpayer was not an insurance broker, agent or intermediary that made supplies related to insurance transactions. It did not possess the essential characteristics of an insurance agent or broker, and it did not collect insurance premiums. The collection of recovered premiums and retaining a proportion as a fee did not amount to the collection of premiums. The appeal was dismissed.

Claims Advisory Group Limited v HMRC [2019] UKFTT 0512 (TC):


6.2 HMRC updates its policy on the cost sharing exemption in the social housing sector

Revenue and Customs Brief 8 (2019) sets out HMRC’s position on the application of the cost sharing exemption to the social housing sector. Five conditions, which apply specifically to the social housing sector, have been added to the existing eligibility criteria. These changes have immediate effect.

HMRC has reviewed the application of the cost sharing exemption (CSE) to the social housing sector and explained its conclusions in Revenue and Customs Brief 8 (2019). The CSE allows persons who carry on exempt and/or non-business activities to form a cost sharing group (CSG) to acquire services and recharge them to its members at cost. This arrangement allows smaller entities to achieve economies of scale to acquire services form a central CSG entity. The CSE was considered by the CJEU in DNB Banka AS (Case C-326/15), but this case was concerned specifically with financial services. The CJEU indicated the exemption was only for social purposes. HMRC will therefore only allow cost sharing arrangements to continue to apply to the social housing sector. In addition to the existing conditions, five additional criteria must be met for the CSE to apply:

  • there must be no uplift of internal or external costs within the CSG;
  • there must be no uplift of the costs being shared within any VAT group including either the CSG itself, and/or the members of the CSG;
  • there must be no uplift of costs by a VAT group member supplying a CSG in the same VAT group;
  • there must be more than one member of the CSG, not including members that are in a VAT group either with the CSG or with other members; and
  • the CSG only applies to providers of social housing and not to private housing providers.

HMRC has confirmed that it will update the VAT CSE Manual to reflect these changes, which have immediate effect.


7. And Finally

7.1 Burying the evidence

In our modern world, the concept of tax avoidance evokes visions of conniving corporates digging through tax legislation, creating new, Houdini-like schemes to circumvent statutes or defy the government. But some metal detectorists have unearthed evidence of tax avoidance in its more rudimental form: coins dating back to the Battle of Hastings that bear the images of two different kings. This, numismatists tell us, was to avoid the tax payable on obtaining new coining tools when a new monarch ascended the throne and the coin illustration changed. What it lacks in sophistication it makes up for in effectiveness; there are no records to show what coins they stamped, the currency is untraceable and the general populace was illiterate, unable to distinguish between the images of kings they had never seen, or to read the inscription.

For all that we groan about the disjointed tangle of anti-avoidance rules, advanced payment notices and ever-lengthening enquiry periods in force today, we do prefer the current penalty system to what the coin stampers faced. We doubt that any barbaric medieval punishments were reducible for unprompted disclosure.

Time for a discovery assessment?



Organisations CourtsTaxes etc
ATT – Association of Tax TechniciansICAEW - The Institute of Chartered Accountants in England and WalesCA – Court of AppealATED – Annual Tax on Enveloped DwellingsNIC – National Insurance Contribution
CIOT – Chartered Institute of TaxationICAS - The Institute of Chartered Accountants of ScotlandCJEU - Court of Justice of the European UnionCGT – Capital Gains TaxPAYE – Pay As You Earn
EU – European UnionOECD - Organisation for Economic Co-operation and DevelopmentFTT – First-tier TribunalCT – Corporation TaxR&D – Research & Development
EC – European CommissionOTS – Office of Tax SimplificationHC – High CourtIHT – Inheritance TaxSDLT – Stamp Duty Land Tax
HMRC – HM Revenue & CustomsRS – Revenue ScotlandSC – Supreme CourtIT – Income TaxVAT – Value Added Tax
HMT – HM TreasuryUT – Upper Tribunal

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.