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 Professional bodies urge Chancellor to take a strategic approach to tax
The CIOT, Institute for Fiscal Studies, and Institute for Government have written to the new Chancellor, asking for a new approach to tax policy to reduce compliance burdens on business. They believe that a considered, strategic approach could become a source of competitive advantage for the UK.
The professional bodies have set out their requests for Chancellor Sajid Javid’s approach to tax policy. They suggest that, with many businesses looking to work with the Government over Brexit and MTD, now is the time to make changes that will reduce compliance burdens. They ask for reassurance that the progress made by Phillip Hammond in simplifying the tax making process will not be undone. The 2017 report produced by these bodies ‘Better Budgets: making tax policy better’ has been drawn to the Chancellor’s attention.
They have asked, in particular, for confirmation that the Government will stick to one fiscal event each year, which has thus far been matched by a reduction in new tax policy and the length of Finance Acts. This was also seen as making tax policy more effective, releasing resources for consultation, increasing quality of legislation, with more effective implementation. The bodies would appreciate a more strategic approach, more consultation before changes are introduced, and systematic evaluation of tax reliefs and measures to determine whether or not they meet policy objectives and are cost effective.
1.2 CIOT comments on proposal for sellers to pay SDLT
Following suggestions that the new Prime Minister may support a proposal to reform SDLT such that it is paid by the seller rather than the buyer, the CIOT has commented on the potential results of the proposals, and issues that might arise. These include disincentivising downsizers, problems with collecting the tax, and double taxation for those currently owning property, and price increases.
It has been suggested that the new Prime Minister has given his support to a proposal by the Association of Accounting Technicians (AAT) to alter the SDLT system. It proposes that SDLT should be paid by those who sell property, rather than the purchasers, suggesting that this would help those moving use the property ladder, and remove the expensive SDLT relief for first time buyers. The change would, however, worsen the position for those wishing to downsize. The CIOT has highlighted some other potential impacts.
The CIOT believes that the proposal could increase property prices, increasing SDLT revenue but worsening the position of buyer or seller, depending on pricing. Current SDLT surcharges are based on the status of the purchaser, so accurate completion of the return would be difficult for the vendor unless the surcharges were reformed. In addition, SDLT collection is currently relatively simple for HMRC, as title registration depends on it. A purchaser who fails to pay, nevertheless owns an asset (the property) over which HMRC could enforce payment. If the vendor is liable for SDLT, particularly if the liability is increased on investigation, then HMRC is in a much weaker position if payment is not made, and in a case of negative equity, enforcement would be particularly difficult.
2. Private client
2.1 CA finds enquiry notice sent only to agent is not valid
The CA has overturned a UT decision, finding that an enquiry notice is not valid if sent only to an agent authorised under the normal authorisation procedure (form 64-8). Enquiry notices are invalid unless sent to the taxpayer or an agent he has specifically authorised to receive these on his behalf.
An HMRC officer sent a notice of enquiry to the taxpayer’s agent, and to a former residence of the taxpayer. An updated address had been provided on the agent authorisation form, but this was not used. The enquiry proceeded normally, until the taxpayer challenged the closure notice on the grounds that the original notice was invalid.
An enquiry notice must be sent to the taxpayer’s current or last known address to be valid under statute. The CA held that the wording of the standard agent authorisation form 64-8 was insufficient to give HMRC the power to send enquiry notices to the agent alone.
The CA also rejected HMRC’s contention that, as the taxpayer and tax agent had complied with the original enquiry notice, they could not now challenge it. As the UT had found, it was due to HMRC that the tax agent had assumed the notice was valid, so it was not the tax agent’s responsibility.
Tinkler v HMRC  EWCA Civ 1392
2.2 Informal HMRC investigation found to be lawful
A taxpayer who had been subject to a long-running informal investigation into him and his business interests has been refused a judicial review. The HC found that it was lawful for HMRC to conduct long-running investigations without opening enquiries. Its statutory duty to collect tax is not limited to enquiries, and this duty must include the power to work out the correct amount.
The claimants were a successful businessman, and five businesses in which he held a beneficial interest. In 2016, HMRC wrote to the businessman to inform him that it intended to investigate his tax affairs, including those of his businesses. No formal enquiries were opened, but over the course of the investigation, large amounts of information were supplied in response to informal requests, and some information notices, and several meetings were held. After three years, the investigation was still open as HMRC had outstanding concerns and had found a few issues, but no signs of tax evasion had been found and no formal enquiries had been opened.
The businessman applied for a judicial review, arguing that HMRC does not have the power to conduct this sort of lengthy investigation without opening an enquiry, that HMRC had acted to deprive him of access to justice, and that specific information requests made to overseas authorities about his companies in those jurisdictions were unlawful.
The HC dismissed all the grounds, refusing permission for a judicial review. It agreed with HMRC that its statutory duty to collect taxes must extend to a duty to find out the correct amount of tax. It therefore has a general power to conduct investigations, not solely under its power to open enquiries. The taxpayer also retained access to justice, as though he could not apply to the FTT for a closure notice, he could appeal any consequence that arose from the informal investigation such as a discovery assessment. The requests to other jurisdictions were lawful, as HMRC could have obtained the same information from an equivalent UK company. The HC also declined his request to supervise the investigation, as it was being conducted lawfully.
JJ Management LLP & Ors, R (On the Application Of) v HMRC & Anor  EWHC 2006 (Admin)
2.3 Late filing penalties upheld for taxpayer with a long illness
A taxpayer appealed three years’ worth of late filing penalties, because of illness. In 2013, HMRC had cancelled a late filing penalty for a different tax return, because of this illness. The FTT upheld the penalties, as one return was over two and a half years late, and he had not shown that he was unable to seek help throughout this period.
Due to serious health problems, the taxpayer had been unable to work for many years. A late filing penalty for his 2011-12 return was waived in 2013, as he had been in intensive care. The next return was filed on time, but the next three returns were filed together late in 2017, three months after he appointed his first agent. HMRC issued late filing penalties for these, the first of which was over two and a half years late.
The FTT ultimately agreed with HMRC’s review decision and upheld the penalties. Although the taxpayer was seriously ill, this was not a reasonable excuse for not dealing with his tax affairs, and he had not contacted HMRC for over four years, despite the reminders and penalty notices. The returns were filed quickly after he appointed an agent, and he had not shown that he could not have sought help before. The waiver of the penalty in 2013 after his stay in intensive care did not indicate that he was exempt from future penalties.
Dad v HMRC  UKFTT 460 (TC)
2.4 Fraud investigation not limited to matters outside tax returns
The FTT has rejected a taxpayer’s appeal against an information notice, holding that investigations under the fraud procedure are not limited to matters outside tax returns. The fact that there was an alternative procedure for enquiring into tax returns was not sufficient to limit other types of investigation. The taxpayer also had no right of appeal against an information notice requiring statutory records.
In the course of a fraud investigation under Code of Practice 9 (COP9) into the taxpayer’s remuneration scheme, HMRC issued an information notice requesting details that related to her tax returns. She appealed this on several grounds, including that a COP9 investigation can only be in respect of tax affairs outside the tax return, as a tax return enquiry can be opened under a different procedure (s.9A). She also asked the tribunal to rule that the whole enquiry was invalid, as it was opened under COP9 rather than s.9A.
The FTT agreed with HMRC’s view that the COP9 investigation procedure was not restricted to matters outside tax returns. HMRC had clear grounds for suspecting an underpayment of tax, so met the conditions for issuing an information notice. Some of the documents requested were statutory records, so the taxpayer had no right of appeal against the requirement to produce them.
Cybulska-Sapon v HMRC  UKFTT 458 (TC)
3. Business tax
3.1 HC accepts two foreign tax credit claims after records were lost in a fire
The HC has found that two large dividends, one paid in 1991 and the other in 1994, should be treated as carrying a tax credit at the foreign nominal rate. The records had been destroyed in a fire, so the HC relied on witness statements and other documents to determine the facts of the payments. Two other dividends were found to be repayments of capital, and therefore did not carry a similar tax credit.
The taxpayers were non-test claimants in the long-running Franked Investment Income Group Litigation Order. Those cases had examined the compatibility of the UK CT treatment of dividend income in force prior to 1999. When the parties were computing the value of these claims, further issues arose regarding particular dividends paid from 1991 to 1994. This case examined four of those dividends, which were paid by European companies to UK companies.
The records detailing the circumstances of these dividend payments were destroyed in a fire in 2006. The HC therefore relied on evidence from witnesses involved in the transactions and other documentation related to the dividends. It examined this material in light of the tax laws in force at the time and the likely commercial decisions that the companies would have made in those circumstances. The central issue was whether or not a tax credit should be awarded at the foreign nominal rate when the profits from which the dividends arose carried a low rate of tax paid and there was no evidence to explain the reason for this. It was found that, on the balance of probabilities, two dividends were paid out of profits of a kind that should be treated as carrying a credit at the foreign nominal rate. The other two dividends were found to be paid out of capital reserves, and therefore were not to be treated as carrying that tax credit.
Non-Test Claimants in the Franked Investment Income Group Litigation v HMRC  EWHC 2014 (Ch)
4. And finally
4.1 Five and counting
We were appalled by reports from the Treasury sub-committee that the number of suicides over the disguised remuneration loan charge may have climbed to five. Can anyone think of another recent tax policy that has had such a baleful and calamitous effect?
Debates as to whether the policy is fair or properly administered are completely beside the point. We cannot have a tax system that drives significant numbers, or indeed anyone at all, to suicide. It must be simply the wrong policy and the wrong tax.
|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|
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.