Insights

Weekly Tax Update 07 July 2021

  • Written By: Ami Jack
  • Published: Wed, 07 Jul 2021 10:00 GMT

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 HMRC to restart collecting tax debts 

HMRC will begin to use its debt enforcement powers again from 1 September 2021. It has emphasised that at all times it will ‘take an understanding and supportive approach'. 

HMRC has published a policy paper setting out its plan to recommence collecting tax debts as economic activity resumes in the UK. Tax debt collection was temporarily suspended during the pandemic. HMRC will attempt to contact taxpayers with outstanding tax liabilities and agree a plan for payment. From 1 September 2021, HMRC may use its debt enforcement powers to begin the collection process if taxpayers ignore HMRC’s attempts to contact them or are unwilling to discuss payment plans.  

www.gov.uk/government/publications/hmrc-issue-briefing-collecting-tax-debts-as-we-emerge-from-coronavirus-covid-19 

1.2 SC finds a follower notice to be invalid 

The SC has agreed with the CA that a follower notice failed to meet the necessary conditions to be valid. HMRC had not been sufficiently certain that its case against the taxpayer would succeed. 

The taxpayer had entered into an ‘around the world’ scheme to avoid a CGT charge. HMRC issued him with a follower notice after the CA found for HMRC in Smallwood v HMRC [2010] EWCA Civ 778. The taxpayer appealed against the follower notice, but the HC found for HMRC. The CA, however, overturned that ruling. 

The SC upheld the CA’s decision. When HMRC issued the follower notice, it had concluded that it was ‘likely’ that the taxpayer would be denied the tax advantage because of the judgment in Smallwood. This degree of certainty was insufficient. The law requires HMRC to have formed the opinion that the relevant ruling ‘would’ deny the tax advantage. The SC found this requirement to mean that there was “no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage”. Furthermore, the SC agreed that HMRC overstated the conclusions reached by the CA in Smallwood. HMRC had therefore misdirected itself when interpreting the judgment on which it based the follower notice in this case. The quashing of the follower notice was therefore upheld.

R (oao Haworth) v HMRC [2021] UKSC 25

www.supremecourt.uk/cases/docs/uksc-2019-0124-judgment.pdf

2. Private Client

2.1 UT rules on the taxation of settlement payments 

The UT has overturned an FTT decision on the taxation of sums paid by an employer to settle claims brought by employees. The settlement sum was only taxable to the extent that it was not used to pay for the legal and insurance costs incurred in bringing the claim. 

An employer had settled a dispute with some of its employees over unpaid overtime and hardship allowances. The total payment was comprised of agreed court costs and a settlement sum. The employees paid their legal and insurance costs relating to the case out of the settlement sum. HMRC argued that the total settlement sum was employment income subject to IT. The taxpayer, one of the claimants, argued that the portion of the settlement sum used to pay legal and insurance costs was not employment income subject to IT. 

The FTT found for HMRC based on the terms of the settlement agreement. It held that the settlement sum arose from the taxpayer’s employment and the use of those funds to pay legal and insurance costs did not change the nature of the settlement sum. The UT overturned this decision. It ruled that that sums used to pay legal and insurance costs did not differ from the agreed court costs except insofar as the former were not yet ascertained at the time of the settlement agreement. Furthermore, even if the amount used to pay the legal and insurance costs arose by reason of the employment, it was not profit of the taxpayer from his employment. The taxpayer’s profit from his employment was limited to the settlement sum less the costs he had to incur to obtain that payment. Only that amount was subject to IT. The amounts used to pay legal and insurance costs were therefore not taxable employment income. 

Keith Murphy v HMRC [2021] UKUT 152 (TCC) 

www.bailii.org/uk/cases/UKUT/TCC/2021/152.html

2.2 UT agrees that a child benefit charge discovery was invalid 

The UT has clarified that discovery assessments made by HMRC, relating to unpaid high income child benefit charges (HICBCs) on a taxpayer who was not submitting tax returns, were not valid. The law allows HMRC to assess amounts to IT, which is not the same as directly assessing IT. 

The taxpayer was subject to the HICBC, which he had not paid. He also had not submitted a tax return because his income was fully taxed under PAYE. HMRC raised discovery assessments relating to non-payment of the HICBC over three years. The question before the UT was whether or not the discovery assessments were valid. The FTT has made conflicting rulings regarding similar HICBC assessments in other cases. 

The UT agreed with the FTT that the assessments were not valid. The legislation allows HMRC to assess income that ought to have been so assessed. In this case, HMRC was seeking directly to assess IT; the unpaid HICBC was an unpaid tax charge rather than untaxed income. Even on a purposive interpretation of the law, it was not open to HMRC to make the discovery assessments. The UT noted, however, that HMRC could have issued the taxpayer with notices to file tax returns for the years in question, or made simple assessments. The UT also agreed with the FTT’s comments that this interpretation may give rise to some anomalies, but that such anomalies are not absurd or unjust. In particular, this outcome would not extend to a taxpayer who had filed tax returns and omitted the HICBC.

HMRC v Jason Wilkes [2021] UKUT 150 (TCC) 

www.bailii.org/uk/cases/UKUT/TCC/2021/150.html

2.3 Report on improving HMRC’s relationship with wealthy taxpayers 

A report has been published on HMRC’s interactions with wealthy individuals and their tax agents. It finds that these relationships are generally characterised by mistrust and a perceived lack of transparency.  

The report aims to help HMRC foster greater trust and transparency with taxpayers and their agents, reduce the tax gap and increase voluntary compliance. It will inform HMRC’s long term strategy for wealthy taxpayers. The primary findings show that many taxpayers perceive HMRC as assuming all wealthy individuals are engaging in tax avoidance or evasion. There was also found to be a common view that HMRC is an ‘enforcer’, and a general relationship of mistrust between HMRC and wealthy taxpayers. Suggested steps to improve this situation include widening the customer compliance manager programme, improved communications and changes to the culture of HMRC. 

www.gov.uk/government/publications/co-operation-with-the-wealthy-and-their-agents

2.4 HMRC acknowledges error in CGT payment on account set-off

Taxpayers filing CGT UK residential property returns have been unable to offset overpaid CGT against IT liabilities. HMRC has acknowledged the issue and advised affected taxpayers to call the helpline.

The tax payment due on filing a CGT property return is often estimated. If the CGT is overpaid, HMRC systems currently do not allow the CGT payments on account to be set against income tax due for the same year. HMRC has now acknowledged that this is an error.

The self-assessment system cannot be updated mid-year, but as a workaround agents or taxpayers should call HMRC to request that the CGT is manually offset. 

www.icaew.com/insights/tax-news/2021/jun-2021/Offsetting-overpaid-CGT-against-income-tax

3. Business tax

3.1 Historic agreement on a global minimum tax rate 

130 jurisdictions have agreed a framework for the taxation of the largest multinational groups in the world. 

The two-pillar framework, which was developed by the OECD, was earlier agreed by the G7. Most OECD and G20 member states have now agreed to the plan, with Ireland being a notable exception. Pillar One reallocates some taxing rights to the jurisdictions where businesses activities and profits arise, regardless of whether or not those businesses have a physical presence there. It will apply to groups with global turnover exceeding €20bn and profitability of at least 10%. Pillar Two imposes a global minimum tax rate. The rate has not yet been finalised, but it has been agreed that it will be at least 15%. It will apply to multinational enterprises with global turnover of at least €750m. The negotiations over the final details are scheduled to conclude in October 2021, and the rules are expected to take effect in 2023. The OECD estimates that the agreement will generate US$150bn in annual global tax revenues, and provide increased tax certainty for businesses and governments. 

www.oecd.org/tax/beps/130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm

www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.htm

3.2 UT agrees that pipe repairs do not qualify for land remediation relief 

The UT has upheld an FTT ruling that improvements to underground gas distribution pipes did not qualify for land remediation relief (LRR). The decision clarifies the interpretation of the conditions for LRR. 

The taxpayer was a gas distributor that had acquired a large system of iron pipes from what had been its parent company at that time. It was required by law to replace the iron pipes for safety reasons. The taxpayer claimed LRR on the expenditure, which was denied by HMRC. The law has since changed, and this case relates to provisions of LRR that are no longer in force.  

The FTT had ruled that the expenditure did not meet two of the conditions required to qualify for LRR. First, because the expenditure was not incurred on or in relation to physical land. Second, because the contamination was at least partly as a result of the actions of a company connected with the taxpayer.

The UT upheld this decision, though with some differences in the interpretation of the law. The land was contaminated at least partly because gas was pumped through the iron pipes by both the taxpayer and its predecessor. That was sufficient to cause the LRR claim to fail, and the fact that neither the taxpayer nor its predecessor had laid the iron pipes did not change that outcome. The UT also went on to find that the expenditure did not qualify because it did not have the requisite connection with land. Expenditure on chattels such as pipes was found to be capable of being sufficiently connected to land. But in this case, that connection was lacking. The appeal was dismissed.  

Northern Gas Networks Limited v HMRC [2021] UKUT 157 (TCC) 

www.bailii.org/uk/cases/UKUT/TCC/2021/157.html

3.3 Further guidance on extended carry-back loss claims 

Extended carry-back loss relief claims of up to £200,000 can now be made online by corporate taxpayers. HMRC has also provided further guidance on group claims for extended carry-back loss relief. 

HMRC’s guidance on claiming the extended carry-back loss relief now includes a link for companies and their agents to submit claims of up to £200,000. Claims may be made as soon as the accounting period in which the loss occurs has ended, provided it can be quantified appropriately. A list of the information that will be required to make those claims is also included in the guidance. Claims exceeding £200,000 must be made in a tax return. Unincorporated businesses may also make claims of up to £200,000 outside a tax return, but no online facility had been provided for these. 

HMRC has also updated the guidance for claims for extended carry-back loss relief by groups. Claims exceeding £200,000 must be made in a tax return, and a nominated group company must submit a loss carry-back allocation statement. Loss carry-back allocation statements must be in writing and include specific details as set out in the guidance.

www.gov.uk/government/publications/extended-loss-carry-back-for-businesses

4. Tax publications and webinars

4.1 Tax publications

The following Tax publications have been published.

4.2 Tax podcasts

The following Tax podcasts are available now.

4.2 Webinar

The following client webinars are coming up over the next week.

  • 14 July 2021: S&W Sessions: Impacts to the R&D Incentive Landscape

https://smithandwilliamson.com/en/events/

5. And finally

5.1 Headache for the Revenue

Over the last few years, the High Income Child Benefit Charge (HICBC) has caused endless trouble. Much as we love odd taxes, a charge that wasn’t quite a tax, brought a tranche of additional taxpayers into self-assessment, and could be applied to someone who had no idea that child benefit had been claimed, left something to be desired. The FTT has been confronted with case after case, and found various ways, but finally the UT has decreed that discovery assessments issued for HICBC where a return was not filed are invalid.

HMRC may very well appeal, but if this judgment holds up then thousands and thousands of assessments may fall down. What a mess.

HMRC v Jason Wilkes [2021] UKUT 150 (TCC)

www.bailii.org/uk/cases/UKUT/TCC/2021/150.html

Ref: NTAJ14072173

Glossary

Organisations   Courts Taxes etc  
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    

 

 

DISCLAIMER
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.

 

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