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 Late penalty appeal from voluntary organisation not admitted
The FTT has refused to admit a late penalty appeal from a small voluntary organisation. Although the volunteers running the scheme had had difficulty managing the payroll, the late filing penalty appeal could not be admitted nine years late without stronger arguments. The length of time meant that the detrimental effect on HMRC of not being allowed certainty outweighed any on the taxpayer.
The taxpayer, a small voluntary organisation with one employee in the years in question, failed to file the correct end of year payroll documents for 2008/09 and 2009/10. HMRC issued late filing penalties, but they were not dealt with until the new volunteer treasurer received a letter from HMRC’s debt management unit in 2019. The returns were filed, and the tax paid between 2015 and 2019.
In 2019 the new treasurer investigated the matter, paid a late filing penalty for a third year, and appealed the other two to the FTT. The appeals were 8 and 9 years late, as there was a 30 day appeal period. The taxpayer argued that they should be admitted as HMRC had been remiss in pursuing them, and as the small voluntary organisation had had difficulties with administration, now resolved by outsourcing the payroll.
The FTT held that the appeal was insufficiently strong to be admitted so late. The chairwomen had spoken to HMRC about the penalties in 2014, but failed to appeal. Although HMRC had only produced dates on which it purported the penalty notices were sent, the prejudice to HMRC in hearing such a late appeal would outweigh the prejudice to the taxpayer in not allowing the appeal to be heard.
Ceredigion Liberal Democrats v HMRC  UKFTT 582 (TC)
1.2 Tax at the Labour party conference
No major tax announcements were made at the Labour party conference this year, but reference continues to be made to plans to deal with tax evasion and avoidance.
The Labour party conference, which concluded last week, contained no major tax announcements. Reference was made in the leader’s and Shadow Chancellor’s speeches to their plans to tackle tax avoidance and evasion, remove tax reliefs for independent schools and increase corporation tax.
2. Private client
2.1 FTT finds that penalty notices were received by a taxpayer
The FTT has upheld late filing penalties in an appeal, rejecting the taxpayer’s argument that HMRC’s electronic evidence was insufficient. It found that the witness statement from HMRC detailing the procedures for issuing these, and the controls in place, were sufficient evidence that these had been received by the taxpayer when combined with template documents.
The taxpayer was charged late filing penalties for four tax returns. She appealed against these on the grounds that HMRC had not demonstrated that it had issued her with notices to file returns, nor penalty notices. HMRC has lost some recent cases at the FTT where the only evidence supplied was electronic logs showing an approximate date of issue, and template notices.
In this case HMRC supplied template notices in evidence, and asserted that it held her correct address at the time of issue. It also submitted a witness statement from an officer familiar with the process, explaining the procedures and controls for issuing notices.
The FTT was satisfied by HMRC’s witness statement, and template evidence. In view of the taxpayer’s statement that she had received post from HMRC, which she did not understand, the FTT held that she had received all the notices in question. It also rejected her alternative argument that she had a reasonable excuse, as her personal difficulties had occurred over several years, and she had been able to run a business throughout. The appeal was dismissed and the penalties upheld.
Pritt v HMRC  UKFTT 578 (TC)
2.2 Taxpayer awarded costs due to HMRC’s ‘unreasonable behaviour’
A taxpayer has been awarded costs for the time period between sending HMRC a piece of information which proved that he was correct about a disputed assessment, and the date of the scheduled hearing. HMRC only recognised the significance of the document on the morning of the hearing, and withdrew at that point, but was held to have acted unreasonably in not withdrawing earlier.
HMRC had disputed the taxpayer’s negligible value claim, but withdrew from defending his appeal two hours before a scheduled tribunal hearing, when the HMRC solicitor noticed an email in the court bundle which was conclusive. The taxpayer applied to the FTT for HMRC to pay the costs he had incurred in preparing his appeal. HMRC argued that the email in question had only been supplied to them by the taxpayer a fortnight before the hearing. The taxpayer argued that he had also sent them a copy in 2014 or 2015.
The FTT refused to strike out the late appeal, and awarded the taxpayer his costs for part of the period claimed, with the caveat that they must be subject to a detailed assessment. It found that HMRC had received the email at least four months before the hearing, so had acted unreasonably in not withdrawing the assessment sooner. Costs were awarded to the taxpayer from the date by which HMRC should have realised the significance of the email, set as two weeks after receipt. This included costs for the vacated hearing.
Tucker v HMRC  UKFTT 569 (TC)
3. Trusts, estates and IHT
3.1 Number of trusts registered for self-assessment falls
In 2017/18, the number of trusts and estates filing self-assessment tax returns fell by 6% from the previous year, but the total tax collected increased.
HMRC has published its annual report on trust statistics. In 2017/18 the number of trusts and estates registered for self-assessment fell by 6% from the previous year to 149,000, which continues the long term downward trend. Registrations on the trust registration service however have increased.
Chargeable income declared by trustees rose by 12%, but there was no significant change to the CGT take.
4. PAYE and employment
4.1 HMRC wins IR35 case against BBC presenters in split judgment
In the latest in a series of cases involving media personalities, HMRC has successfully argued that three individuals were within the IR35 rules and therefore subject to IT and NICs. The judge found there was sufficient mutuality of obligation between the parties and control held by the BBC to reflect a contract of employment. The Member of the Tribunal dissented, concluding that the arrangements were analogous to self-employment.
Three BBC presenters appealed to the FTT following determinations and notices issued by HMRC for IT and NICs. The presenters had each operated personal service companies, which had been engaged by the BBC to provide the services of the individual. As in several similar cases involving media personalities, HMRC argued that the arrangements were caught by the IR35 legislation. These rules apply where the individual would have been regarded as an employee of the client if his services were provided directly, rather than through the intermediary. The individuals are then taxed as if they were employees of the client.
The FTT examined the contracts between the intermediaries and the BBC at length. It found that, if the presenters had contracted directly with the BBC, the arrangements would have been contracts for employment in almost all cases. The primary issues were the mutuality of obligation and the control vested in the BBC over the presenters. The presenters were required to work for a minimum number of days if requested to, and the BBC was required to pay the presenters for the minimum number of days even if no work was provided. This was held to be a sufficient mutuality of obligation, even though the working arrangements were flexible and the presenters could refuse to work on some dates. In respect of control, the presenters had to obtain consent from the BBC before accepting work from another client. Although the BBC indicated that this consent would be forthcoming, the right to refuse still existed and was found to be evidence of employment. The fact that the presenters had a degree of autonomy when interviewing or presenting did not prevent there being an employment relationship; the autonomy was commensurate with their experience, and the BBC retained the ultimate control over the productions.
The Member of the FTT agreed with the finding of facts, but dissented from the conclusion reached by the Judge. The flexibility of working dates, autonomy, lack of benefits, imbalance of bargaining power and risk of the contracts not being renewed were cited as evidence of self-employment. This conclusion is broadly in line with those reached by the FTT in earlier IR35 cases involving media personalities that were heard by different judges.
Paya Limited and others v HMRC  UKFTT 583 (TC)
5. Business tax
5.1 CJEU upholds EC’s ruling on illegal State Aid granted to Fiat Chrysler
The CJEU has dismissed all actions brought by the Grand Duchy of Luxembourg and Fiat Chrysler Finance Europe Limited for the annulment of the EC’s finding of illegal State Aid. The transfer pricing methodology applied by the Luxembourg tax authority was found to be flawed: it incorrectly reduced the tax liability of the company by minimising the remuneration allocated to it. The decision by the CJEU confirms that the arms’-length principle can be used by the EC to establish whether or not an arrangement amounts to illegal State Aid.
In 2015, the EC had concluded that the tax authority of Luxembourg had granted illegal State Aid to a group treasury company of the Fiat Chrysler group. The tax authority had made a ruling in the company’s favour, approving the transfer pricing methodology applied to the financing services provided to other group members. The EC found that, among other things, the methodology did not comply with the arms’-length principle. This principle broadly requires transactions between related entities to be taxed as if the transactions had been undertaken by independent parties acting at arms’-length. On this basis, the EC concluded that the taxable profits of the company had been incorrectly reduced, and a tax advantage had therefore been granted.
The company and the Grand Duchy of Luxembourg each brought an action of annulment against this decision. The central argument was against the EC’s use of the arms’-length principle as a measure of whether or not a tax advantage existed. The CJEU dismissed this argument, noting that a tax advantage can only be identified by comparison to ‘normal’ taxation. This process requires the comparison of the actual tax treatment with what would have occurred under the normal domestic rules of taxation. Where domestic tax law does not differentiate between intra-group and independent party transactions, the law is intended to tax the former in accordance with the arms’-length principle. The EC was therefore correct to use this approach to establish whether or not a selective advantage had been granted. The ruling was upheld and the Luxembourg tax authority will be required to recover the under-charged tax from the company.
Paya Limited and others v HMRC  UKFTT 583 (TC)
5.2 Starbucks wins annulment action against EC decision on illegal State Aid
The CJEU has annulled the EC’s decision that illegal State Aid had been granted to a Starbucks group company by the Dutch tax authority. Although the EC was correct to examine the case on the basis of the arms’-length principle, it had failed to establish the existence of an economic advantage. Findings of non-compliance with the transfer pricing methodology and failures to analyse transactions properly are not sufficient to demonstrate that an economic advantage had been granted. The EC needed to have shown that those errors and failings led to the creation of an economic advantage amounting to State Aid.
In 2008, the Dutch tax authority had entered into an Advanced Pricing Arrangement (APA) with a Starbucks group company in respect of its intra-group services and payment of royalties. An APA is an agreement between a taxpayer and one or more tax authorities that sets out the transfer pricing methodology to be applied to future intra-group transactions. The EC had found that the Starbucks-Netherlands APA constituted illegal State Aid because it applied an inappropriate transfer pricing methodology and did not analyse a royalty payment. The Dutch tax authority and the Starbucks group company both brought actions before the CJEU for the annulment of the EC’s decision.
The CJEU upheld the actions, annulling the decision and the requirement for the tax authority to recover the undercharged tax from the company. It rejected the claim that the EC erred in using the arms’-length principle as a basis for analysing the case. The reason for this decision mirrored that in the Fiat Chrysler Finance Europe case (see Article 5.1 above). The EC had not, however, demonstrated that the methodology applied and the lack of consideration of the royalty resulted in an economic advantage. Merely identifying errors in the analysis underpinning the APA is not sufficient to conclude that those errors resulted in the company receiving State Aid.
T-760/15 Netherlands v Commission and T-636/16 Starbucks and Starbucks Manufacturing Emea v Commission
5.3 Taxpayer win against late filing penalties
The FTT has dismissed late filing penalties on the grounds that HMRC could not prove it had issued valid notices to file. It also considered the application of the new rules that deem a notice to file to have been issued where a voluntary tax return is submitted. It found that the voluntary returns could not have been filed late; the three month deadline for filing commences on the date the notice to file is deemed to have been issued, which is the date on which the return was actually filed.
The taxpayer appealed against penalties for the late filing of CT returns, though the judgment does not record the grounds of its appeal. As evidence that valid notices to file had been issued in advance of the penalty notices, HMRC produced three computer printouts that, it argued, proved that the penalties were imposed on a lawful basis. The FTT ruled that these printouts were not definitive evidence of valid notices to file. First, the 6 April 2016 date of the Return Summary was almost certainly a fiction; it is well known that this is the date on every Return Summary despite the fact that HMRC sends the letters on a staggered basis. Second, the Return Summary does not prove that a notice to file was actually sent. Third, there was no evidence that the supposed notice to file had been given by an officer of HMRC or of what information it requested from the taxpayer.
The FTT also considered the application of the voluntary tax returns rules, which deem there to have been a valid notice to file if a company files a CT return without having first received such a notice. This is a relatively new provision that was inserted by Finance Act 2019. It found that, since the filing date is three months after the notice is issued, and the notice is deemed to have been issued on the date the tax return was filed, the filing deadline could not possibly have been missed. The late filing penalties were therefore dismissed.
Tillzane Scaffolding Limited v HMRC  UKFTT 575 (TC)
6.1 VAT registration on a no-deal Brexit
HMRC has updated its position on VAT registrations in the event of a no-deal Brexit. Businesses will be able to submit advanced notifications of VAT registrations, which will be effective 1 November 2019 if the UK withdraws from the EU without a deal.
This change has been made in response to concerns that some businesses that are not currently registered for VAT will need to be VAT registered in the event of a no-deal Brexit. Advanced notifications are available for both UK and EU businesses. Applicants will receive a VAT number, but it will not be active unless and until the UK exits the EU without a deal in place. VAT notice 700/1 has been updated to provide guidance on this process.
7. And finally
7.1 Fun and games
Who would be a judge? In every case, caught between HMRC and the taxpayer, the learned judiciary and members of the FTT must mediate complex arguments, analyse less-than-perfect evidence, and, somehow, produce a just outcome. We may occasionally disagree with their views, but we applaud the effort poured into the written judgments, which are perhaps only ever read by a handful of people. Their judgments may not attract livestreamed hearings and eager journalists, but they are tremendously important to the taxpayer.
Their effort to produce clear, readable decisions is perfectly illustrated in a judgment published this week that was drafted at the height of the tennis season. The Judge, perhaps confined to some dark courtroom and deprived of even the most basic facilities for watching the US Open, chose to frame his written judgment in terms of the outside world. Observing the taxpayer at an initial disadvantage, he called it 30-love to HMRC. He followed the analogy through further points, noting a brief rally by the taxpayer to 30 points (HMRC at 40), before a final analysis of ‘game to HMRC’ (see article 1.1 above). It is both understandable and eminently readable.
Though we would not encourage taxpayers to engage in point-scoring against HMRC, we are extremely taken with the view of the Tax Tribunal hearing as a more-or-less friendly match, with all parties shaking hands once the best person has won. Long may our judiciary continue to mediate in this fashion. Our thanks to Judge Nigel Popplewell for enlivening a quiet afternoon, and game, set, and match to the FTT.
|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|