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 CA rules on Accelerated Payment Notices and PAYE
The CA has found that Accelerated Payment Notices (APNs) can be issued validly in respect of PAYE determinations.
A company entered into a marketed IT and NIC avoidance scheme in relation to the remuneration of two of its directors. An APN was later issued by HMRC. The company argued that an APN could not be issued validly in respect of a PAYE determination because PAYE is a collection mechanism rather than a tax in its own right. The FTT and the UT dismissed the appeal.
The CA upheld the UT’s ruling that tax due under a PAYE determination could be demanded through an APN. Although the PAYE system does not impose a charge to tax, amounts subject to PAYE determinations nevertheless fall within the meaning of ‘disputed tax’. The judgment sets out a detailed examination of the legislation and its correct interpretation.
Sheiling Properties Limited v HMRC  EWCA Civ 1425
1.2 HC refuses mistake rectification claim on tax scheme
The HC has refused an application by a family to set aside transactions involving a tax scheme on the grounds of mistake and restore the assets transferred into the scheme to the claimants. Although the family were mistaken as to the consequences of the scheme failing, which will result in up to 90% of the investment being lost, they understood the consequences of the initial transfers. While the introducers had sold a scheme they knew to be evasive, the taxpayers had looked into it carefully before investing.
The family invested in a complex scheme using an employee benefit trust (EBT). They later became aware that the scheme would result in them only recovering 10% to 20% of the assets transferred. They then applied to the HC to unwind it by effectively negating the initial transfers into the scheme on the grounds that they had made a mistake.
The HC considered the case law on equitable mistake. Although highly critical of the introducers, who sold the family a scheme they knew to be evasive, and made dishonest claims about it, the judge refused the application. The family had taken a careful and painstaking approach to the investment, and were aware that the funds were to be transferred into a trust for non-existent employees, as a sham. They miscalculated the consequences of the failure of the scheme, as they had believed that it could be reversed, but this did not mean that the transfers had been made in error. In dismissing the claim, the judge commented: ‘[The claimants] gave no thought to the point that the transactions they freely entered into were not things writ in water and reversible at will, but proper transfers of their property that could only be reversed if certain conditions were met. That, in my judgment, is not a mistake.’
Bhaur & Ors v Equity First Trustees (Nevis) Ltd & Ors  EWHC 2581 (Ch)
2. Private client
2.1 CA partially allows HMRC appeal on transfer of assets abroad
The CA has found that taxpayers who caused a company to transfer its business to an overseas company had procured the transfer, so were taxable under the transfer of assets abroad (TOAA) code. One of the three taxpayers, who did not take business decisions, was held not to be taxable under this legislation.
The taxpayers transferred their gambling business from a UK company to a Gibraltar company, as it was commercially advantageous to offer customers a reduced rate of betting duty. The UK resident taxpayers, a family group, were directors and shareholders of both companies, so paid tax in the UK on salary and dividends. HMRC sought to tax them on the entire profits of the transferee company, in proportion to their shareholdings, on the grounds that they had made a transfer of assets abroad. Much of this profit had been reinvested in the business.
The UT had found that the TOAA code did not apply to the transaction; the taxpayers had not made a transfer, as the assets were the property of the company which transferred them. The CA disagreed. It considered that even though the shareholders each held minority interests so did not control the company, they did act together to procure the transfer, although only two of the three judges agreed on this point.
The CA also found that there was no requirement for income tax to be avoided for the TOAA rules to apply, and disagreed with the UT’s finding that the taxpayers had a valid motive defence. Although the transfer was to save the business, this was only possible by avoiding the betting duty. The two were inseparable, so there was a tax avoidance motive. It rejected the contention that the TOAA in this case infringed the EU freedom of establishment principle, and held that the income subject to the assessments was not too remote from the initial transfer to be assessed.
Overall, HMRC’s appeal was allowed in relation to the two taxpayers involved in the business, who had procured the transfer, but dismissed in relation to the third, who had simply gone along with their decisions.
Fisher v HMRC  EWCA Civ 1438
2.2 FTT finds employments not aggregated for NICs
The FTT has dismissed the appeal of a taxpayer that his two employments should have been aggregated for NICs. Although both companies employed him to drive ambulances to the same hospitals, they were organisationally separate and provided different services. NICs on the two employments calculated separately were insufficient to entitle him to claim employment and support allowance.
Following health problems, the taxpayer, an ambulance driver, tried to claim employment and support allowance. HMRC informed him that two years of work were non-qualifying, as he had paid insufficient NICs. He had had two separate employments, on which the NICs were calculated separately, and as the income from each was low the total NIC was insufficient. He appealed in relation to 2014/15 on the grounds that the earnings from the two employments should be aggregated, so more NIC should have been deducted.
Originally, the taxpayer worked for a company (A) providing patient transport services and ambulance services to the NHS. A then lost the contract for patient transport to another company (B). Part of the taxpayer’s contract was transferred to B, and he then worked for both companies driving their respective vehicles for the same hospitals. They did not share vehicles or premises.
The FTT found that the companies had not been carrying on business with each other, so the employments could not be aggregated for NICs. They provided distinct, though complementary services, and were completely separate organisations, though both working with the NHS.
Long v HMRC  UKFTT 338 (TC)
2.3 Appeal allowed on private residence relief
The FTT has found that a taxpayer was entitled to private residence relief (PRR) on an annex to his home that was converted to a flat capable of being a separate dwelling. After the conversion, although friends stayed on an informal basis, it was regarded as part of the main home.
The taxpayer converted an annex to his home in to a flat. The annex and his home had been purchased as one transaction. He later sold it to his partner, who shared his home, but did not report the disposal as he regarded the annex as part of his dwelling.
The FTT analysed the period between the conversion of the annex and the sale. Initially it was used as storage space, then friends of the couple had lived there for a small charge, without a formal tenancy agreement. During their stay the taxpayer continued to use it to store some items, and for relatives to stay in when the ‘tenants’ were away. After they left, it was made available as a holiday let.
The FTT found that, though capable of being used as a separate dwelling, the annex formed part of the main home until the holiday letting began to be advertised. The friends had used it on an informal basis that did not negate its being part of the main home. PRR was therefore available. Although the holiday letting was not continuous, and some family use continued, from the time it was advertised it could not be regarded as part of the home.
Crippin v HMRC  UKFTT 0351 (TC)
2.4 CA dismisses appeal on IHT exemption for political donation
The CA has found that denying IHT relief on a donation to a political party that does not meet the criteria set out in legislation does not constitute discrimination on the grounds of the taxpayer’s political opinion.
The taxpayer made donations to UKIP from his personal funds through a company he controlled. Normally, gifts made in this way would be subject to an IHT charge, but he claimed the exemption for donations to political parties. As this exemption only applies to political parties that meet specific criteria, including at least one MP elected at the last general election, the exemption was refused, though the party had won two by-elections. He appealed on the grounds that this exclusion was a breach of the European Convention of Human Rights (ECHR).
The CA agreed with the UT that the legislation did not discriminate against the taxpayer on the grounds of his political opinion. It did discriminate against him on the basis of his status as a supporter of a political party without MPs elected at a general election, but this difference in treatment was justified so the ECHR was not breached. The legislation reflected the will of Parliament through the chosen criteria, and there were no grounds to interfere.
Banks v HMRC  EWCA Civ 1439
2.5 Late filing penalties reduced due to HMRC failure
The FTT has reduced late filing penalties as, when the taxpayer asked to be resent the return to fill out, HMRC had failed to advise him that filing an electronic return would reduce penalties. The FTT adjusted the penalties to put him in the same position as though he had filed an electronic return on the same date. His other reasons for late filing were not taken as reasonable excuses.
The taxpayer appealed late filing penalties on various grounds, including the difficulty he had had in obtaining information, that he had relied on his agent, and medical issues. The FTT rejected the reasons put forward, partly due to the length of the delay in filing, but reduced them as it found that other special circumstances applied.
After the taxpayer had called them, having found out penalties were charged, HMRC sent him a paper return which he filed nine days later. The HMRC adviser had not suggested that he file an electronic return instead to reduce penalties, nor informed him of the difference in penalty calculation, so the FTT reduced penalties as though the return he filed had been electronic.
Puttock v HMRC  TC08283
3. Business tax
3.1 R&D claim fails for lack of expert evidence
The FTT has been unable to conclude that expenditure was incurred in respect of R&D activities because of a lack of expert witness. The burden of proof falls on the company to demonstrate that the claim meets all the legislative requirements, including that the activities amount to R&D.
A company had engaged software developers to create a digital platform to match individuals with online learning providers. HMRC denied R&D relief in relation to those costs on the basis that the expenditure did not meet the definition of ‘R&D’ as set out in the Department for Business, Innovation and Skills guidelines. The burden of proof falls on the taxpayer to demonstrate that the expenditure meets that definition.
The FTT dismissed the appeal on the grounds that it did not have sufficient evidence to conclude that the activities fell within the scope of that definition. The known facts showed that the activities could meet that definition; but, equally, they might not. The company had failed to provide its witness statements on time, and they were therefore inadmissible before the FTT, leaving the company with no supporting expert evidence. This case reiterates the importance of being able to substantiate R&D claims, particularly with the evidence of competent professionals working in the field.
Grazer Learning Limited v HMRC  FTT 0348 (TC)
4.1 Changes to HMRC policy regarding the construction self-supply charge
HMRC has announced that following the Supreme Court’s decision in Balhousie Holdings Ltd, it now accepts that certain sale and leaseback transactions are not considered disposals which trigger a self-supply charge.
Where a zero rating has been obtained on the construction or acquisition of a property for ‘relevant residential’ or ‘relevant charitable’ purposes, there may be a VAT self-supply charge if there is a change of use or disposal of the property within a 10 year period. The Court considered whether or not a sale and leaseback arrangements entered into by Balhousie, where they operated the premises for a relevant residential purpose throughout the period, represented the disposal of the ‘entire interest’, which was HMRC’s view.
The Supreme Court, however, disagreed and ruled that the simultaneous sale and leaseback resulted in Balhousie always maintaining an interest in the property either as owner or lessee without interruption and therefore no self-supply charge was triggered.
This policy change is relevant to organisations within the care home, NHS or charities sector as well as businesses engaged in property transactions carried out for a relevant residential or relevant charitable purpose.
Balhousie Holdings Ltd v Revenue and Customs (Scotland)  UKSC 11
5. Tax publications and webinars
5.1 Tax publications
The following Tax publications have been published.
6. And finally
6.1 What ho!
15 October 2021 marks the 140th anniversary of the birth of P.G. Wodehouse. Better known for his humour and wit, his financial success also resulted in a spectacular string of tax disputes on both sides of the Atlantic. He found himself grappling with double taxation laws still in their infancy, incompetent accountants and liens issued to his publishers by the IRS. A decision to move to France to mitigate his tax troubles led to him becoming a prisoner of war during World War II, and he eventually ended up settling his tax affairs before the US Supreme Court. So great was his (understandable) ire at the tax system that he dedicated his novel, Right Ho, Jeeves, to his tax lawyer.
We cannot hope to describe his opinion on the tax system with as much flair as the man himself. May we suggest the following article for your enjoyment?