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. Private client
1.1 Discovery found not to be stale
A taxpayer’s claim to offset Mansworth v Jelley losses has been refused. The FTT found that although the claim to the losses was made in 2003, HMRC made a valid discovery in the course of correspondence with the agent in 2013, and issued an assessment before it was stale.
In 2003, the taxpayer wrote to HMRC to claim losses for two previous tax years, following new guidance that they were allowable. HMRC denied later offset of the losses, in line with new guidance, and issued closure notices for the offset years and a discovery assessment. The taxpayer appealed on two issues.
The first was against HMRC’s view that his 2003 letter was an amendment to his tax returns, rather than a standalone claim, on which HMRC would have been out of time to issue a closure notice. The FTT found on review of the letter that the intention was clearly to amend the returns, and dismissed this part of the appeal.
The second issue was ‘staleness’. The taxpayer began using the losses to offset gains on his 2009-10 tax return. His agent then wrote to HMRC in 2012 to advise them that these losses were potentially not allowable, depending on the outcome of a related court case. HMRC replied to explain that guidance on these losses had previously changed, so they were not allowable. After along two years of correspondence, the discovery assessment was issued. The FTT also dismissed this ground of appeal, as HMRC had engaged in active consideration of the issues throughout this period. The discovery was only made in 2013, when the officer received a subsequent letter from the agent with more details.
Cumming-Bruce v HMRC  UKFTT 490 (TC)
1.2 Entrepreneurs’ Relief claim refused as no employment existed
The FTT dismissed a taxpayer’s claim to Entrepreneurs’ Relief (ER) on £3m of gains, finding that he was not an employee of the company for the required 12 months before the disposal.
HMRC refused claims to ER on two share disposals, as the taxpayer’s directorship had ceased over one year prior to the sale. The taxpayer argued that he had been an employee in this period, as his written service agreement was never properly terminated.
He was issued with an unsigned service agreement describing his employment, with a termination clause requiring notice in writing. He was a director and later started to provide other services to the company through a personal service company. His directorship was terminated following a disagreement, and the consultancy was terminated at the same time, and he received no further income from the company. He explained that he was advised by his sister that his employment had not been properly terminated, and therefore he continued undertaking work on behalf of the company, such as looking at strategy, but did not inform anyone at the company of this. The FTT found that as owner of 23% of the company, it was more likely that he was concerned with the share value. On his 2013/14 tax return an employment end date was included.
The FTT held that the employment ceased when the personal service company became involved, as the parties must have had a mutual understanding that the earlier service agreement no longer governed their relationship. When his directorship was terminated, more than 12 months prior to sale, there was no employment relationship and ER was therefore not available.
Kennedy v HMRC  UKFTT 3 (TC)
1.3 Loss with no economic substance disallowed
Arrangements that taxpayers entered into in order to produce tax-deductible losses have been found to be ineffective. As no real economic loss existed, the separate elements of the arrangement were treated as one transaction. As there was no overall loss, the appeal was dismissed.
The FTT heard four near identical appeals on structures sold to the taxpayers by one company. Two related to claims for capital losses on share disposals, and two to claims for miscellaneous income losses on disposals of certificates of deposit.
Each taxpayer entered into two forward contracts, for purchase and sale of securities to the same bank. The contracts were structured such that the index the contracts were linked to changed, any gains would arise on gilts, and any losses on the shares or certificates of deposit. The taxpayers paid the agent commission for arranging this.
The FTT considered previous similar cases, and concluded that, as in those, the separate identity of these contracts should be disregarded. This was one integrated scheme, and as one transaction, no loss arose. The FTT also found that the main purpose of the arrangements was to secure a tax advantage. The appeals relating for the capital losses would also have failed on this ground, though there is no similar provision for income losses.
Padfield & Ors v HMRC  UKFTT 513 (TC)
1.4 Follower notice penalties reduced
The FTT has upheld penalties charged on a taxpayer who failed to amend his return after receiving follower notices. It was not reasonable of him to rely on the advice of the avoidance scheme promoter not to comply. The penalties were reduced by a quarter as the judge disagreed with HMRC’s calculations.
The taxpayer participated in a tax avoidance scheme. It was found to be ineffective, so he was issued with follower notices requiring him to take corrective action. This was to agree with HMRC in writing that he would relinquish the tax advantage, and inform HMRC of the amount of tax due. He refused to comply, based on advice from the scheme provider, and on some confusion between the advance payment notices and follower notices. He was charged penalties.
The FTT upheld the penalties in part. They had been correctly charged, and it was not objectively reasonable for him not to take corrective action. Many of his submissions related to events after the deadline, when penalties had already been charged, and the HMRC correspondence was clear. He had relied on the advice of the scheme promoter not to comply without taking action to verify it independently, which was not reasonable given HMRC’s letters to him. The judge however reduced the penalties by a quarter as he had assisted HMRC by providing information.
Bentley v HMRC  UKFTT 5 (TC)
1.5 FTT cancels late filing penalties
Penalties have been waived for a low income taxpayer who encountered difficulties in filing online, and tried to resolve them with HMRC. The judge noted that although he could have resolved the problem by using an agent, this should not be necessary in a case where taxable income was only £3,500.
The taxpayer filed his 2016/17 return almost a year late. He appealed against the late filing penalties. He had been in self-assessment since 1996, and until his local HMRC office closed in 2014 they had assisted him with his return. On encountering difficulties with filing this return online he had repeatedly called HMRC, and made efforts to submit, eventually doing so on paper. He did not possess a computer or mobile phone. His income for the year was £3,500.
The FTT granted his appeal on review of the chronology. The online filing issues had been beyond his control, and HMRC had given him incomplete advice on penalties, as well as taking some time to issue letters to him. Although he could have instructed an agent, this should not be necessary for a low income taxpayer.
Brocklesby v HMRC  UKFTT 498 (TC)
1.6 COVID-19: Self-assessment penalties
HMRC is not offering a blanket penalty waiver, despite the difficulties agents and taxpayers are experiencing in filing due to the pandemic. Appeals will, however, be looked at leniently.
HMRC has reiterated that it does not plan any changes to the self-assessment deadline nor penalty structure. Taxpayers are encouraged to file returns and pay tax on time.
HMRC does, however, understand that this is a difficult time, and has confirmed that:
‘no taxpayer or agent who is unable to submit a return by 31 January for reasons related to the pandemic should worry that a penalty will be payable; it won’t, and we will make the process of cancelling penalties as simple and easy as possible for all concerned’.
2. Trusts, estates and IHT
2.1 Trusts, estates and IHT
HMRC has extended an exemption to public access rules on national heritage assets exempt from IHT until April 2021. The conditional exemption will continue to apply if viewing conditions are not met due to the pandemic until then.
Some assets of national importance are granted conditional exemption from IHT, resulting in an IHT deferral, on condition that they are available for the public to view. Exact conditions are agreed with HMRC for each particular national heritage asset, but, for example, would generally include regular opening times for historic buildings.
HMRC had previously confirmed that if conditions were not met due to the effects of the pandemic, the exemption would not be lost. Withdrawal of public access to objects on loan to exhibitions, or available to be seen by appointment, is acceptable, as are difficulties with publicity. The original announcement stated that where a national heritage property was closed, HMRC would expect the lost days to be made up later in the year, if possible, when Government advice changes. This part of the guidance has now been removed
3. PAYE and employment
3.1 Cars in dealership found to have been made available for private use
The FTT has largely upheld benefit in kind and NIC charges on a car dealership and its director. In any year in which he had used the cars for private journeys, they had effectively been available to him, even if taxed as off road.
HMRC assessed an individual to a benefit in kind charge covering five tax years in respect of two cars. It also issued NIC determinations on the company believed to have made them available to him , for a slightly different time period. The appeals were heard together.
The company was a car dealership, that also owned two expensive cars. The taxpayer and his wife were the directors. The tribunal heard evidence on how the cars were used in the business, for example to attract business, and how they were taxed as off road except when taken out specially. In some years, a benefit in kind was declared on one or the other, and some years not, which was intended to reflect the years in which the cars were occasionally used for private journeys.
The FTT found that in any year where the cars had been used for private journeys, they had in effect been made available to the director, even if taxed as off road and that there were more years than had been declared on P11ds. Some of the assessments for early years were not upheld due to a procedural issue, but the appeals were largely dismissed.
Tim Norton Motor Services Ltd & Anor v HMRC  UKFTT 503 (TC)
3.2 Technical consultation on NICs for veterans
HMRC has published the draft legislation that will reduce secondary Class 1 NICs to nil for employers of armed forces veterans in their first year of civilian employment.
The draft clauses follow an announcement made in the 2020 Budget and a public consultation on the proposed measures. The proposal is designed to encourage businesses to employ veterans and support their transition into civilian life. The zero rate of secondary Class 1 NICs will be capped at £5,000 for each qualifying employee. It will be available for the first twelve months of civilian employment for veterans who have completed at least one day of basic training in Her Majesty’s regular armed forces. There are specific provisions covering concurrent and subsequent employments within that twelve month period. HMRC is seeking views on the draft clauses and the consultation closes on 8 March 2021. The legislation is expected to take effect from 6 April 2021.
4. Business tax
4.1 Daily penalties cancelled where notice was given retrospectively
The FTT has ruled against daily late filing penalties because notice was given after the period in respect of which the penalties were issued. It held that notice of daily penalties cannot be given retrospectively.
The taxpayer had filed its ATED return late and HMRC issued several late filing penalties. The taxpayer was eligible for ATED relief, so no tax was due. The director was also unaware of the ATED regime and the requirement to file an ATED return. The FTT, however, ruled that the taxpayer did not have a reasonable excuse, nor were there special circumstances that would allow a penalty reduction. It was not objectively reasonable for the taxpayer to be unaware of the filing requirements of a tax regime that had existed for so long. The three and six month automatic penalties were upheld by the FTT. The daily penalties, however, were not found to be valid. The law requires HMRC to give notice specifying the date from which the daily penalties will be imposed. The FTT held that such notice cannot be given retrospectively. HMRC gave notice of the daily penalties to the taxpayer after the period to which those penalties related. Those penalties were therefore held to be void.
D & G Thames Ditton Limited v HMRC  UKFTT 489 (TC)
4.2 R&D claims fail for lack of evidence
The FTT has only partially upheld an appeal on R&D relief because the taxpayer failed to provide adequate supporting evidence to verify either the activities or the expenditure involved. In particular, the taxpayer did not prove that most of the activities in question sought to resolve a scientific or technological uncertainty or to advance overall scientific knowledge.
The taxpayer was an engineering company that had been denied R&D relief, under the SME scheme, by HMRC on several different activities. The taxpayer conceded that some of the claimed expenses were ineligible before the case concluded, but appealed the remaining amount.
The central issue was the lack of evidence supporting the claims. There was little written evidence, the taxpayer had failed to provide information requested by HMRC and errors were found in the R&D report. The Managing Director provided verbal evidence to the FTT on each of the R&D projects in question. His evidence, however, was only strong enough partially to support one of the claims for relief. The remainder was dismissed. The FTT found that the taxpayer had not demonstrated that most of its activities sought to resolve a scientific or technological uncertainty; nor had it proven that most of its activities sought to advance overall scientific knowledge in the field. Furthermore, some of the activities claimed as R&D were in fact subcontracted to the taxpayer by other companies, or subsidised, and therefore ineligible for relief.
Hadee Engineering Co Ltd v HMRC  UKFTT 497 (TC)
5.1 VAT avoidance scheme defeated in the FTT
HMRC has succeeded against a scheme designed to avoid irrecoverable VAT by using an artificial structure involving a Gibraltarian entity. The FTT ruled that the arrangements must be redefined according to the economic reality of the transactions.
The taxpayer was a loan broker, and therefore supplied services that were exempt from VAT. It entered into arrangements with a Gibraltarian credit broker that had been set up by the principal shareholder of the taxpayer. The Gibraltarian entity then engaged a UK advertiser that had previously been engaged directly by the taxpayer. The taxpayer claimed that the Gibraltarian entity, rather than itself, had made supplies of credit brokering to UK customers. The taxpayer also claimed that the Gibraltarian entity had received the advertising services. The FTT compared the contracts and actions undertaken with what would be expected from an arm’s-length arrangement to identify the commercial reality of the transactions. It found that, in fact, the taxpayer had made the supplies of credit brokering services. The advertising company was held to have directly supplied the taxpayer. The FTT redefined the transactions accordingly.
Wilmslow Financial Service plc (in administration) v HMRC  UKFTT 516 (TC)
5.2 FTT rules on the nature of a payment
A payment from a financing company was found by the FTT to be a loan, rather than consideration for taxable supplies. HMRC had mis-characterised the payment after refusing to accept evidence of a loan arrangement.
The taxpayer was a property development company that had received payments from a financing company. One of the director-shareholders of the financing company was also a director of the taxpayer. The taxpayer claimed these payments were loans, and therefore exempt from VAT. HMRC believed the payments to be consideration for taxable supplies that should have been subject to VAT.
The FTT considered the payment documentation and concluded that the payments were advances by way of a loan. There were several pieces of evidence that HMRC claimed not to have seen before, but even based on the evidence familiar to HMRC the FTT ruled that HMRC had erred in its judgment. The documents HMRC admitted to having previously seen were sufficient evidence to demonstrate the financing relationship.
6. Tax publications and webinars
6.1 Tax publications
7. And finally
7.1 Celebrating Mansworth v Jelley Day in style
8 January, as our readers well know, was Mansworth v Jelley Day. We commemorate that on that day in 2003, the Inland Revenue issued a now famous Technical Note on the CGT effect of that decision, which had just been handed down in December 2002.
You had to be there; tax return preparers went into a tail spin to scramble to make in-time claims for ridiculously artificial but Revenue-approved CGT losses from share option exercises following the release of what was the Revenue’s spectacularly wrong analysis of the application of the case.
How brilliant that this year we could celebrate the Day fittingly with yet another decision: Cumming-Bruce v HMRC, discussed at 1.1 above. At the time in 2003, as we recall, counsel for Mr Jelley, Michael Sherry, wrote a useful article pointing out that the Revenue analysis was seriously muddled and that the losses didn’t arise as the Revenue said they did. In a great continuity story, we were delighted to see that Mr Sherry was still slugging it out, representing the taxpayer in the Cumming-Bruce decision.
Mansworth v Jelley is the case that truly keeps on giving. Here we are some eighteen years later still arguing over the aftermath of the debacle. We are not really surprised, though, that the discovery case was lost. Mansworth v Jelley can never go stale.
Mansworth (Inspector of Taxes) v Jelley  STC 53
Cumming-Bruce v HMRC  UKFTT 490 (TC)
|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.