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 HMRC reveals the existence of a Family Investment Company investigation unit
HMRC has released details of a specialist unit investigating the use of Family Investment Companies (FICs). The team was created in April 2019, but information on its existence had not previously been disclosed.
HMRC confirmed the details of the FIC unit in response to a Freedom of Information request. The new team was formed to undertake a qualitative and quantitative review of the tax risks of FICs, particularly in respect of IHT. HMRC has confirmed that its work to date has been only exploratory. It also stated that the formation of the new team had not been announced to prevent individuals from arranging their activities to avoid challenge from HMRC. The FIC unit is part of the Wealthy and Mid-sized Compliance Directorate.
2. Private client
2.1 FTT upholds closure notice issued by HMRC
A taxpayer claimed sideways loss relief on losses realised from an LLP of which he was a member. HMRC denied the claim and removed it under a closure notice. The FTT has upheld HMRC’s decision.
The taxpayer was a non-active member of an LLP and had losses of £422,312. The taxpayer claimed £25,000 of the loss against his other income for the year. HMRC enquired into his personal return but not that of the LLP.
HMRC denied the sideways loss relief claim and the balance of carried forward losses. HMRC’s reasoning was that the LLP was not carrying on a trade, or at least was not carrying on a trade commercially. To make a loss relief claim against income, a trade had to be carried on commercially.
The taxpayer argued that HMRC could not deny the sideways loss relief claim on this basis without enquiring into the LLP’s tax return. The judge dismissed this appeal on the basis HMRC can enquire into anything contained in the return. It was up to the taxpayer to prove that there was a trade and it was being carried on commercially, which the taxpayer did not do.
Christopher J Grinyer v HMRC  UKFTT 0064 (TC)
2.2 Taxpayer’s appeal against assessment to tax and failure to notify penalties
The FTT has overturned HMRC’s decision to deny a taxpayer the right to appeal against eight assessments to income tax and failure to notify penalties. The FTT found that there was no evidence to deny the right to appeal.
HMRC contended that regular deposits into the taxpayer’s bank accounts were taxable income. HMRC subsequently issued the taxpayer with eight assessments to income tax totalling £290,928.56 and failure to notify penalties of £132,193.25.
The taxpayer asserted that he was a successful gambler and that all funds stemmed from his gambling winnings. The deposits would not, therefore, be taxable. The taxpayer’s appeal against the assessments and penalties had been denied by HMRC after an internal review.
Having stopped gambling in 2010, the taxpayer’s records were required to be kept until at least 31 January 2013. HMRC’s enquiries commenced in October 2013, meaning that the taxpayer’s statutory obligation to retain his records had ceased.
The FTT commented that whilst the taxpayer did not have any records of his gambling winnings, he reasonably demonstrated that he did not have a taxable income source. Under thorough crossexamination, witnesses were held to be truthful and credible in the evidence they gave supporting the taxpayer’s assertions. HMRC did not show any evidence of employment or trading.
The FTT allowed the taxpayer’s appeal.
Mr Simon James McMillan v HMRC  UKFTT 0082 (TC)
2.3 FTT upholds HMRC’s assessment on a payment treated as earnings
The taxpayer claimed that a payment from his company in 2014 was to purchase goodwill, which he held personally. The taxpayer claimed Entrepreneurs’ Relief (ER) on this transaction. HMRC opened an enquiry the taxpayer’s 2014/15 tax return. When issuing a closure notice, HMRC determined that the payment was employment income rather than for a disposal for capital gains purposes.
The taxpayer had operated a business through a variety of structures over more than two decades. The taxpayer maintained that the goodwill of the business remained with him personally throughout this period.
In September 2014, the company operating the business was said to purchase the goodwill from the taxpayer for £1.2m. This was treated as a capital transaction on the taxpayer’s 2014/15 tax return, into which HMRC enquired. HMRC amended the tax return to report the £1.2m as employment income, which resulted in extra tax due, and issued a closure notice.
The FTT has upheld this amendment. This was on findings of fact and inconsistencies in the taxpayer’s evidence, which did not prove that he owned any goodwill personally. The payment of £1.2m should be treated as earnings as it was not consideration for goodwill or a distribution.
Neill Dyer v HMRC  UKFTT 0072 (TC)
2.4 FTT reduces late filing penalties
The FTT has ruled in favour of the taxpayer by reducing late filing penalties from £2,160 to £430. The FTT cancelled the penalties for one tax year on the basis of a reasonable excuse and reduced penalties for the next tax year by half, due to special circumstances.
The taxpayer has been in self-assessment since at least 2005. He often submitted his return late. The 2013/14 tax return was filed in September 2015. The 2014/15 tax return was filed in July 2016. HMRC raised late filing penalties accordingly and correctly in line with the legislation. The £100 late filing penalty was not disputed and had been settled in both instances.
The taxpayer contested the amount of the additional late filing penalties, mainly on the basis of proportionality. In assisting the taxpayer, the FTT considered the appeal on grounds of reasonable excuse and special circumstances, although the taxpayer did not fairly make these arguments in his submissions.
The FTT found that a reasonable excuse existed for the late filing of the 2013/14 return because of the new two-step verification process used to access HMRC and bank records. These penalties were therefore cancelled.
The FTT then found that. while the same excuse was not reasonable for the late filing of the 2014/15 return, special circumstances existed. These were that the taxpayer was meticulous in his approach to his filings, and his “propensity for complexity” was considered to contribute to the length of time taken to prepare and submit his return. The penalties were reduced by half.
David Ferguson v HMRC  UKFTT 0066 (TC)
3. PAYE and employment
3.1 HMRC releases draft guidance on the off-payroll working rules
A new section has been added to the Employment Status Manual, setting out HMRC’s position on the operation of the off-payroll working rules in the private sector. This section is a draft version only and is subject to change.
The new draft guidance includes explanations of terminology, instructions on how to calculate the tax liabilities and the responsibilities of the various entities involved in the off-payroll arrangements. The new rules come into effect on 6 April 2020.
3.2 HC dismisses claims that the Loan Charge violates human rights
The HC has ruled in favour of HMRC on claims that the Loan Charge is against the Claimants’ human rights.
HMRC had previously sent letters to five Claimants, which HMRC argued were invitations to enter into a dialogue with a view to settling their respective tax liabilities. The judge ruled that these should be treated as decisions made by HMRC. The judge therefore reviewed the decisions made.
The judge ruled that the first Claimant, Cartref Care Home Limited (Cartref), was granted permission for judicial review. All other Claimants failed at the permission stage.
Cartref differed to the other claimants as the disguised remuneration rules did not exist at the time of relevant transactions.
The Claimants noted that the judge should consider the European Convention on Human Rights (ECHR) whilst presiding over the case. The challenges raised by the Claimants included:
- The legislation is retrospective;
- The Loan Charge is in breach of the ECHR, which protects the right to a fair trial;
- The Loan Charge has a disproportionate interference.
In dismissing each of these, the following points were noted:
- It does not matter whether or not legislation is retrospective, or even retroactive. This is provided that the legislation gives a fair balance between the public and private interests, and does not impose an unreasonable burden on the taxpayer.
- As there is a judicial review process, the Claimants are not denied a right to a fair trial.
- The evidence provided for the fourth challenge was hypothetical and not evidential.
The judge found that the challenges from Cartref failed. The challenges would also have failed for the other four Claimants. The claims were all, therefore, dismissed.
Cartref Care Home Ltd & Ors, R. (On the Application Of) v The Commissioners for Her Majesty's Revenue And Customs  EWHC 3382 (Admin)
4. Business tax
4.1 New interest restriction election for corporate non-resident landlords
New secondary legislation will make a new election available to corporate non-resident landlords (CNRLs) that do not have gross payment status. These CNRLs may elect for a fixed limit to finance cost deductions, rather than apply the Corporate Interest Restriction (CIR).
From 6 April 2020, CNRLs will be transferred from IT to the CT regime. Some CNRLs will remain part of the Non Resident Landlord Scheme (NRLS), which requires IT to be withheld by the tenant or the agent from the rent paid, reduced by allowable expenses including finance costs. CIR limits the finance costs that can be deducted by a company for tax purposes and can involve complex calculations. The new regulation introduces a simpler alternative to the CIR for the purposes of determining the amount of tax to be withheld under the NRLS. CNRLs may make an irrevocable election to restrict financing cost deductions to 30% of UK rental income net of deductible expenses other than finance costs. Unused allowances and unrelieved financing costs may be carried forward.
SI 2020/151 Taxation of Income from Land (Non-residents) (Amendment) Regulations 2020
4.2 Updated guidance on corporate non-resident landlords
HMRC has updated its guidance on the requirement for companies in the Non Resident Landlord Scheme (NRLS) to submit CT returns.
From 6 April 2020, Corporate Non Resident Landlords (CNRLs) will be transferred from IT to the CT regime. There is no requirement to submit a CT return if the CT liability is fully offset by the tax deducted under NRLS. This exemption ceases to apply, however, where the CNRL makes a property disposal on or after 6 April 2020. The CNRL will then be required to report its property income annually on a CT return until the property business ceases, even if tax is deducted under NRLS.
The updated guidance also confirms that there is no need to notify HMRC of property disposals connected to Collective Investment Vehicles where relief is given under a Double Taxation Agreement.
5.1 HMRC has released a brief in relation to the UT decision in the News Corp case.
As reported in the 14 January 2020 edition of Update, the UT ruled that e-newspapers may be zerorated for VAT. HMRC has released a brief on this decision, confirming that its stance on the matter has nevertheless not changed. An appeal will be made to the CA.
HMRC contends that the supply of digital newspapers does not qualify for zero-rating for VAT purposes. This stance remains unchanged despite the UT decision.
An organisation can make a claim for overpaid VAT if it considers that the News Corp decision is applicable to its own supplies of digital publications. The claim should be made in writing to HMRC and the brief details what is required.
Any claim made will be rejected by HMRC. The claimant can then appeal HMRC’s decision to protect its own position. The usual four year time limit for the claims applies.
The brief also notes that any claims made may be subject to considerations of unjust enrichment.
5.2 EC adopts VAT simplification and anti-fraud measures
The Council of EU Finance Ministers (ECOFIN) has agreed to implement simplified VAT rules for small businesses. It has also adopted anti-fraud measures in respect of cross-border financial transactions.
The simplified VAT rules will reduce the administrative and compliance burden for small enterprises. The rules will apply to enterprises with an annual turnover below a threshold set by the Member State governments. This threshold cannot exceed €85,000. The simplified measures will take effect on 1 January 2025.
The anti-fraud measures focus on cross-border e-commerce. Payment service providers will be required to keep records of cross-border payments in respect of e-commerce to aid in the detection of tax fraud. These rules come into effect on 1 January 2024.
VAT scheme for small businesses: https://ec.europa.eu/taxation_customs/business/vat/action-planvat/vat-scheme-for-small-businesses_en
Anti-fraud VAT measures: https://ec.europa.eu/taxation_customs/news/new-measures-fight-vat-fraudusing-payment-data_en
6. Tax publications and webinars
The following client webinars are coming up over the next few months.
- 17 March 2020: S&W Sessions: The Budget
7. And finally
7.1 The house always wins
We were intrigued by the FTT hearing on Mr McMillan and his gambling winnings, as reported at item 2.2.
The FTT noted that HMRC had inadvertently disclosed a review letter that was not sent to Mr McMillan. This review letter was dated 11 April 2018 and concluded that all of the assessment and penalty determinations issued by HMRC should be cancelled. This on the basis that HMRC had failed to identify a taxable source. Of course, this is just what the FTT found and what Mr McMillan asserted.
The review letter that was sent to Mr McMillan, dated 16 April 2018, from the same review officer, stated that the assessments and penalties should be upheld. Well this certainly raises an eyebrow.
Now, we are in no position to say that evidence was not received by HMRC in these five days to facilitate the change of position. The fact that HMRC could not show Mr McMillan as employed or engaged in any trade at the tribunal, however, is not helpful.
Mr McMillan has since stopped gambling and has used his winnings to acquire and restore a residential property. HMRC appears to have gambled by claiming that Mr McMillan has a taxable source of income without sufficient evidence.
But the house always wins. Mr Simon James McMillan v HMRC  UKFTT 0082 (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|