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 Penalties quashed due to justiciable error by HMRC
The FTT found that HMRC failed to address one of the taxpayer’s arguments regarding late filing penalties. She had argued that she had come to an agreement with HMRC regarding her outstanding tax. Failing to address this issue, the FTT ruled, amounted to an error of public law character.
The taxpayer had incurred a PAYE underpayment, and HMRC had registered her for self-assessment to collect this tax. The taxpayer failed to submit the tax return, and incurred an immediate late filing penalty. She claimed to have then called HMRC and agreed that the tax would instead be collected through PAYE, so she did not need to submit the return. When the failure to file continued, HMRC issued further penalty notices. The FTT found that the taxpayer did not have a reasonable excuse for the immediate failure to file the return, so the first penalty was valid. The later penalties, however, were quashed on the grounds that HMRC’s approach to the issue of special circumstances was flawed. HMRC failed to address her claim that it had agreed to collect the tax through PAYE and the FTT held that this amounted to an error of public law character. If such an agreement had been reached, it would have affected the imposition of the later penalties. HMRC should have considered the argument before issuing the later penalties. The appeal was allowed in part.
Dana Louise Sanders v HMRC  UKFTT 0023 (TC)
1.2 Penalty cancelled after bank failed to produce statements
Penalties for a failure to produce bank statements have been quashed after the FTT held the taxpayer had a reasonable excuse. The missing thirteen days of statements was due to the bank’s error; the taxpayer had taken reasonable care.
HMRC had issued an information notice requesting bank statements in relation to two bank accounts belonging to the taxpayer. The taxpayer had requested these from the banks, and passed the documents to HMRC. One of the statements was thirteen days short of the full period requested by HMRC. HMRC imposed a penalty for failing to provide those statements. The FTT cancelled the penalty on the grounds that the taxpayer had a reasonable excuse. He had taken the actions a reasonable business person wishing to comply with the information notice would have taken. The fact that one bank had failed to produce statements for the full period before the deadline for providing the information did not mean he had not taken reasonable care.
Pervez Akhtar v HMRC  UKFTT 0039 (TC)
1.3 NIC thresholds increased for 2019/20
Draft regulations have been laid before Parliament, which will increase the lower thresholds for Class 1 Primary and Class 4 NICs. The upper limits have not been changed.
The changes are in line with the Government’s promises to reduce the NIC liabilities of lower income earners. The new primary threshold for Class 1 Primary NICs will be increased to £9,500 from £8,632 per year. The lower profits limit for Class 4 NICs will also be increased to £9,500 from £8,632 per year. The thresholds for Class 1 Secondary, Class 2 and Class 3 NICs will be increased in line with inflation.
2. Trusts, estates and IHT
2.1 APPG for Inheritance & Intergenerational Fairness publishes its report on IHT
The All Party Parliamentary Group (APPG) report proposes a radical reform of IHT and CGT, replacing IHT with a low flat rate gifts tax. In addition, reliefs such as business property relief and agricultural property relief would be abolished. The tax free uplift on all assets at death would also be abolished, replaced by a no-gain no loss disposal. If adopted, this would be a radical simplification of capital taxes.
This report was not produced by a statutory body and so the Government may be informed by it but is not bound by any of the recommendations.
The APPG suggests replacing the current IHT regime (which combines a high flat-rate of 40% with an array of associated reliefs), with a flat-rate gift tax payable both on lifetime and death transfers.
All IHT reliefs other than spouse and charity exemptions would be abolished and the tax-free capital gains tax (CGT) uplift on death would also be abolished. There would be a death allowance at a similar level to the current nil rate band to ensure that small estates not currently paying tax will remain unaffected by the changes. There would also be an annual lifetime allowance of £30,000 on lifetime gifts.
- If the gift was of cash, the donor would withhold the tax. Gifts of illiquid assets could pay tax over 10 years, interest-bearing, except for businesses and farms where it could be interest-free.
- Lifetime gifts would have no effect on the position at death.
- There would be no application of the reservation of benefit rules or pre- owned assets tax as all lifetime and death gifts would be taxed.
- Gifts to trusts would be taxed as gifts to individuals. Discretionary trusts would pay an annual charge and gifts to a life tenant would be taxed as a gift to an individual and taxed on death.
- The loss to estate principles would be replaced.
- All pension funds at death would be taxed at a flat rate of 10% unless passing to spouse.
- Tax would be payable on death on worldwide estate at 10% possibly rising to 20% over £2M (unless the spouse exemption applied).
- 100% charity relief would be retained.
- Non-doms: domicile would be abolished as a connecting factor for IHT. Those resident for more than 10 out of 15 years would be taxed on their worldwide assets. Trusts set up by non-doms who have been resident for more than 10 years would be subject to the annual tax if any UK resident could benefit.
- The CGT death uplift would be abolished and assets would pass on a no-gain non loss basis, in other words, a compulsory holdover. All lifetime gifts of assets could be held over.
The report does also explore ideas of a wealth tax, but considers it problematic.
3. Business tax
3.1 FTT upheld SAO penalties
Two penalties for failures to comply with the Senior Accounting Officer (SAO) rules have been upheld by the FTT because there was no reasonable excuse for the penalties to be cancelled.
A company and its SAO had incurred penalties of £5,000 for failure to notify and failure provide a certificate to HMRC under the SAO regime, respectively. The company was dormant, had not submitted a tax return for several years, and was inadvertently omitted from the notification that included all the other relevant group companies. The FTT went to considerable length in the judgment to explain how HMRC should decide whether or not to issue penalties in relation to non-compliance with the SAO rues. The SAO penalty regime affords HMRC discretion over when to issue a penalty, but does not allow discretion over the quantum of the penalty, if issued. The FTT expressed concern over HMRC’s decision to impose penalties. It also noted that the penalties were inconsistent with the purpose of the penalty regime, which is to deter re-offending. The FTT does not, however, have jurisdiction over this issue and so could not cancel the penalties; it could only consider whether or not the taxpayers had a reasonable excuse. The innocent mistake of the taxpayers did not amount to a reasonable excuse, so the penalties were upheld.
Castlelaw (No.628) Limited and another v HMRC  UKFTT 0034 (TC)
3.2 EC extends State Aid approval of UK film tax relief
The EC has confirmed that it will not object to UK film tax relief until April 2025. The relief is a form of State Aid, and approval was due to expire on 31 March 2020.
UK film tax relief allows qualifying taxpayers enhanced tax deductions or payable tax credits for the production of ‘British’ films. The relief is a form of State Aid, which is only legal under EU law if it has been approved. The EC gave approval to UK film tax relief in April 2015, but it will expire on 31 March 2020. The extension to the approval means the relief will continue to be legal until April 2025, or the UK is no longer subject to the EU laws on State Aid.
3.3 HMRC reports more than £5bn collected from Diverted Profits Tax
HMRC has released figures that link the introduction of Diverted Profits Tax (DPT) to increased tax revenue. £4.2bn of the estimated £5bn total is attributable to additional CT and VAT paid on profits no longer diverted offshore.
DPT, which was introduced in 2015, imposes a 25% tax on profits from large companies that are diverted offshore. A press release from HMRC reports that at least £5bn of tax revenue has been collected to date as a result of the DPT. This is leading behavioural change among multinational groups such as companies no longer diverting profits outside the UK. HMRC has concluded that companies prefer to pay CT rather than incur DPT on diverted profits. The decrease in diverted profits has also increased the amount of VAT revenue collected by HMRC.
3.4 Non-payment of penalties held to be reasonable in an ‘unusual’ case
Non-compliance by a company was found to have been reasonable because HMRC’s communication was so ambiguous that the company genuinely believed the liability to have been paid. The company, which owed tax after participating in SDLT avoidance, had concluded that the tax paid also discharged the penalty due.
The taxpayer was a company that had participated in a scheme to avoid SDLT that would otherwise have been incurred by its directors. A similar scheme was defeated in the FTT, and HMRC subsequently issued a follower notice and an accelerated payment notice to the company. The company initially ignored the letters and failed to take corrective action in relation to the follower notice. Later, however, an agreement was reached with HMRC to make payments by instalments to cover the avoided SDLT. The company incorrectly understood these payments to satisfy all outstanding liabilities, when in fact a 50% penalty for failure to take corrective action was also due. The correspondence from HMRC on the matter was, however, so confused and ambiguous that the FTT found that the non-compliance of the company was in fact reasonable. HMRC had failed to engage substantively with the company’s understanding of events, and had not argued a factual case in regards to the payment agreement. The appeal was allowed, but the Judge noted that the case was unusual; non-compliance is rarely the result of a reasonable approach to penalties.
Comtek Network Systems (UK) Limited v HMRC  UKFTT 0029 (TC)
4.1 UT overturns FTT decision on carelessness
The UT has found that a charity had a reasonable excuse for incorrectly issuing a certificate that allowed construction services to be zero-rated. Not consulting HMRC did not amount to carelessness, and HMRC cannot overlook statutes that allow penalties to be mitigated for reasonable excuses.
The taxpayer was a charity that HMRC had argued had been careless to incorrectly issue a certificate so that construction services could be zero-rated. The FTT found that the taxpayer had not taken appropriate steps to determine if the certificate could be issued. In particular, the FTT noted that the taxpayer did not seek clarification from HMRC at the earliest opportunity.
The UT disagreed, ruling that the taxpayer had not been careless to rely on professional tax and legal advice instead of approaching HMRC. It also dismissed HMRC’s argument that a 100% penalty was the only way to collect the ‘true tax’ in this scenario. The law permits mitigation of the penalty by a reasonable excuse, and this provision cannot not be ignored so that HMRC can collect what it concludes is the correct amount of VAT. The appeal was therefore dismissed.
Marlow Rowing Club v HMRC  UKUT 0020 (TCC)
5. Tax publications and webinars
The following client webinars are coming up over the next few months.
- 12 February 2020: R&D and Patent Box
6. And finally
6.1 Making Tax Difficult
There is something a little bit wonderful about a tax system that requires us to consider whether our sausage rolls were heated or reheated, and whether Nesquik is strawberry or chocolate-flavoured. We may be regularly baffled by the logic of VAT, but its quirks and idiosyncrasies invite the taxpayer to delve into the law and, perhaps, learn to enjoy its peculiarities.
Endearing it may be, but never simple. We were, therefore, somewhat dubious when HMRC lauded the introduction of Making Tax Digital (MTD) as a major development for reducing VAT errors. The problem isn’t the VAT return; it’s the sheer magnitude of technical detail in the VAT code.
According to a study by the CIOT, businesses have found MTD less a milestone in technological development, and more a myriad of technical difficulties. 64% of those surveyed reported little reduction in errors after adopting MTD; 15% experienced increases in errors. More than half of respondents indicated that business productivity had decreased as a direct result of adopting MTD. The only surprising outcome seems to be that it was in fact possible for VAT to be made even more complicated than it was twelve months ago.
May we offer this suggestion for reducing VAT mistakes: if the law changes depending on whether our biscuits are covered in chocolate or not, mandating automation is not going to fix the problem. The law is too far gone to try to make any sense of it. Lean in; embrace the quirks.
|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.