Brexit and the Route Map: Do all roads lead to Rome?

Brexit and the Route Map?

Do all roads lead to Rome?

Rome

Whatever people think of the merits or demerits of Brexit, if, as seems increasingly likely, we fail to agree on all aspects of a Brexit formula before March 2019 (now just a few months away) how are we supposed to advise clients?

It is the nature of our business that we often get asked about the more esoteric bits of tax practice, such as cross border matters and the impact of double tax.

Here is an example, which we have just looked at as part of researching advice for a client in respect of the Swiss/UK double tax treaty.  Of course, Switzerland is not a member of the EU.  However, Clause 18 (4) of the UK/Swiss Treaty only applies if the individual making the claim is “subject to the legislation of the Home State in accordance with the Agreement on the Free Movement of Persons”.

I appreciate this may only apply to a few people, although it should be noted the Governmental Authorities each thought the issue significant to incorporate specifically into the Treaty.  Anyway, are not individual citizens important?

Additionally, if EU concepts are so ingrained into UK tax procedure as to affect non-EU Treaty countries, surely there must be more issues lurking.

Professional bodies what are your views?

In this context, I commend the Article by Alistair Spencer Clarke in the August 2018 edition of ICAEW Tax Line.  Ownership of Spanish property is not an outlandish thought for many UK citizens, quite apart from many other cross border situations which are now common place in our shrinking world.

Please can we start a debate about how to approach this matter?  Here I am talking about practical reality and proper approaches for Tax Practitioners to ensure they are giving best advice to clients.  Constitutional jurisprudence is for another day!

Requirement to Correct – 30 September Deadline Looms

sun

The Weather Today – Scorchio!

 

BUT 30 SEPTEMBER DEADLINE LOOMS

 

WINTER IS COMING!

 

Requirement to Correct

 

Many people over the years of the world becoming smaller and more accessible may have acquired assets abroad.  For example, immigrants and emigrants may have UK interests, but also ones in other countries, whether because of family, work or just acquiring (and perhaps disposing of) a holiday home.

 

Sometimes (it may sound odd) it seems, perhaps when lying on the patio of their newly upgraded Spanish villa, the owner may reach for an escapist novel (such as Banker’s Draft by RG Lennon https://www.amazon.co.uk/Bankers-Draft-R-G-Lennon-ebook/dp/B07CW4JC1J) instead of the latest Taxes Acts.

 

The Taxes Acts would of course warn the reader of the forthcoming deadline of 30 September 2018.  This is to disclose any offshore liabilities (including say Capital Gains on the older villa used to help finance the new one) or the rent when you weren’t using it, or the sale of the home inherited from an uncle, or the apartment in Delhi where your Dad used to live and rental values have gone up so much it would be rude not to etc., etc.,

 

The world is small, families are dispersed; so are assets.  Thanks to automatic sharing of financial information across Governments – permitted in most international double tax treaties,  HMRC will receive bucket loads of data automatically.  Modern computers will allow this to be analysed.  No doubt HMRC will leap to conclusions and try to assess ‘evaded tax’.

 

Key points:

 

  1. Crucially, the time limit for assessment is planned to be extended to 12 years (going back from 4 years) which makes retaining records more important.

 

  1. There is to be a new criminal offence for ‘offshore evasion’, which means HMRC do not need to prove there was ‘deliberate intent’. This heightens the need for professional advice, because innocent ignorance is unlikely to amount to a successful defence.

 

  1. There will be new sanctions for ‘offshore evaders’ based on a penalty of up to 10% of the value of the underlying assets.

 

  1. Tougher sanctions come in for those who fail to disclose relevant offshore interests before 30 September 2018

 

IF IN DOUBT TAKE PROFESSIONAL ADVICE

 

Disguised Remuneration Schemes

 

Anyone involved or may have clients involved in what HMRC may consider to be caught in the new ‘disguised remuneration schemes’ should take independent advice soon, to ensure they can meet the deadline for any appropriate disclosure of 30 September 2018.  It is now less than 2 months away.

 

Settlement terms are available for appropriate disclosure made before the deadline.  After that date, HMRC are threatening more severe action.

An Englishman’s Home is his ‘Tax Exempt’ Castle – Private Residence Relief (PRR)

CardiffCastle-Exterior41-med-A0013928-1“Everyone knows” that:-

“A person’s home is exempt from capital gains tax” – SIMPLES!

Well, no actually! In law it may get up to 100% tax relief, but it remains a chargeable disposal.

Imagine:-

1. You own more than one property (including say a holiday home overseas) OR
2. You buy a property to live in, but actually live elsewhere (say in rented accommodation) OR
3. Circumstances change over your period of ownership.

Each of these (quite common) circumstances could give rise to a nasty, unexpected tax liability. We have seen a number of situations where advice has been sought ‘Just Too Late’. This can mean a relatively small outlay “saved” on proper professional advice, results in an expensive (and potentially unnecessary) tax bill – plus, on occasion penalties, for naïve belief in the somewhat misleading phrase, set out above.

Some of the benefits of this suggestion are reflected in the recent case reported below.

Private Residence Relief Claim Rejected

Private Residence Relief (PRR) can be a very beneficial relief where the conditions are met, providing for up to 100% of a gain to be exempted where a property has been a taxpayer’s main residence throughout ownership.

Of course though careers, inheritance, divorce and the general messiness of real life, things do not always quite pan out as simply as “always” living in one house. As a result, claims made perhaps in ignorance and good faith, can lead to disagreements between HMRC and taxpayers over whether, and the extent to which, properties may qualify. This can lead to appeals, so a number of cases end up being dealt with through the courts.

One such recent case was P Lam v HMRC at the First-Tier Tribunal. The case found that a taxpayer’s occupation of the property was not sufficient to meet the conditions. HMRC accepted the taxpayer had spent some time in the property whilst she was renovating it, but they argued that the nature and extent of that occupation was not enough to qualify for relief, which requires a degree of permanence.

What may be useful for taxpayers is that the Tribunal provided a list of things that the taxpayer in this case was not able to provide as evidence. Such factors therefore appear to be key in being able to prove that occupation in a property should be sufficient for the relief. This list included:

• Proof of how many days she lived in the property
• utility bills to establish the time spent there
• moving any furniture into the house
• bringing items that would have made occupation more comfortable
• providing evidence of a change of address

Taking professional advice in advance and keeping good records will certainly make matters easier in the event of an HMRC challenge into a PRR claim. Perhaps an easier route would have been to file a timely election for the relevant property to be deemed the qualifying property.

To quote an old motto, regarding getting matters in order in advance …

“A stitch in time, saves 9”.

Good News for EMI

The EU have signed off on ‘State Aid’ rules which mean that it should be possible to start granting EMI share options again shortly. It is believed HMRC will announce an exact date soon.

EMI is a very attractive and popular measure which allows selected employees in small trading companies to be rewarded in a tax efficient manner which is HMRC approved (and has been for 18 years, with cross party support).

Anyone wishing to get more information or advice, please call Paul Eaves on 01704 548698

Appeal Rights

Like any large organisation, HMRC sometimes acts in a way that can make individuals, who may be challenged by this monolith feel intimidated.  Fortunately, there are general rights of appeal.  Recent cases have shown that these rights are useful in ensuring HMRC do not overstep the mark and abuse their powers.

In M. Miron, it was held that the taxpayer’s accountants were at fault in not following a fairly simple procedure.  However, that did not excuse the ‘terrible muddle’ that the taxpayer ended up in.  The fact that HMRC was a large organisation could not justify a situation where one hand did not know what the other was doing.  “The whole purpose of maintaining a file was to ensure knowledge is disseminated across an organisation”.  Thus the taxpayer had a ‘reasonable excuse’ in not filing her appeal in a more timely manner.

Similarly, in M. Capuano the ‘staggeringly bad’ service provided by HMRC generally, contributed towards the taxpayer having a ‘reasonable excuse’ for late filing.

M. Beardwood was also held to have had reasonable excuse for late filing.  Indeed the First Tier Tribunal said it was ‘difficult to see what more the appellant could have done’.  They considered HMRC had wasted everyone’s time in bringing a case which had very little merit on the side.

This contrasted with R. Popat, where the taxpayer (who again won) was allowed an appeal where he wished to postpone payment of tax assessed on an assessment.  The taxpayer only had a low hurdle to overcome to get tax postponed, pending settlement of the relevant appeal.  The purpose of the postponement hearing was not to settle the appeal finally on its merits, but to allow tax collection to be postponed pending a full rehearsal of all the relevant facts.

For advice on HMRC powers and penalties please contact either Paul Eaves or David Stebbings.

Mind the Gap – EMI Share Options from 6 April 2018

Mind-the-GapHMRC have announced via their Employment related securities bulletin (No 27 – April 2018) that due to not having yet received EU State Aid approval for the EMI scheme (the previous approval expired on 6 April 2018) new EMI share options issued after 6 April 2018 will not be treated as tax-approved share option schemes and would therefore be taxed under the far less favourable non-approved regime.

HMRC do reassure taxpayers that options granted up to 5 April 2018 will continue to qualify, so there is no need to panic over existing share options.

However, if you or your clients are in the process of implementing an EMI share scheme, it would be advisable to delay granting options until the approval is granted. Of course, if this is not possible then clients should be made aware of the implications of options falling to be treated as unapproved, or consider other options such as a CSOP.

One of the big differences between approved EMI options and unapproved ones is that any tax paid on exercise is based on the value of shares at grant of the options for EMI schemes, and on the value at exercise for unapproved ones. Therefore any growth in value is sheltered under the EMI scheme.

EMI schemes also provide other valuable features including relaxations of Enterpreneurs’ relief conditions for employees.

Please get in contact with us if you have any concerns or if you require assistance with share option schemes.

HMRC Publish New Research & Development (R&D) Guide

Research & Development (R&D) remains a highly beneficial area for those companies carrying out qualifying work.  Historically it has been an underused relief with HMRC and Government seeking ways to highlight the availability of the relief.

As part of this on-going initiative, HMRC have published a document on R&D designed to ‘Make R&D easier for small companies’.  It does contain some useful summaries and case studies for those who are unfamiliar with the relief.

As a reminder, R&D tax relief is available to companies that are developing a product through an advance in science or technology by overcoming scientific or technological uncertainty.

For small to medium sized companies (SMEs), the relief takes two forms:

  • Firstly, enhanced R&D tax relief – for every £1 of qualifying costs spent on R&D, the company receives a deduction in calculating their taxable profit for corporation tax purposes of £2.30.
  • Secondly, for loss making companies up to 33% of the qualifying cost can be available as a tax refund.

The Research and Development Expenditure Credit (RDEC) scheme which pays a taxable credit of 11% of qualifying expenditure may also be relevant to SMEs, for example where they are carrying out work for larger companies.

HMRC’s new guide goes through some of the factors to consider in determining whether projects would qualify for R&D relief, but does highlight that the relief is not just for ‘white coat’ scientific research, but also for other “development work in design and engineering that involves overcoming difficult technological problems”.

It also includes case studies on certain areas, such as food, ICT and construction.  The food case study for example notes that, “Creating an innovative chilled food container that provides a substantially longer shelf life than currently available, would […] qualify. The scientific or technological uncertainties to be addressed are in the interactions between the food, gas content and container to keep the food fresh for longer. By contrast, the work in dealing with authorities to comply with extended use-by date regulation would not qualify.”

Eaves and Co has dealt with a number of R&D claims and have a proven track record in completing successful claims and can offer assistance in all aspects of the claim process.  If you would like to discuss how we can help, please get in touch.

Employment Related Securities – HMRC Withdraw Late Filing Penalty

We were recently successful in challenging HMRC penalties for late filing in relation to annual Employment Related Securities (ERS) reporting.  In the case in question, a company had submitted an online ERS return the previous year relating to a one-off share event, being an acquisition of shares by an employee.

Quite reasonably, the company did not appreciate that HMRC expected an ERS return to be submitted the following year, bearing in mind there was no share scheme and no events had taken place.  Without providing the company with a reminder that a return would be due, HMRC proceeded to raise late filing penalties when the return was not submitted.

HMRC argued that a nil return was due for all subsequent years regardless of whether there were any share events.  The manner of the penalty was concerning in that it provided no details of which legislative provisions it was based on, even after the penalty had been appealed.

According to HMRC, annual returns are to be submitted on or before 6th July each year and returns, including nil returns, “must be submitted for any and all schemes that have been registered on the Employment Related Securities online service.”

They argued that, “A return is required even if you have:

  • Had no transactions
  • Have made an appeal/Had an appeal allowed
  • Rely on a third party to submit the return
  • Ceased the scheme by entering a final event date
  • Registered the scheme in error
  • Registered a duplicate scheme
  • Did not receive a reminder
  • Have changed accountant/agent/staff

Once a scheme or arrangement has been registered on the service and remains live, you have a continuing annual obligation to submit an electronic end of year return by the deadline.”

The actual legislation states that a return is required for each tax year falling in the personʼs “reportable event period”.  A personʼs “reportable event period” is defined under s.421JA(3) as:

  • beginning when the first reportable event occurs in relation to which the person is a responsible person, and
  • ending when the person will no longer be a responsible person in relation to reportable events.

Clearly the legislation is somewhat unclear, however there was a strong argument that where no future reportable events were envisaged they would no longer be within a reportable event period.

We were able to get HMRC to withdraw the penalties on the basis that there was no employee share scheme, and therefore no ongoing obligation under the actual legislation to file returns.  One suspects HMRC will not be changing their policy in this regard, but it does highlight the importance of challenging them where they apply policies that go further than the actual law.

J Hicks – Discovery Case Won by Taxpayer

The scope of HMRC’s powers in relation to raising discovery assessments outside of the normal enquiry window has been a contentious issue in recent years and a number of cases seem to have eroded the position of the taxpayer (see our earlier blog post for example).

A recent First-Tier Tribunal case, J Hicks v HMRC, seems to have taken a more reasonable approach and may therefore give hope to taxpayers for a more balanced approach in the future.

The taxpayer in this case took part in a tax avoidance scheme which was marketed by a firm specialising in such schemes.  The scheme in question was marketed at derivatives traders, which the taxpayer was.  Having taken part in the scheme it was reported on his 2008/09 tax return, with the relevant avoidance scheme reference included.  He had losses carried forward, which he claimed on his 2009/10 and 2010/11 returns, which were both filed in late January before the filing deadlines for each year.

HMRC opened a standard enquiry into the 2008/09 return, and this enquiry was ongoing when the later tax returns were filed.  However, HMRC did not open enquiries into 2009/10 or 2010/11.

In March 2015, HMRC issued discovery assessments for 2009/10 and 2010/11, which Mr Hicks appealed.  HMRC argued they could issue an assessment under either TMA 1970, s29(4), that the insufficiency was a result of careless behaviour, or under TMA 1970, s29(5) that a hypothetical officer could not have been aware of the deficiency within the normal time limits.

The tribunal found that a hypothetical officer should have had enough information by the end of the normal window to raise an enquiry, with the Judge noting that, “I do not consider that subsection (5) allows or is intended to allow HMRC to issue assessments which ignore the normal time limits while they spend further time in polishing a justifiable assessment as at the closure of the enquiry window into a knockout case.”

He also points out that these rules should not be seen as giving HMRC “carte blanche […] to omit to open an enquiry—whether intentionally or by omission—and then simply rely on subsection (5) in every case to issue assessments which would otherwise be out of time. The statutory time limits for assessments are a critically important safeguard for the taxpayer, just as the onus of disclosure on the taxpayer, and the duty not to act carelessly or deliberately, are a protection for HMRC where those limits are not met.”

It is interesting to note the Judge acknowledging that taxpayers deserve rights and safeguards from HMRC, particularly in light of HMRC’s continued attempts to obtain ever greater powers.

Looking at the matter of carelessness, the Tribunal found that reliance on the scheme provider for information included in the return was not careless, nor is the use of a tax avoidance scheme automatically careless.  The key point was whether careless behaviour led to the deficiency of tax.  In this case, it was found not to be careless.

The taxpayer’s appeal therefore allowed.

Non-resident penalty appeal allowed

In a recent First-Tier Tax Tribunal case, a non-resident’s appeal for reasonable excuse in relation to late filing penalties was denied, however, interestingly the Tribunal still decided to waive the penalties.

The appellant in A Newton v HMRC was resident in France and filed his 2012/13 tax return late.  He appealed against the higher later filing penalties on the basis that as he was living in France, he had not seen any advertising in relation to the new penalties.

We recently wrote about another case involving a non-resident appealing on similar principles, in relation to the introduction of the Non-Resident Capital Gains Tax (NRCGT) returns.  In that case the appeal was allowed because it was felt to be unreasonable to expect the taxpayer to have found the new rules independently.

However, the tribunal in this case did not feel the same principle would apply.  In this case, the taxpayer would have received documents showing the new penalty levels (for example on the notice to file) and the Tribunal therefore felt that, “a person reasonably trying to meet their tax return filing responsibilities would have realised from reading any of these documents that the penalties had changed”.

However the tribunal judge did overturn the penalties on the basis that the individual did not have a UK tax liability at all and stated that, “he would not have met the “SA criteria” that HMRC use, and he would not have had any obligation to notify chargeability under s 7 Taxes Management Act 1970”.  He was therefore, in the judge’s opinion, not legally obliged to complete the UK return.  The penalties were therefore reduced to nil.