Littlewoods Case – Compound Interest due on VAT Refunds?

HMRC paid Littlewoods £205m in relation to a VAT claim by them, stretching back over a period of up to 30 years.

Interest under the normal simple basis was calculated at £268m, as being due to Littlewoods.

However the owners of Littlewoods were not satisfied that this was sufficient recourse for them not having the money for so long and challenged in the Courts that interest should be calculated on a compound basis.  If successful they stand to gain additional interest of around £1bn.

As the case rumbles on, its outcome could have a significant effect on everyday taxpayers.  If HMRC lose will underpayments of tax also be charged with compound interest?  Also, are the rates of interest payable fair, in terms of the rate payable on refunds being lower than that on tax due.

Termination Payments – Contractual PILON or Damages?

In the recent case of Goldman (TC 01999) the tribunal found that a payment made to an employee for termination of their contract was taxable as earnings under ITEPA s.62 and did not therefore qualify for the £30,000 statutory exemption.

The taxpayer had contended that the amount agreed under the terms of a compromise agreement was received not as earnings but as damages because the employer failed to make the payment in lieu of notice (PILON) within 14 days of termination, thus making them in breach of contract.

However, the tribunal found that where a payment is made in respect of a contractual provision it should be regarded as an emolument and not damages.

In reaching this conclusion the tribunal said that if the taxpayer was correct it would be possible for anyone entitled to a payment in lieu of notice to ensure the availability of the £30,000 exemption by accepting an amount in settlement of the claim to enforce the contractual contract.  This was considered to be inconsistent with a purposive interpretation of the legislation.

On the other hand, in the case of Rubio (TC 02047) the tribunal decided that a termination payment was not earnings under s.62 but a payment of damages.  This was particularly relevant because the taxpayer spent a lot of time abroad therefore the foreign service exemption was available.

In this case, the taxpayer had been seconded from Spain to the UK.  The UK company issued a new contract which stated that he was on leave from the Spanish company.  HMRC therefore stated that the original Spanish contract was automatically reinstated when he ceased employment with the UK company (and under the terms of which he would have been contractually entitled to a PILON).  However, the tribunal did not agree with this interpretation.

These cases demonstrate that where an employer is making a termination payment, the facts should be looked at carefully in order to determine whether or not the payment is contractual or a non contractual payment of damages.

Changes Proposed to ESC A19

Under the current concession taxpayers that have outstanding tax are able to apply to use ESC A19. This concession writes off the amount owed if the taxpayer can show that HM Revenue & Customs failed to use information at their disposal in a timely manner.

Under the proposed changes taxpayers would be deemed to have a basic level of knowledge and understanding of their own tax affairs. Also, if the taxpayer believes there is an error relating to their tax affairs they would be expected to contact HM Revenue & Customs without delay.

This also brings into question whether there should be a time limit on using the concession as taxpayers have to take ‘personal responsibility’ in making sure their tax affairs are correct.

The proposals are currently under consultation and Eaves & Co are to provide a response as we have successfully assisted clients in claiming under ESC A19 on a number of occasions.

In practice these proposed changes would appear to make it more difficult for taxpayers to make a claim under concession ESC A19 as there is more onus on the taxpayer to make sure their affairs are correct.

Eaves & Co on Tax Avoidance

Highly aggressive tax-avoidance scheme, Sign, ...

Highly aggressive tax-avoidance scheme sign. Pearson Airport, Toronto, Canada (Photo credit: gruntzooki)

With the recent furore regarding complex tax avoidance schemes, as tax specialists we thought we could share our reasons for not generally getting involved in such schemes.

For users of aggressive schemes, before the introduction of DOTAS, it was a question of hoping the scheme went under the radar, but now this is almost impossible (as shown by the rise in the number of media oustings).  It is now a question of waiting for an enquiry to begin, and hoping that when it does, the scheme is water tight.  More often than not the age old adage applies, that if something seems too good to be true, it is.

The majority of such schemes fail and the client is forced to pay the tax, interest and possibly penalties in addition to the high planning fee.  This can leave a sour taste in the mouth for the client, with them unlikely to come back for repeat business.

With the introduction of the general anti-abuse rule announced in the latest budget, the scope for such schemes is to be narrowed even further; a point which appears to have been conveniently forgotten by the country’s media.

At Eaves & Co we pride ourselves in providing bespoke tax planning which works; this is simply not possible to achieve using one-size fits all tax avoidance schemes.  Therefore with client satisfaction and value for money as our main aims we steer well clear of providing or recommending such schemes.

We find that genuine tax planning provides a robust position for the client and gives them more comfort that the planning works and will not be counteracted at some point in the future.  There is less chance (although obviously the risk is still present) of costly and time-consuming correspondence and litigation involving HMRC.  This is because the planning is specific to the actual facts relating to the client, taking into account their needs and commercial aims.  The client has more peace of mind.

We are keen to maintain a good reputation and build on-going relationships with the tax authorities and working within the spirit of the law is an important aspect of this.

Recent Tribunal Case re Principal Private Residence Relief (PPR) – MJ and BA Harte (TC1951)

In a recent tribunal case (MJ and BA Harte (TC1951)), a gentleman inherited a house from his father in 1992.  In May 2007 he transferred a half share in the property to his wife, and in October of the same year the property was sold.

The couple claimed Principal Private Residence relief (PPR) on the property sale even though they had another home during this period.  Their claim was based on the fact that they had intended to make the inherited property their home, but had only ever spent brief spells there.

The Tribunal found that their spells in the house did not add up to occupation, and it could not have been their home because they did not transfer any possessions.

Furthermore the appellants did not permanently vacate their original residence, so their original home remained their principal private residence.  A married couple can only have one PPR at any one time.

The claim for PPR was therefore denied.

Employment Status – Umbrella Contracts and Illegal Performance – Quashie v Stringfellows Restaurants Ltd

Contracts

Contracts (Photo credit: NoMouse)

A recent Employment Appeal Tribunal case was of interest for tax purposes as it considered whether an individual was employed or self-employed in fairly unusual circumstances, as well as a related legal point on whether illegality in reporting the income from the engagement could prevent a claim being made in relation to the contract.

 The case concerned Ms Quashie, who had worked as a dancer at Stringfellows from June 2007.  An interesting element of the case concerns the fact that the dancers were not paid by the the club, but actually paid the club to be able to work there.

 The tribunal considered whether the elements of control and mutual obligation still created an overarching “umbrella” contract of employment despite this.

 The key factors appeared to be the requirement for dancers to turn up if they were rostered to appear, and a requirement to attend team meetings every Thursday morning.  Fines were levied for failures to attend in these circumstances.

 Based on these factors, the tribunal found that there was an employment contract which covered the full period of her engagement.

 A further interesting aspect of the case related to illegality.  Ms Quashie had completed tax returns on the basis that she was self-employed and had claimed a number of expenses which the tribunal believed had been misrepresented.  These included £20 per week for the use of her home, motor expenses and “depreciation and loss of profit”.

 The judge pointed out that false returns to HMRC can make the performance of a contract illegal and therefore prevent a claim being made by the taxpayer for a breach of the contract.

 The case was referred to a full employment tribunal to consider Ms Quashie’s claim for breach of contract on the basis that she was employed but direction was given for the tribunal to consider the illegal performance aspect further.