The question as to whether or not monies are taxable as employment income is a common area of dispute in tax. However, the First Tier Tribunal case of Colin Collins v HMRC involved a particularly unusual set of circumstances to which the question needed to be applied.
The case itself involved the payment of $2 million by a former shareholder of a Company to the taxpayer who had worked for that Company, before subsequently leaving and later being re-employed under the new ownership.
The precise facts of the case led the Tribunal to consider that the payment amounted to a gift by the former shareholder. HM Revenue and Customs had contended that it was a payment in connection with the taxpayer’s former or current employment.
Of significant interest is that the Tribunal set out in their written judgement a list of key points that lead them to their decision:
- Was the payment gratuitous?
- Was the payment expected?
- Was it proportionate (for example in terms of past salary)?
- Was there any regularity in the payments?
- Who made the payment?
- Was there a time delay in making the payment and if so was this delay cosmetic?
- What was the occasion/reason for the payment?
While the list is of interest, the old adage remains that each case must be considered on its own merits.
The ICAEW has issued guidance to its member accountants to consider when dealing with potential tax avoidance schemes for their clients.
Whilst such tax avoidance may be legal, the question of ethical behaviour is also brought into play by the guidance. The guidance probably is to some extent a response to recent press coverage regarding certain artificial tax planning schemes and their use by celebrities.
The ICAEW recommend that amongst other tools/methods at their disposal, the advisor should use their own judgement on whether the scheme is artificial or not by considering the following:
- The scheme is too good to be true
- Apparently guaranteed returns with no risk
- Confidentiality Agreements
- Scheme Promoter lending funds
- Offshore companies, trusts and tax havens are involved for no reason
- Over complex arrangements for what is required
Eaves and Co recently conducted a poll on Linkedin regarding attitudes to tax avoidance and found that respondents generally view tax avoidance as acceptable, whether it is ethical or not as long as it does not become illegal. Some respondents also argued that such opportunities for tax avoidance have come about as a lack of simplicity in the legislation of the UK tax system. The poll results may not be representative of a full cross section of society.
At Eaves & Co we believe that bespoke tax planning that fits with the business’ or individual’s commercial requirements is much more appropriate than using one-size fits all tax avoidance arrangements.
In a recent First-tier tribunal case, the taxpayer, a Swiss national, was employed in the UK and claimed he was resident but not ordinarily resident in the UK.
His salary was paid into a bank account in Guernsey, and part of the money was transferred to an Isle of Man bank account held jointly with his girlfriend. The remainder of the funds were used in the UK.
Some of the money in the Isle of Man account was used to pay bills in the UK which was agreed as having been remitted to the UK. Further amounts were spent in the UK by his girlfriend.
HMRC had argued that all the money in the joint account should be regarded as the taxpayer’s, and therefore any sums spent in the UK should be treated as remitted.
The taxpayer argued that the account was opened in joint names to provide funds for his girlfriend as she was unable to open a bank account in her name as she was a student and not eligible to work in the UK.
The First-tier Tribunal found this explanation ‘wholly plausible’ and accepted that the account was fully controlled by the taxpayer’s girlfriend. Therefore none of the withdrawals made by her should be regarded as remittances by the taxpayer.
Mr Sandford was a service engineer for Slush Puppie Limited (SPL). From 2001 to March 2007 the individual had always considered himself to be self-employed and paid tax on that basis.
However; when his engagement ceased, the individual’s tax agents reviewed the situation and concluded that they believed he had been an employee of the company.
As a result they informed HMRC and sought a refund of self-assessment tax paid, suggesting SPL should be liable.
After a review of the facts HMRC accepted this view. They subsequently issued SPL with a notice that ruled Mr Sandford was an ‘employed earner’ and as result SPL were liable for income tax and Class 1 NICs.
The tribunal looked at several of the key indicators and found on balance Mr Sandford was self-employed.
Below are some of the key points which the tribunal felt indicated self-employment:
- He was free to take on business from elsewhere and was able, having accepted a job, to find someone else to do it.
- SPL’s supervision and control of his work was restricted to ensuring he complied with legal obligations
- The use of a daily rate of pay was ‘a strong indicator’ that matters were based on a daily contract. The fact that monthly invoices were raised for convenience did not alter this fact.
- The lack of redundancy rights or other employment protection meant Mr Sandford shouldered financial risk.
- The fact ‘that no substantial risks materialised in the course of five years is no indication that they did not exist potentially’.
The case does, however, highlight the importance of taking advice in this area as the company could have been liable for the tax due through PAYE should the tribunal have found that he was employed.