Late Group Relief Claim – Bampton Property Group Ltd and others v King

A recent Court of Appeal case (Bampton Property Group Ltd and others v King) concerned whether HMRC should accept late claims for group relief from Corporation Tax for a company who were members of a group of property companies.

The taxpayers originally submitted claims for group relief but made mistakes on the apportionment of relief available; they did not take into account the fact that overlapping accounting periods would qualify.  They therefore submitted late claims for group relief to relieve the losses in other members of the group.

HMRC refused the claim as the deadline for making a claim had passed.

The taxpayers claimed they had made an innocent error, which the Revenue had known about but not drawn to their attention, however the Court of Appeal rejected the claims, stating that, the fact that HMRC had not told the taxpayers they had made an error did not have to be taken into account when determining whether to accept the late claim.

The enquiries opened actually extended the period the taxpayers had to realise their error.  The taxpayers’ appeal was therefore dismissed.

HMRC Wins Important Business Travel Expenses Case: Dr Samadian

A recent test case was heard by the tax tribunal regarding whether certain business travel expenses were allowable, in terms of the interpretation of the “wholly and exclusively” rules.

Summary

Dr Samadian worked full time as an employee for the NHS at two hospitals in London and had a permanent NHS office. He also worked at two private hospitals holding weekly out-patient sessions.

The tribunal acknowledged that Dr Samadian had a dedicated office in his home which was necessary for his professional activity; however the Tribunal did not accept that Dr Samadian’s home office could be treated as the start for calculating his allowable private practice business mileage for habitual journeys.

The decision could potentially have an impact on all self-employed professions in cases where there is a home office and another business base from which they operate on a regular basis.

Taxpayer’s Case

The taxpayer argued that the business base should be regarded as the place from which the business is run and not the place where the professional services are carried out (as was argued by HMRC).

In particular the taxpayer said there was no general principle that meant any travel to/from a taxpayer’s home must always be disallowable due to having an element of non-business duality. He said that each case should be judged on its own facts.

The taxpayer submitted that on the facts, his home was the business base and therefore there was no non-business purpose in his travel between the home and the private hospitals.

HMRC’s Case

HMRC’s argument was that the cost of travelling to and from home and a place of work is generally not allowable as the journeys are not wholly and exclusively for business.

The motive, object and purpose of Dr Samadian’s disputed journeys were to take him from his home, where he lives, and to then undo this journey.

Past Cases Considered

The tribunal considered various cases put forward by the taxpayer and HMRC, however rather unusually they also considered an additional case – Mallalieu v Drummond, with a view to explain the statutory words “expended for the purposes of the trade”.

Mallalieu related to a claim for professional clothing for use in court by a barrister. The tribunal concluded that this claim had failed “because although she had conscious motive for incurring the expenditure which was not a business motive, the facts were such that there must necessarily have been a non-business motive in her mind as well”

The judge felt this case made it clear that it was possible for him to “look behind the conscious motive of a taxpayer where the facts are such that an unconscious object should also be inferred”.

Tribunal Ruling

The tribunal accepted that Dr Samadian has a place of business at home, but there must have been a “mixed object” in the travelling between home and the private hospitals, because part of the object of the journeys must “inescapably” be to maintain a home in a separate location.

The journeys between the NHS hospitals and the private hospitals were also regarded as non-deductible by the panel on the grounds that “the object of the travel is to put the appellant into a position where he can carry on his business away from his place of employment; the travel is not an integral part of the business itself”.

New Amnesty on Tax Penalties – Isle of Man Disclosure Facility Agreed with signing of Memorandum of Understanding

A memorandum of understanding between the Isle of Man Government and the UK’s HM Revenue & Customs was signed on 19 February 2013 setting out the terms of a new agreement and disclosure facility between the two countries.

The financial world becomes steadily more transparent.  Those with ‘hidden funds’ should beware.  The UK Government is using Money Laundering regulations to pursue previously untaxed funds.  The latest is with the Isle of Man Disclosure Facility.  The agreements signed include an automatic tax information exchange and the setting up of a disclosure facility.

The Isle of Man Disclosure Facility will run from 6 April 2013 to 30 September 2016 in order for taxpayers with relevant investments in the Isle of Man to bring their tax affairs up-to-date.

The terms set out in the Memorandum suggest that the Isle of Man Disclosure Facility will bear some similarities to the Liechtenstein Disclosure Facility, including an April 1999 cut-off date, a guaranteed penalty rate of 10% for returns due to be filed before April 2009 and a proposed single point of contact.

There are some key differences however, including the fact that there will be no guarantee against criminal investigation for tax related offences.

Further confirmation will be needed but it appears that a qualifying connection to the Isle of Man could be established if an interest in relevant property is established at any time before 31 December 2013.  This may mean that those with undisclosed income could transfer assets to the Isle of Man in order to take advantage of the beneficial tax treatment available.

Eaves and Co have successfully completed a number of disclosures under the Liechtenstein Disclosure Facility and will therefore be well placed to advise on the new Isle of Man Disclosure Facility if you are affected.

A copy of the Memorandum of Understanding can be found here, whilst the HM Treasury press notice can be viewed here.

Holiday Letting Business Does Not Qualify for Business Property Relief

CRC v Lockyer and Robertson (as the personal representatives of N Pawson, deceased) – Business Property Relief

HMRC have successfully appealed the landmark Business Property Relief case of N Pawson deceased which, if it is upheld at the Court of Appeal, is likely to have a significant on the potential Inheritance Tax liabilities of individuals with a holiday letting business.

HMRC success in this case is perhaps not as surprising as the fact they originally lost at Tribunal.  The judge gives some extra useful guidance on the distinction between active trading and property letting.

The First-tier Tribunal initially ruled that as long as additional services were provided in conjunction with a holiday let then the  business property relief (BPR) would be available and therefore obtain relief from Inheritance Tax (IHT) at 100%.

HMRC subsequently appealed the above ruling.

The Upper Tribunal Judge focused on “the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity”.

He said that a property could be managed actively and still be retained as an investment.

The services provided to clients, such as cleaning, providing a welcome pack, and being on call to deal with queries and problems, were unlikely to be significant or sufficient to stop the business from being “mainly one of property investment”.

These services all enhanced the capital value of the property and made it possible to obtain a regular income from its letting.

The judge concluded the First-tier Tribunal should have found that “the business… did indeed remain one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property”.

He did not accept the taxpayer’s argument that the innate character of a holiday letting business rendered it outside the scope of a normal property letting business. Rather, it was a typical example of a property letting business.

As a result business property relief was disallowed and the letting operation fully charged to IHT.

Penalties for deceased persons in prior years contradicts human rights | IHT Planning

Penalties for deceased persons have been an area of contention recently.  For those individuals who die not having their tax affairs in order, HM Revenue & Customs are able to go back and enquire into an individual’s tax affairs for the 6 tax years prior to the date of the deceased’s death, in the case of careless or deliberate understatement of tax.

However, HM Revenue & Customs are no longer allowed to apply penalties for deceased persons in relation to the tax affairs of the 6 tax years preceding the individual’s death as it is deemed to be a contravention of an individual’s human rights.

Eaves and Co have been able to apply this to a recent client situation where an individual had died not disclosing trading income to HM Revenue & Customs. This had led to undisclosed profits resulting in unpaid tax for the 6 years prior to their death. This would have incurred significant penalties for non-disclosure without the case law findings against the application of penalties.

Julian Martin v HMRC – TC 02460 – Income Tax where Employee Obliged to Refund Earnings

In the recent case of Julian Martin v HMRC (TC 02460),  the appellant agreed to enter into an employment contract under which he received a signing bonus of £250,000 in 2005/06 the terms of which required him to work for the company for a period of 5 years.

The signing bonus was subject to income tax and NIC’s through PAYE and the net amount received was £147,500.

Mr Martin gave early notice and therefore became liable to repay £162,500 to his former employer.

The appellant made an error and mistake claim for 2005/06 on the basis that whilst the full bonus had been taxed in that year, in retrospect the full amount had not been earned in that year and as such the repaid amount of £162,500 should not be taxable.

HM Revenue and Customs rejected Mr Martin’s claim for relief and argued that the full amount remained taxable despite the fact that most of it was later repaid.

This gave rise to an anomalous position whereby Mr Martin was worse off than if he had never accepted the signing bonus because the tax and NICs were in excess of the amount of the bonus that he actually retained.

The first tier tribunal found that relief should be available on the basis that the repayment of the bonus amounted to negative taxable earnings in Mr Martin’s hands.

 

UK-Swiss Tax Treaty – Swiss pay 500m Swiss francs over to HMRC

As part of the agreement between the UK and Swiss governments which recently came into force, the UK-Swiss Tax Treaty, in an attempt to reduce evasion in Swiss bank accounts the Swiss have paid over the equivalent of £342m to the UK.

The payment is the first instalment of the levy on bank accounts held in Switzerland by UK taxpayers, designed to cover arrears on previously unreported income.  The levy will apply to accounts in Switzerland unless the account holder allows the bank to disclose details to HMRC.

Current and future tax liabilities will be covered under the UK-Swiss Tax treaty and it is anticipated it will raise around £5bn in the next five years.  Prior years will be covered by the levy whilst future years will be covered by witholding taxes within the accounts in Switzerland.  In many cases, depending on the level of growth seen in the accounts, the levy under the treay can work out more expensive than other disclosure options, such as the Liechtenstein Disclosure Facility (LDF).

If you are interested in more details on the UK-Swiss Tax Treaty or the Liechtenstein Disclosure Facility, please contact us or take a look at our UK-Swiss Tax Treaty page.

Inheritance Tax Series – IHT Planning

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Inheritance Tax & Estate Tax Planning

Overview

Inheritance tax and estate planning is an important tool to ensure that wealth is preserved for future generations.

The nature of the planning undertaken will depend on the type and value of assets in the estate as well as the overall objectives such as who is to benefit from the assets, degree of control and distribution of income.

Examples of inheritance tax and estate planning opportunities include:

  • Business Property Relief – up to 100% relief for the value of qualifying business interests, shareholdings and assets
  • Agricultural Property Relief – up to 100% relief for the value of qualifying land/property used for agricultural purposes
  • Woodlands Relief – up to 100% relief against the value of timber on the land, although a charge may subsequently arise if the timber is later sold
  • Gifts to charity
  • Making full use of allowances such as the annual allowance and gifts on marriage
  • Regular gifts out of income
  • Outright gifts to individuals/trusts
  • Trusts for vulnerable persons

Non-UK Domicile Tax Planning

Non-UK domiciled persons are usually only subject to inheritance tax on their UK situs assets, however where a person has been resident in the UK for 17 out of the last 20 tax years they are automatically deemed to be domiciled in the UK, potentially bringing their worldwide assets within the scope of UK inheritance tax.

However, where a person sets up an offshore trust to hold overseas assets whilst non-UK domiciled/deemed domiciled, the trust will be treated as excluded property and should remain outside the UK inheritance tax net.

In certain cases, it may be possible to restructure the ownership of assets to allow assets that would otherwise be treated as UK situs to qualify as excluded property. Although care will need to be taken, particularly where the recent changes to the stamp duty land tax rules are in point.

Inheritance tax and estate planning is a complex area and advice should be sought before any planning is undertaken.

Anti-Avoidance & Other Considerations

Where inheritance tax planning is to be utilised care should be taken to ensure that the planning does not fall foul of anti-avoidance legislation such as the rules for gifts with reservation of benefit, associated operations, pre-owned asset tax etc.

It will also be necessary to consider the potential impact of the proposed planning on other taxes such as capital gains tax, VAT, SDLT and relevant anti-avoidance rules such as the settlement provisions and transfer of assets abroad.

A further key consideration will be the commercial and practical aspects of the planning – in our experience bespoke advice that is tailored to the individual’s precise circumstances is more likely to achieve the desired result than one size fits all schemes.