When Can HMRC Suspend a Penalty?

Where a taxpayer is subject to a penalty from the tax year 2008/09 onwards, HM Revenue & Customs (HMRC) have the power to suspend a penalty for a careless inaccuracy.

However what many people may not be aware of is that in addition to HMRC granting a suspension it is also possible for the taxpayer to request that they do so.

If HMRC refuse to suspend a penalty it is possible to appeal to the First-tier Tribunal, but the tribunal can only allow your appeal if it thinks that the HMRC decision is flawed.

A complete failure to exercise the discretion, i.e. not to consider a suspension in light of the taxpayer’s circumstances, is generally considered a flawed decision.

There is however nothing which prevents HMRC adopting policies or practices which indicate factors it may take into account when exercising its discretion; so long as they do not prevent consideration of individual circumstances.

HMRC’s instruction to staff is to only consider a suspension where they can set at least one condition that, if met will help the taxpayer to avoid a further penalty.

Some officers claim that HMRC cannot suspend a penalty for errors involving capital gains tax (CGT).  This is incorrect as there is no reason that HMRC cannot suspend a penalty in relation to CGT providing at least one condition can be set.

Case law however has proved inconclusive. In Fane v HMRC the tribunal accepted HMRC’s view that a one-off error was not suitable for a suspended penalty, however in Boughey v HMRC the tribunal disagreed and overturned the decision not to suspend.  Both tribunals said that the suspension conditions need not relate to the specific error.

Budget 2013: The Best of The Rest

Budget 2013

Budget 2013

With all the fanfare of the increase in personal allowance to £10,000 ahead of schedule, the accelerated alignment of Corporation Tax rates and the £2,000 NICs break for small employers you may have missed some of these other important taxation announcements in the 2013 Budget:

New Close Company Loan Rules – Overdrawn Directors Loan Accounts (s.455 Tax)

Inheritance Tax Exempt Amount to Non UK Domiciled Spouses

Above the Line R&D Tax Credit

Budget 2013: Non UK Domiciled Spouse IHT Changes

Increase in the Lifetime Inheritance Tax Exempt Amount to Non UK Domiciled Spouses

The lifetime Inheritance Tax exempt amount for transfers between UK-domiciled individuals and their non UK domiciled spouse or civil partner is to be increased from £55,000 to £325,000 (i.e. in line with the nil rate band).

The exempt limit will then mirror the nil rate band as it increases.

UK Domicile Election

In addition there will be a new election regime, whereby non-UK domiciled individuals who are married or in a civil partnership with a UK domiciled person will be able to elect to be treated as UK-domiciled for Inheritance tax purposes.

The non UK domiciled spouse who makes an election will benefit from uncapped Inheritance tax exempt transfers from their spouse or civil partner, but subsequent disposals by them would be liable to IHT (subject to their own nil-rate band), irrespective of the location of the assets.

If no election is made then the non UK domiciled spouse’s overseas assets would be exempt from Inheritance tax but any transfers from their UK domiciled spouse or civil partner would be subject to the lifetime exempt limit above.

Budget 2013: R&D Above The Line Tax Credit Introduced

Budget 2013 announced the introduction of a 10% ‘Above the Line’ credit for large company R&D activity.

The ‘Above the Line’ credit is designed to increase the visibility of large company R&D relief and provide greater cash-flow support to companies with no corporation tax liability.

Companies will be able to claim the ‘Above the Line’ tax credit for their qualifying expenditure incurred on or after 1 April 2013.  The credit will be equal to 10% of the qualifying R&D expenditure.  The credit will be fully payable, net of tax, to companies and will not be liable to Corporation Tax.

The ‘Above the Line’ credit scheme will initially be optional and companies will be required to elect to claim R&D relief under this scheme.

Companies that do not elect to claim the ‘Above the Line’ credit will be able to continue claiming R&D relief under the current large company scheme until 31 March 2016.

The ‘Above the Line’ credit will become mandatory from 1 April 2016.

Budget 2013: Loan to Participators (Overdrawn Directors Accounts) – s.455 Tax Charge

Budget 2013 announced various anti avoidance measures aimed at the loan to participators/overdrawn directors accounts s.455 tax charge .

Repayment Provisions Amended To Deny “Bed & Breakfasting”

Certain owner managed companies have previously been extracting funds from the company through overdrawn directors loan accounts, which are then repaid by crediting the loan account just before the date when tax would become due under s.455. They would then subsequently recreate a similar debt to the company. Such tactics are now being targeted by HMRC as previously there were no specific rules to prevent it.

The repayment provisions are to be amended so as to deny relief for the loan to participators s.455 tax charge where repayments and re-drawings are made within a short period of time of each other, or there are arrangements (or an intention) to make further chargeable payments at the time repayment is made (and there are subsequent re-drawings).

The effect of this being that the loan to participators s.455 tax charge can no longer be avoided by repaying the loan within 9 months of the accounting period end if a loan is taken out again soon after or there is an intention to do so.  Therefore such ‘bed and breakfasting’ is no longer a possibility.

Loans via Relevant Partnerships & LLPs

Legislation will be introduced in Finance Bill 2013 to apply the loan to participators s.455 tax charge to any loans from close companies to participators made via partnerships (including LLPs) in which the close company and at least one partner/member is a participator (or associate of).

Extractions of Value

Where there is an extraction of value from a close company and the value is transferred to a participator, there will be a 25% tax charge on the close company on the amount of the payment to the participator.

Relaxation of RTI rules for small employers

The rules on PAYE are changing with reporting of individual payments to HM Revenue and Customs becoming stricter and moving to Real Time Information (RTI) reporting.

However, it has been announced that businesses with 50 or fewer employees will be given more time to report payments to employees to HMRC in the short term.

This relaxation of the rules will apply until 5 October 2013, and means that small businesses may send the relevant PAYE reporting information to HMRC no later than the end of the tax month (e.g. 5th of each month) instead of at the time at which the payment is made to the employee.

This has come about through the Government responding to suggestions that the requirement to report to HMRC on or before the employee is paid may prove difficult for certain small businesses.

The Boundaries of Fairness – Joost Lobler v HMRC (TC2539)

In the recent case of Joost Lobler v HMRC (TC2539) the taxpayer was Dutch and had sold property in Holland after moving to live in the UK. He invested roughly $1.4m of the proceeds in a number of Zurich life insurance policies arranged through HSBC Private Banking.

Without taking financial advice, over the course of the next two years Mr Lobler withdrew the funds invested in order to buy a UK property, leaving the policies with comparatively negligible value.

The taxpayer opted for partial surrender out of the 4 options available when completing the form to make a withdrawal. He did not mention the withdrawals from the policy on his tax returns for 2006/07 and 2007/08 as he assumed that no taxable gain had arisen, having not withdrawn more than he had paid into the policies.

Unfortunately, technically he was wrong, and because of the options he chose Zurich carried out their legal obligation to inform HMRC of the withdrawals, which led HMRC to determine that tax was due and assessed the taxpayer to $560,000 under ITTOIA 205 s.461.

The taxpayer appealed saying that a mistake had been made when filling in the surrender forms. Had he made a full surrender no tax would have been due and he did not realise the consequences of making a partial surrender claim.

The first tier tribunal dismissed the taxpayer’s appeal on the grounds that they could not find a different way to interpret the legislation. It was suggested that the taxpayer’s situation was “outrageously unfair” as he had made no profit or gain, but had become liable to tax which could potentially bankrupt him.

The moral of the story is of course that tax is complex and it is prudent to take professional advice. Anyone drawing a comparison between HMRC’s aggressive use of obscure legislation to their own financial advantage and those indulging in “tax avoidance” must of course be mistaken.

New Disclosure Campaign Targets Undisclosed Property Gains – Property Sales campaign

HMRC have announced the Property Sales campaign, a further new disclosure opportunity aimed this time at those with undisclosed taxable gains on residential property sales.

The disclosure campaign requires details of income and gains and the tax payable to be settled in full before 6 September 2013. After this date, HMRC will use the information they hold to target those who should have come forward under the campaign and did not do so.

HMRC states that reduced penalties will be levied on those who make a disclosure, but no firm details have yet been released.  At present, a penalty calculator on the HMRC website refers to a maximum penalty of 20%.

This campaign marks a further step in HMRC’s drive to get taxpayers to come forward over undisclosed income and gains, following the recent announcement of the Isle of Man Disclosure Facility, the longer running Liechtenstein Disclosure Facility, and the UK-Swiss Tax Treaty amongst others.

Principal Private Residence Relief – TC02560 Mrs Bradley

The recent tribunal case of Mrs Bradley v HMRC was regarding principal private residence relief, and in particular whether the appellant had ever ‘resided’ in the property in question.

Mrs Bradley had moved into a property which she had previously rented out after separating from her husband. After living in the property for less than a year the property was then sold and Mrs Bradley reconciled with her husband.

Prior to Mrs Bradley moving in to the property it was put on the market for sale and remained so when she moved in.  The tribunal were happy that the couple had intended to permanently separate but questioned whether she ‘resided’ there.

In line with Goodwin v Curtis the tribunal stated that in order to qualify for principal private residence relief a taxpayer must provide evidence that their occupation shows some degree of permanence, some degree of continuity or some expectation of continuity.

On the basis that the property was for sale throughout, the tribunal concluded that the residence was not intended to be permanent; had Mrs Bradley received a suitable offer for the property she would have sold sooner. The property could only ever have been a temporary home in those circumstances, and therefore it was never her residence.

The claim for principal private residence relief was denied.

HMRC Crackdown on Tax Evaders Continues

HMRC’s crackdown on tax evaders continues. A recent case saw a London barrister being convicted of tax fraud and sentenced to 3 and a half years in prison. HMRC investigators found he had failed to declare or pay over £600,000 of VAT over 12 years.

Mr Pershad’s VAT registration was cancelled by HMRC in 2003 with effect from 1999, after a history of failure to submit tax returns and also not telling HMRC about a change of address. This resulted in him being unable to legally trade above the VAT threshold, which was between £54,000 in 2001 and £67,000 in 2008.

On completion and submission of his self-assessment tax returns, they showed his income had increased from £85,000 in 2001 to £346,000 in 2008, hence breaching the VAT registration limit.

During this time he continued to use his invalid VAT number on invoices, hence collecting the VAT on the fees he charged his clients but keeping the money for himself.

In another case, two businessmen have been jailed for fraud and tax evasion after hiding £500,000 in offshore bank accounts over a 6 year period.

The business men were given the opportunity to disclose their offshore accounts through HM Revenue & Customs’ Offshore Disclosure Facility (ODF). One of the two men did not register for the facility whilst the other only disclosed one of the 12 accounts he controlled.

The men ran a company offering computer technology to the automotive industry, with many of their clients based in Germany. After close inspection, sales in Germany were in the region of £1.26m, while only £49,650 of this money in sales for the same period was declared to HM Revenue & Customs. The balance was divided into offshore accounts of five shell companies registered in Mauritius and the Isle of Man, created solely for the purpose of tax fraud.

The men were jailed for 15 months and 12 months respectively. Confiscation orders were issued under Proceeds of Crime legislation in respect of amounts totaling £500,000 which must be paid within 24 months or the men will be jailed for a further 15 and 12 months respectively.