HMRC: Reasonable Excuses and Suspended Penalties

Many years ago, as a young Inspector of Taxes, my District Inspector taught me not to take a harsh line on “late” submissions on behalf of the Inland Revenue.  His policy was that it was not the job of the Government to fine or penalise citizens if they were broadly trying to comply with their tax obligations but were slightly late in doing so.  The thinking behind this idea was that people were far more likely to be co-operative and compliant – factors key in having a capable and cost effective tax system – if citizens felt they were dealing with people who were reasonable and flexible, rather than hide bound by bureaucratic rules.

Perhaps as a result of such benevolent views, Accountants rarely thought about questions of Revenue powers and procedures, trusting the administrative reasonableness of the ‘Powers that be’.  It appears to me that such flexibility and judgement has been eroded from the Revenue lexicon.  This may be because of a desire to be more consistent, but in any event Accountants should help clients by considering carefully whether penalties have been correctly and legally levied or whether they can be eliminated or mitigated via concepts such as reasonable excuse or the use of suspended penalties.

Examples of cases where the Revenue line taken to the courts could appear harsh include;-

Cotter, where the Revenue sought to deny a taxpayer the right to claim a stand over of collection of tax which was in dispute pending resolution of the appeal.  The taxpayer won in the Court of Appeal, but HMRC are now taking it to the Supreme Court, demonstrating their effective limitless resources compared to individual taxpayers.

Business Women’s Coaching, where the taxpayer was fined for filing a return due by 31 December on 11 February.  The return in question was updated as originally it had been submitted on 9 December, but was then rejected as being incomplete.  The taxpayers did not advance a ‘reasonable excuse’ so their appeal was rejected, but would taxpayers consider HMRC’s behaviour as reasonable and proportionate in imposing a fine on being just 6 weeks late in adding extra material to a return originally submitted in time?

F Weerasinghe, where an accountant had lost the client’s papers and HMRC then rejected updated figures from a new accountant on the basis that they were too late.  The taxpayer won on a technicality because the tribunal held the time limits did not apply, because HMRC had not issued a formal demand for the Return in question.  They also found that the taxpayers figures appeared more reliable than those calculated by HMRC.

Hard cases make bad law and HMRC have a very difficult job to do.  It is a question of balance but perhaps it may be worth reflecting on the original responsibility of the Inland Revenue for the “care and management” of the tax system in Section 1 of the Taxes Management act 1970.  This was changed in 2005 to “collection and management”.  Maybe a little more “care” to mitigate pure “collection” may pay dividends in keeping taxpayers happy and compliant?

The other lesson is that accountants should be helping their clients by seeking to identify circumstances winthin the scope of “reasonable excuse” or the regime for suspending penalties.

April 2013 Newsletter

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.

Read the full article.

Disclosure Update: Isle of Man, Jersey & Guernsey

HMRC announced three more disclosure facilities in quick succession as they attempt to tighten the net on tax evaders operating closer to the UK. 

 Read the full article.

Fairness in Tax – A Round-up of Some Recent Cases

There has been much publicity in the media in recent months over tax avoidance, and whether certain parties are paying the “right” amount of tax.    The theme of fairness ran through three recent tax cases heard by the courts.

Read the full article.

New Disclosures – Lessons from the Liechtenstein Disclosure Facility (LDF)

In many ways these new tax treaties are similar to the Liechtenstein Disclosure Facility (LDF) which has been operating for some time now.  It therefore makes sense to consider them in the light of experience and lessons learned from the LDF.

Read the full article.

Entrepreneurs’ relief on Enterprise Management Incentives (EMI) share options

Draft proposals under the Finance Bill 2013 could make it much easier to qualify for entrepreneurs’ relief on shares acquired through a qualifying EMI share option scheme.

Read the full article.

Changes to Corporation Tax deductions available for employee share schemes

Read the full article here.

Entrepreneurs’ relief on Enterprise Management Incentives (EMI) share options

One of the problems with Entrepreneurs’ relief as opposed to the old rules on Business Asset Taper Relief, was that employee shareholders could struggle to acheive the relief due to the 5% holding requirement.  This position has now been relaxed where shares are acquired through an Enterprise Management Incentives scheme, meaning it should now be easier to obtain Entrepreneurs’ relief on Enterprise Management Incentives (EMI) share options.

Draft proposals under the Finance Bill 2013 will remove the requirement for a person to hold at least 5% of the ordinary share capital of a company in order to qualify for entrepreneurs’ relief on shares acquired through a qualifying EMI share option scheme.

The legislation will also be changed to allow the period in which the options are held to count towards the 12 month holding period required to qualify for entrepreneurs’ relief.

These announcements will therefore increase the already highly efficient tax treatment of EMI schemes, and potentially enhance the incentivisation of employees under such schemes.  Even where the share option scheme itself is not desired, EMI schemes could potentially be used to enable employees to acquire shares that will qualify for Entrepreneurs’ relief, as there is no minimum exercise period for EMI options.

New Disclosures – Lessons from the Liechtenstein Disclosure Facility (LDF)

This new tax year sees the opening of new tax disclosure facilities for offshore tax havens of Isle of Man, Jersey and Guernsey.  They offer a streamlined disclosure method for offshore hidden funds with a laid down table of reduced penalties for tax errors.

In many ways these new tax treaties are similar to the Liechtenstein Disclosure Facility (LDF) which has been operating for some time now.  It therefore makes sense to consider them in the light of experience and lessons learned from the LDF.

The new opportunities to disclose run from 6 April 2013 to 30 September 2016.  Whilst 2016 currently sounds a long way off. It is surprising how fast time goes by.  Experience with LDF suggests that people are liable to procrastinate, so the sooner they get relevant information, the more likely it is they will take appropriate action before it is too late.

Registering sooner rather than later gives greater protection, because HMRC enquiries continue, and those caught in an investigation are too late to take advantage of the benefits of reduced penalties and time scope of those disclosure schemes.

Whilst Accountants hope that all their clients are honest and do not need specialist disclosure facilities, as a firm dealing in serious tax investigations we see that such hopes are sometimes dashed.  It is useful to make all clients aware of the disclosure facilities, because even the most honest ones may have funds or relations who requires help.  Specialist advice is essential (we can help).  Sometimes the happiest way forward can be just to provide the client with contact details, so that the existing client relationship is unaffected.

Changes to Corporation Tax deductions available for employee share schemes

Under current legislation a corporate tax deduction is given on shares acquired through employee shares schemes. The amount of the deduction available is the amount that is chargeable to income tax when the shares are acquired by the employee or the amount that would be chargeable if the employee was a UK resident and other reliefs were unavailable.

The legislation introduced under Finance Bill 2013 clarifies that if relief is given under Part 12 CTA 2009 it is not possible to claim any other deduction for Corporation Tax in relation to those employee shares or options.

The legislation also highlights that no Corporation Tax deductions are available to a company in relation to employee share options unless shares are actually acquired by an employee in accordance with the option.

It appears these provisions are largely to prevent avoidance and should not affect genuine planning using tax efficient options such as EMI schemes.

Fairness in Tax – A Round-up of Some Recent Cases

There has been much publicity in the media in recent months over tax avoidance, and whether certain parties are paying the “right” amount of tax.  Whilst such discussions have often focused on big businesses trying to pay less tax, fairness in the tax system can swing both ways with unexpected bills being incurred.  The theme of fairness ran through three recent tax cases heard by the courts.

In the First-tier Tribunal case of Joost Lobler v HMRC (TC2539) the taxpayer was hit with a huge tax bill on partial surrenders of life insurance policies, despite having made a loss.  If he had made full surrenders, then he would have had no tax to pay.  The tribunal suggested that the taxpayer’s situation was “outrageously unfair” as he had made no profit or gain, but had become liable to tax, under the letter of the law, which could potentially bankrupt him.

In the recent case of T James V HMRC, the taxpayer persuaded the Tribunal that he had a ‘reasonable excuse’ for late payment because he chose (out of limited resources) to provide his corporate business with funds to pay their PAYE, VAT and corporation tax, rather than keep up with his previously agreed ‘time to pay’ arrangements on his personal account with HMRC.  This enabled the business to continue and increase the total tax take to HMRC.  Despite this, HMRC still took the case to tribunal rather than consider the fairness of the case internally.

Finally, in the case of J Jackson v HMRC (TC2448), the taxpayer had received termination payments from his employer when he retired, on which tax had been deducted at basic rate.  The payment was included on Mr Jackson’s tax return, which was filed on time. He believed that his employer would have deducted any tax due, having always been taxed through PAYE and therefore made no payment of tax at the higher rate.

He received a tax demand from HMRC.  On receiving written confirmation of what the additional tax related to, he paid the tax but was then issued with a late payment penalty.  The Tribunal found that the taxpayer had acted reasonably and had a genuine belief that his taxes were up-to-date.  The tribunal overturned the penalty and noted that the taxpayer clearly felt aggrieved and unfairly treated.

As can be seen from these cases, HMRC’s view on fairness appears to be at odds with that of the general population and the concept of “paying the right amount tax” is not as clear cut as the media portrayal.  Tax is complicated, and taking professional advice is therefore essential.

Disclosure Update: Isle of Man, Jersey & Guernsey

HMRC announced three more disclosure facilities in quick succession as they attempt to tighten the net on tax evaders operating closer to the UK.  Memoranda of understanding have been signed with the Isle of Man, Jersey and Guernsey in the last few months meaning more and more taxpayers could be under scrutiny.

Whilst co-operation with HMRC from the above jurisdictions is another nail in the coffin for tax evaders operating off the coast of the UK, these disclosure facilities offer a great opportunity for individuals to wipe their slate clean and take preemptive action.

If individuals come forward under one of the disclosures they will be liable to reduced penalties – which can result in sizeable savings when compared to an ad hoc disclosure or HMRC investigation.

However the disclosure facilities do not offer immunity from criminal prosecution, therefore individuals may wish to disclose using the Liechtenstein Disclosure Facility (LDF).  The LDF can be used on worldwide assets providing sufficient funds are transferred to a financial intermediary in Liechtenstein.  The LDF offers both reduced penalties (as low as 10%) and immunity from criminal prosecution.

This is certainly an area in which to be proactive on as under the terms of the agreements the jurisdictions will provide HMRC with details of suspected evaders in due course.

Therefore disclosing to HMRC before they come ‘knocking’, not only secures reduced penalties but also allows individuals a greater element of control as to the manner and time frame in which they disclose. This offers piece of mind to the individuals involved.

In addition to the above HMRC are also looking to sign similar agreements with British overseas territories. There are 14 such territories including Bermuda, the British Virgin Islands and the Cayman Isles.

The importance of the motive behind the transaction

In the recent case of Land Securities PLC v HMRC, the appellant Land Securities PLC appealed against the decision of the First Tier Tribunal, who had agreed with HMRC’s arguments to disallow claims made to deduct a capital loss from profits subject to corporation tax on the basis that the creation of the loss, and therefore the avoidance of tax, was the underlying motive behind the transaction.

The series of transactions involved Land Securities PLC selling shares in a subsidiary called LM Property Investments Limited (LMPI) to a subsidiary of Morgan Stanley in the Caymen Islands (C) with a put option being set up whereby C could sell the shares back to Land Securities PLC at any time after 29 February 2004. On 1 August 2003 C injected funds of around £200m into LMPI. On the same day C also agreed to sell back the shares in LMPI to Land Securities PLC for over £200m more than they had originally been purchased for.

The Upper Tier Tribunal denied relief, finding against the appellant on the basis that the transaction did not exist to create a commercial profit but that the materiality of the transaction was to create a loss for Land Securities PLC to offset against its profits and as such pay a lower amount of tax.

A further recent case (PA Holdings),involved a company constructing a complex arrangement in order to divert employee bonuses to be taxed as dividends rather than employment income, therefore saving tax and NICs. The Court of Appeal found that the payments were remuneration for employment and subject to Income tax and NICs accordingly.

PA Holdings’ appeal to the Supreme Court following this ruling has now been withdrawn and the decision at the Court of Appeal is therefore final. Further details of the case can be found at:

 http://eavesandco.co.uk/blog/2012/01/18/a-payment-cannot-be-both-dividend-and-employment-income/.

Reynolds painting from 1776 is found to be a “Wasting Asset” – Executors of Lord Howard of Henderskelfe (dec’d) v R&C Commissioners

A recent Upper Tier Tribunal case – Executors of Lord Howard of Henderskelfe (dec’d) [2011] TC 01340 – considered the Capital Gains Tax implications of the sale of a painting by Sir Joshua Reynolds.

The painting, owned by Lord Howard, was informally lent it to a company that put it on display at Castle Howard, Lord Howard’s stately home, as part of the company’s ‘house-opening trade’.

Lord Howard died in 1984 and the painting was sold by the executors of his estate in 2001.  Throughout this period, the painting continued to be displayed by the company. The executors claimed that the painting was tangible moveable property which was ‘plant’ and therefore a ‘wasting asset’.  The result being that the gain on the sale of the painting would be exempt from capital gains tax.

The first-tier tribunal originally found in favour of HMRC, who argued that the painting was not plant because the executors did not have a business.  However, Mr Justice Morgan at the Upper Tier Tribunal found in favour of the executors, agreeing that the painting represented plant, stating, “the painting satisfied the tests as to function and as to permanence in the established test as to the meaning of plant”.

Tax Payment Plans – Reasonable Excuse (T James v HMRC)

Good news for taxpayers (well a bit!).  Times are hard and paying tax an unfortunate if important and compulsory imposition.  Business being business, sometimes it proves difficult to pay on time.  Late payment now results in surcharge penalties unless there is a ‘reasonable excuse’.

The concept of ‘reasonable excuse’ is one which is evolving.  Sometimes it seems HMRC treat all claims like the ones they have heard about ‘my dog ate my tax return’ or ‘my Mam threw the HMRC cheque on the fire’, but thankfully HMRC cynicism can be overcome by a good case well presented (at least on appeal).

In the recent case of T James, the taxpayer persuaded the Tax Tribunal that he had a ‘reasonable excuse’ because he chose (out of limited resources) to provide his corporate business with funds to pay their PAYE, VAT and corporation tax, rather than keep up with his previously agreed ‘time to pay’ arrangements on his personal account with HMRC.

Whilst saying the taxpayer would have been well advised to explain the position to HMRC in advance of making the decision, the Tribunal helpfully found that although a mere inability to pay tax was not an excuse in itself the reasons why a person is unable to pay can constitute a reasonable excuse.

In this case the Tribunal took into account the business pressures and the fact that maintaining the businesses as going concerns increased employment and the overall tax take.

It was not so much a failure to pay tax altogether, more a choice to focus on the business taxes first.