Payroll Schemes and the Isle of Man Disclosure Facility

Over the years, a number of agency workers and related workers, will have entered into arrangements to try to reduce their tax burdens.  In certain cases, these may have involved Payroll Schemes run through the Isle of Man.

HMRC have been cracking down on such schemes for a number of years and have been successful in pulling them apart in a number of cases.  With the original scheme providers often no long in existence, the tax is pursued from the end users of the scheme, potentially leading to financial hardship, especially when interest and penalties are also brought into the equation.

In appropriate circumstances, the Isle of Man Disclosure Facility (MDF) could provide an option for users of such schemes to come forward and pay the tax at a reduced penalty rate.  The MDF provides a useful framework for making disclosures and would enable the taxpayer to start again with a clean slate.  In our experience, this feeling of relief is often the most significant outcome for clients from disclosing.

Eaves and Co have had extensive experience in dealing with the Liechtenstein Disclosure Facility, which operated in a similar manner, and can bring this experience to bear in assisting with a disclosure under the MDF.

For more details on the terms of the MDF, please see our earlier post here.  If you think you may be able to benefit from the MDF, please do not hesitate to contact us.

Principal Private Residence: The Importance of Intention

D Morgan (TC2596)

The first-tier tribunal case dealt with the taxpayer’s claim for principal private residence relief (PPR). The area of contention was whether the taxpayer’s occupation of the property was sufficient to justify its description as his residence for PPR purposes.

The key message from the outcome of this case is that, according to the tribunal, it is a taxpayer’s intention, and not the quality of the occupation, that is more important in determing whether the relief applies.

Background

The taxpayer purchased the property with the intention of moving into it with his fiancée, and making it their marital home. However, shortly before completion his fiancée broke off the engagement suddenly, giving no explanation.

The taxpayer, on the lack of evidence to the contrary, felt that his fiancée was merely having cold feet. He assumed that they would soon reconcile and she would move into his new house with him. He therefore went ahead with the property purchase and moved in.

Some weeks later it became apparent that they were not going to reconcile as she was seeing someone else. The taxpayer, whilst purchasing the property in his own name, had budgeted on his fiancée paying for groceries and household bills etc. As a result this left him in financial trouble and he had to assess his options.

After living in the property 3 months the taxpayer moved back in with his parents and rented the property out. The property was rented out for just under 5 years, at which point the taxpayer moved back in with the intention of selling the property. The property was then sold within 4 months.

HMRC assessed the taxpayer to capital gains tax on the gain, saying that the two periods he had stayed in the property had been temporary and it therefore did not qualify for principal private residence relief.

The taxpayer appealed.

Ruling

The tribunal said the case was “extremely finely balanced”. It was their view that it is not the ‘quality’ of the occupation, but the intention of the occupier that matters when determining whether or not the property is an individual’s principal private residence.

If Mr Morgan had moved into the property fully furnished, and all the bills had been addressed to him personally, and if he had already intended to let the property, then the quality of his occupation would be irrelevant.

The tribunal accepted the taxpayer’s assertion that he had hoped, when he occupied the house, that his fiancée might return. Therefore when purchasing the property he had intended for it to become his principal private residence.

After learning his fiancée would not be returning, an early repayment charge clause in the mortgage made it clear it would have been financially unviable to sell the property straightaway. Therefore the tribunal said that it was understandable that, after he found the cost of living too high, the taxpayer decided to let the property and move back in with his parents.

The taxpayer’s appeal was allowed and he was entitled to principal private residence relief.

Tax Advisors Beware! : Supreme Court Decision abolishes ‘Get out of Jail Free’ card

Many Accountants and Tax Advisors will have a number of Trusts as their clients.  They may or may not have known that the ‘Rule in Hastings-Bass’ referred to a legal defence Trustees could use to prevent HMRC collecting tax on steps which resulted in extra tax liabilities [NB:  Those who thought the Hastings-Bass rule was to do with the offerings of a South Coast pub should read on to protect their PI insurance].  Effectively, the Hastings-Bass rule was used as a way to unwind actions which had unexpected, adverse tax effects.  Essentially, it was a ‘Get out of Jail Free’ card.

Trusts are often misunderstood.  They have suffered recent adverse publicity, but they can still serve valuable roles in protecting minors, the vulnerable and inter-generational family wealth.  This is the reason many Trustees may only be involved in one Trust, and many Advisors will only have a few on their client list.  Such diversity is helpful, in my opinion, because it keeps those most affected by the outcome closely involved in the decision making process.  The underlying personal and commercial issues are generally more important, and those who are close can give a more balanced view, than just technical input.  It does not stop the latter being important though.

This month the Supreme Court issued its judgement in Futter and Another v The Commissioners for HM Revenue and Customs and Pitt and Another v The Commissioners for HM Revenue and Customs.  They were disparaging about the Hastings-Bass rule and Trustees claiming that they had acted in an ‘un-Trustee like fashion’ such that they should be able to void as a ‘mistake’ actions which gave rise to an unexpected tax bill.  The Supreme Court compared such a defence with the lack of relief which would be due to an individual beneficial owner of property who may have made a similar mistake.

The Court Opinion is elegantly written but raises a number of potentially complex issues for advisors.  Those who may be affected should read the judgement carefully.  Perhaps the first thing which springs to mind though is that Trustees and Advisors need to protect their own interests (as well as the Trusts) by ensuring they have evidence of obtaining appropriate professional advice.

Liechtenstein Disclosure Facility (LDF): Further Update from HMRC

HMRC have written to tax advisors who have taken part in the Liechtenstein disclosure facility (LDF), informing them on common errors that lead to “unnecessary delays” in the system.

From 1 April 2013, HMRC have said they will be taking a more robust stance on whether LDF certificates are issued in such circumstances.  Incomplete disclosures may be taken as a sign of lack of co-operation, leading to the withdrawal of the beneficial terms under the facility.

According to HMRC, the most frequently omitted items are:

  • A narrative explanation detailing the background to the previously undisclosed items;
  • Computations showing how the taxable figures in the disclosure have been arrived at;
  • A fully completed certificate of full disclosure;
  • The statement of assets and liabilities at the end of the final year covered by the disclosure;
  • Completed letter of offer; and
  • Full payment of the tax, interest and penalties due in the offer.

It is therefore essential to take suitable advice from experienced advisors, in order to ensure the terms of the LDF can be met.  Eaves and Co have successfully completed a number of disclosures under the LDF and would be happy to assist.

 

Finance Bill 2013: Changes to the Statutory Residence Test

As of 6 April 2013, whether an individual is resident in the UK for tax purposes will be determined by the Statutory Residence Test.

It is designed to give taxpayers greater certainty and clarity as to whether or not they are UK-resident for tax purposes. This in turn will provide certainty as to whether or not they are subject to UK income tax and capital gains tax.  Due to the drafting of these rules, it remains to be seen whether the goal of greater clarity will be met.

In December 2012 HM Revenue & Customs produced draft guidance and legislation for the Statutory Residence Test.  The legislation has since been updated in the draft Finance Bill 2013.

The Main Changes

The main changes to the statutory residence tests were the introduction of ‘sufficient hours’ and the addition of a fifth automatic overseas test.

Sufficient Hours

In the first draft both the third automatic overseas test and third automatic UK test contained reference to ‘full-time work’. This phrase has now been replaced with ‘sufficient hours’, and there is a corresponding test to determine whether an individual has worked ‘sufficient hours’.

The sufficient hours test has been criticised as it does not allow for an adjustment (when determining whether sufficient hours have been worked) for periods of absence other than annual leave, parental leave, sick leave or embedded non-working days.

Therefore an adjustment is not allowed for agreed ad-hoc leave, such as compassionate leave or study days.

The provisions regarding gaps between periods of work are also highly restrictive, applying only where the gap is one between two employments.  It has not been extended to gaps between an employment and a trade, or two trades.

Generally speaking, the sufficient hours test is met when an individual works on average 35 hours per week after making the allowed adjustments, although the actual calculation is complex.

Fifth Automatic Overseas Test

A fifth automatic overseas test has been added where an individual dies during the tax year.

It is, loosely, a test which applies to those who die during the year and who have become non-resident in a previous year because they have gone to work abroad.

Potential Problems

The two most important areas where changes have not been made are in respect of the accommodation tie and of the definition of a ‘home’.

The accommodation tie still contains concepts which have no precise definition such as ‘a holiday home or temporary retreat’.  This is likely to lead to differing interpretations of what is and what is not a holiday home by HMRC and taxpayers.

Perhaps more importantly the Statutory Residence Test uses the concept of home, which is a notoriously difficult word to pin down as it can bear a wide range of meanings.  Unfortunately no clear and exhaustive definition of what constitutes a home has been provided by the Statutory Residence Test which is likely to cause ambiguity in its application.