The recent High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, regarding specialist tax advice.
According to some media reports, the case means that accountants are required to advise on complex tax avoidance schemes, but the reality is slightly more subtle than that.
Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including his first tax returns in the 1980s.
The case therefore revolved around whether the accountants had been negligent in failing to notice his non-domicile status and the impact this would have on his UK tax position on making a gain.  The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs.
In October 2004 his accountants considered the CGT position on Mr Mehjoo selling his shares in a company. Neither the firm’s general practice partner, nor the tax partner appeared to have considered the non-domicile status or the impact this could have.
The accountants claimed that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so.  This was found to be not the case, in part due to the fact that they had provided such advice on a number of occasions without express instruction.
The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself.
Tax is complicated, and the ever increasing tax legislation means it is harder than ever to keep up-to-date.  The key message for accountants is that they need to know enough to know that there is a problem, and seek out relevant specialists to assist.  Please feel free to contact us if you feel you may need specialist tax advice for your clients.

County cricket clubs were first to be targeted by HMRC enquiry. They have broadly been given a clean bill of health, although questions are still being asked about tax associated with image rights for Test players and there have been problems with the tax position of players’ agents.

HMRC though have denied it is targeting local sports clubs after a Hertfordshire cricket club was sent a tax bill of over £14,000.

Sawbridgeworth Cricket Club, a 151-year-old amateur team with an annual income of around £21,000, received the bill after the Revenue carried out an assessment in 2012.

However, after HMRC agreed a schedule of staged payments and waived penalties, the club was able to settle the bill with money raised from fund-raising events and an interest-free loan.

Community amateur sports clubs are exempt from corporation tax on profits of less than £30,00 a year, but employees such as bar staff are subject to PAYE.

An HMRC spokesperson said the department wasn’t targeting amateur clubs, but non-compliance with the PAYE regime.

“This kind of work is normal. HMRC works to ensure employers are correctly operating the payroll system, so that everyone pays the right amount of tax. We have worked with sports clubs to put things right if necessary,” the spokesman said.

The England & Wales Cricket Board (ECB) has issued guidance notes to clubs, outlining what HMRC wants, urging them to seek advice and warning they could face penalties for failing to meet PAYE and NIC payroll deductions. “Do not accept any HMRC calculations without challenge, but use the results of your review to negotiate with HMRC,” says the ECB.

A recent case on ‘property trading’ has been won by taxpayers, but longer term, HMRC may be secretly cheering their own defeat because of the possible arguments it may give them on other future cases.
The case of Albermarle 4 relates to the classic dilemma of property dealing.  Is it a trading transaction, taxable as income?  Or is it a deal on capital/investment account to be dealt with under the capital gains tax regime?  In many cases the facts point clearly one way or the other, but often, particularly where people have interests in a number of properties it can be unclear whether they are buying to hold, or buying to sell – especially as, for the right offer, virtually all commercial assets are for sale anyway.
The judgement in Albermarle 4 suggests that the decision was very finely balanced, with the taxpayer just about convincing the First Tier Tribunal that they intended to sell the properties on and trade them, rather than hold them long term.  This meant that the resulting losses could be set against other income, producing a significant tax saving.  This was despite the fact that the properties were shown as fixed assets on the balance sheet, rather than trading stock for resale which would have been a more conventional accounting treatment.
HMRC also lost on a subsidiary technical point on their powers which held that making an amendment to a partnership return to cancel a loss (which they purported to do) was not the same as making a ‘discovery assessment’ so they were ‘out of time’ in any event in terms of adjusting the earliest year of the enquiry into the taxpayers losses.  Again this shows the importance of understanding properly which powers HMRC are purporting to use when they seek to make adjustments to a taxpayers self assessment.  The rules are complex but do not give HMRC carte blanche to make amendments, especially outside the normal enquiry window.  This is likely to be an important taxpayer defence in future, where stretched HMRC resources attempt to widen enquiries into more than 1 year.  So far the courts seem to be willing to try to strike a balance between allowing HMRC powers to investigate whilst also protecting taxpayers by giving them the certainty regarding earlier years they were promised when self assessment was first introduced.

We have commented on a number of court cases in the past dealing with the interpretation of “reasonable excuse” in the context of penalties.  It has been shown on a number of occasions that HMRC’s restrictive approach to the definition of reasonable excuse has gone further than the legislation ever intended, with no backing in case law.

Some examples of a reasonable excuse have included;

  • inability to pay (T James V HMRC (TC2527), Dudman Group Ltd v HMRC (TC1608))
  • failure of HMRC to provide online filing facilities (Paul & Annette Galbraith t/a Galbraith Ceramics (TC2639))
  • “special circumstances” which included redundancy (C Horne  v HMRC (TC2592))
  • HMRC communication failure (M Styles v HMRC (TC2599))

The cases where the inability to pay has successfully been claimed as a reasonable excuse is particularly interest bearing in mind the legislation specifies that lack of funds is not a reasonable excuse.  The tribunal appears to have taken the view that whilst lack of funds in itself is not a reasonable excuse, the circumstances that led to this can amount to a reasonable excuse.

With all this case law going against HMRC’s previous stance on reasonable excuse, have they changed their manuals and training of staff to reflect this?

Certainly, the tribunal decisions still filtering through from the courts suggest that HMRC have not changed their policy and we have seen further demonstration of this in recent discussions with HMRC.  A member of HMRC’s complaints department stated that as far as he was concerned, reasonable excuse meant, “death, disease or disaster” and refused to comment on recent tribunal decisions.

HMRC did, however, update their guidance, “SAM10090 –  Appeals, postponements and reviews: appeals: reasonable excuse” , on 13 March 2013.  The guidance is not as restrictive as the approach actually taken by HMRC in practice (“death, disease or disaster”), as they acknowledge that postal delays, loss of records, certain online filing issues and banking errors can constitute a reasonable excuse.

However, it still states that lack of online filing facility, shortage of funds and work pressures should never be accepted as reasonable excuses, despite the fact that cases have suggested that there are situations where these could count as a reasonable excuse.

For advisors and agents then, it is worth being aware of these developments and challenging penalties where a genuine excuse exists.   It is, however, disappointing that HMRC refuse to operate within the law and is particularly worrying where unrepresented taxpayers can be bullied into unfair penalties.   Perhaps, if the profession continues to appeal these penalties and win at tribunal, HMRC may be forced to finally change their ways.

Ramsay v CRC – A Property Business Can Qualify for Incorporation Relief

Mrs Ramsay appealed against HMRC’s decision to deny her rollover relief under TCGA 1992 s.162 on the transfer of a property into a company – otherwise known as incorporation relief.

HMRC said the gain did not qualify for the relief as the property was not a business when the transfer was made.

The case was initially decided in favour of HMRC at the First-tier Tribunal.  However, the case was subsequently appealed to, and heard by the Upper-tier Tribunal.

Background & Relevant Facts

The taxpayer inherited a one-third share of a block of flats in 1987. She took over the administration for the whole building in 2002 and gifted half of her share to her husband in February the following year.

The couple spent about 20 hours a week attending to the building, making sure the rent was paid on time, cleaning communal areas, forwarding post to tenants who had left, and ensuring the property was insured and complied with fire regulations.

The taxpayer purchased the rest of the building from her brothers, and in September 2004, she and her husband transferred the property to TPQ Developments Ltd in exchange for shares in the company – incorporation relief was claimed. The couple made a gift in August 2005 of all their shares in TPQ to their son, who became the sole shareholder and director of the firm.

The Case

HMRC claimed the incorporation did not qualify for rollover relief under TCGA 1992, s 162 because the property was not a business when the transfer was made. The First-tier Tribunal (FTT) agreed the Revenue’s arguments.

The taxpayer appealed to the Upper-tier Tribunal (UTT).  The UTT found that the FTT’s finding was based on an error of law.

The question which was required to be addressed was a straightforward one; ‘whether the activities of Mrs Ramsay in relation to the Property constituted a business’.

Unfortunately, however, the FTT had concerned itself whether the property activities were sufficient to be taxed as trading income (rather than property income), and whether the property would have attracted business property relief.

The UTT said “business” in the context of s.162 should be interpreted broadly – there was no set test under the legislation.

The judge remarked that the criteria as to what constituted a business in Customs and Excise Commissioners v Lord Fisher [1981] STC 238 were helpful, even though that case concerned VAT.

In this instance, the work carried out by the taxpayer satisfied the tests laid out in Lord Fisher. As to the question of degree, the taxpayer’s activities in respect of the property amounted to a business for the purpose of s.162.

The taxpayer’s appeal was allowed.

How many clients have a ‘cunning plan’ where they overdraw their private company loan account and then ‘rectify’ the position with a bonus/dividend just before 9 months have passed so as to avoid a charge for loans to participators under S455 CTA 2010?  How many then repeat the pattern year on year?
How many partnerships have converted to LLPs, have ‘salaried partners’, saving employer/Class 1 NIC?
How many structures have corporate partners included?
Each of these types of arrangements may be affected by proposals in the Finance Bill 2013 and the outcome of a current Government consultancy process (scheduled to close 9 August 2013) where new legislation is proposed for April 2014.  As the proposals affect the fundamentals of business planning, then serious strategic thought should be given on the potential impact straight away.
The rules are quite complex (and therefore at odds with supposed ‘tax simplification’) and may well result in an unexpected hit where businesses will find well established arrangements are suddenly taxed differently.
In particular, new provisions on the S455 charge are being brought in, which seek to deny the relief due on a ‘repayment’ of a loan where there are arrangements in place to advance a replacement loan.
Changes are also planned for partnerships where a salaried partner carries little or no equity risk whereby in future they are likely to be liable under PAYE with consequent impact on cash flow, expense deductibility, car arrangements and employers national insurance contributions.