Wholly and exclusively test and duality of purpose – Healy v CRC

The rules on whether expenditure may be allowed as a deduction under the ‘wholly and exclusively’ principles can often be contentious.  This is demonstrated by the number of cases taken to the courts to determine such disagreements.

The recent Upper Tier Tribunal case of Healy v CRC has added further material to the case law on the subject, and due to the outcome promises more to come as it has been referred back to the First Tier Tribunal.

The case concerned professional actor, Tim Healy, and whether or not the cost of his accommodation in London was an allowable expense.  The First-tier Tribunal had allowed his original appeal on the basis that he had not been looking for a permanent home in London.

HMRC appealed, arguing that the tribunal had erred in law by ignoring whether or not Mr Healy had a duality of purpose when incurring the costs as it met the need for warmth and shelter than he ordinarily had.

The Upper Tier Tribunal agreed that by failing to address this point the Tribunal had erred in law.  Based on the facts available to them, they did not have the necessary detail to determine the case.  It was therefore remitted to the First-tier Tribunal for a new hearing.

The outcome of the re-heard case could have wider implications for the self-employed and so it will be interesting to see how the case develops.  In the meantime, it is important to take care in this area and take each case on its own merits.

Disincorporation Relief

Background

Disincorporation Relief was introduced from 1 April 2013 and is a form of roll-over or deferral relief.

When a company ‘disincorporates’ there is a transfer of assets between the company and its shareholders.  As the parties are connected, the transfer is deemed to occur at market value for tax purposes and normally results in a Capital Gain.  Prior to the introduction of disincorporation relief this would result in a Corporation Tax charge being incurred.

Disincorporation relief enables small owner-managed companies to transfer qualifying assets so that no capital gain arises, and as a result no Corporation Tax charge is incurred.

The availability of Disincorporation Relief coincides with the introduction of other tax simplification measures for unincorporated businesses, such as the ‘Cash basis’ election and the flat rate expense allowances.

Conditions for Relief

A company and its shareholders can make a claim for Disincorporation Relief if:

  • the company transfers its business to some or all of its shareholders
  • the transfer is a ‘qualifying transfer’
  • the transfer occurs between 1 April 2013 and 31 March 2018
  • the transfer is to either a sole trader or individuals in partnership, but not to members of a limited liability partnership (LLP)

Qualifying Transfer

There are a number of conditions to be met, and each case should be considered in the light of the facts.  One of the key requirements, which will restrict the application of the relief, is that the total market value of ‘qualifying assets’ (land and goodwill) at the time of the transfer must be below £100,000.

If you would like more information on Disincorporation Relief please contact Paul Eaves on 0113 244 3502 or peaves@eavesandco.co.uk.

HMRC Criticised in Share Scheme Tribunal Case – Benedict Manning V HMRC

HMRC were criticised for their handling of a recent employee share scheme case by the tribunal judge, who noted that they had conducted their investigation “without apparently troubling to look at the scheme rules”.  The recent case is not the first time tribunal judges have been critical of HMRC’s conduct.

 

The case in question involved an employee share option scheme.  The taxpayer exercised his share options in October 2007, paying £7,636 for shares worth £111,579.  The scheme rules stated that the taxpayer should pay over the PAYE due on the exercise within 90 days, but he was not told the amount to pay by his employers until March 2008.

 

HMRC charged tax on under ITEPA 2003, s.222 on the basis that this was not within the 90 day limit imposed by the scheme rules.  The taxpayer appealed as he could not have paid the PAYE before being told the amount to pay.

 

The tribunal allowed the appeal, agreeing with the taxpayer that the date of exercise could not be the relevant date as he was not informed of the amount to pay until March 2008.

 

The tribunal judge stated that s.222 was introduced to target grossly abusive schemes and that there was nothing abusive about this scheme.  The case again shows that it often pays to challenge HMRC, especially when they are being over-zealous in their application of the law.

IHT Developments (APR and BPR)

Two of the most generous IHT reliefs are Agricultural Property Relief (APR) and Business Property Relief (BPR).

With them each providing up to 100% relief it is perhaps unsurprising that the borders of each tend to be closely monitored by HMRC.  Their challenges often end up in court, giving guidance into the legislation.

One area HMRC are keen to block is making an APR claim on an expensive executive house.  With changes in modern agriculture and common place use of cars for work commuting, houses which were historically farm houses are now often owned by city dwellers with nebulous connections to agriculture.  APR is generally blocked in these cases, because of the need for the dwelling to be used for agriculture and be of an appropriate ‘character’ in relation to the farming operation.

Historically, HMRC have argued that this nexus between the house and land requires common use and ownership.  In a recent case (Hanson) the Tribunal held that this was not the case.  Agricultural use was required, along with appropriate character for the relevant farming operation, but not necessarily common ownership.  This conclusion may prove very useful, especially in certain farming situations where different generations of a farming family may have different interests.  Often these evolve over time, without the parties necessarily taking the advice at each stage.

In another recent case (Zetland) the Tribunal found that no BPR was due, because the business was mainly one of dealing in land or the making or holding of investments.  Interestingly, the judgement does not seem to imply that the activities in managing commercial property were not a ‘business’.  The problem was rather that the nature of that business caused a disallowance of BPR.

As ever, understanding the consequences of dealing with valuable assets is important – even if it may mean paying for professional advice!

Offshore Disclosure Facilities – LDF and Others

Eaves and Co have assisted a number of clients to make disclosures under the Liechtenstein Disclosure Facility (LDF) as well as advice for those affected by the UK-Swiss Tax Treaty.  HMRC have made clear that they continue to target offshore funds with more recent disclosure facilities in Jersey, Guernsey and the Isle of Man.

The LDF has been very successful for HMRC and they have even increased the expected yield from £1billion to £3billion.

We have written previously on the differences between the LDF and other disclosure facilities, in particular the more favourable guaranteed immunity from prosecution under the LDF.

A further, and often overlooked, aspect of the LDF which can be much more favourable than the other disclosure facilities is the ability to elect for a composite rate of tax rather than the actual rate.  This can mean significant savings where Inheritance Tax is involved.  As such, it might be worth those with funds in Jersey, Guernsey or the Isle of Man considering making a disclosure under the LDF where IHT is involved.

We would be delighted to hear from anyone seeking assistance in this area.

Another HMRC Campaign – My Tax Return Catch Up

White rabbits!  White rabbits! 1st of the month!

 

Following the late example of the White Rabbit in Alice in Wonderland, HMRC are offering a deal whereby dilatory taxpayers can ‘catch up’ with their Tax Returns, hopefully before the Red Queen says ‘Off With Their Heads’.

In other words HMRC have launched yet another campaign.  This time it is aimed at those who have failed to submit tax returns in the past.  They are now being given the chance to ‘catch up’, with the benefit of a 10% penalty in unpaid tax from prior years.  This could be considered harsh by those sinners caught earlier and subject to heavier penalties, but I suppose there is more joy in heaven at a sinner who repents…

The difficulty could prove to be the tight deadline of 15 October, although HMRC do indicate a Time to Pay arrangement may be allowed.  Analysing the figures and preparing the computations could prove problematic in a timescale where often the persons concerned may have poor or negligible records for earlier year events.

Setting individuals up to fail would always be an unhappy route!

Further, bearing in mind the fact that those who are dilatory are unlikely to look to those in authority first, it would perhaps be more effective to encourage the profession to help publicise the arrangements?  Experienced professionals are more likely to be able to produce the sort of quality material HMRC require.  Why do I feel like we are being treated as the ‘enemy’ when my whole professional life I have sought to help people to comply with their tax obligations and the law?

Still to stick to our knitting and make a living we should tell all those who regularly ignore us to comply and help them file tax returns – SOON!