The Government is planning changes to the taxation system applying to Limited Liability Partnerships.  From 6 April next year, the intention is to categorise “salaried partners” as employees for tax purposes.  This will result in an increase in costs for such partnerships, as a result of extra National Insurance Contributions becoming due, plus an adverse impact on cash flow, because of the new requirement to pay PAYE/NIC on a monthly basis.
The charges will be brought in as part of wider measures on ‘disguised remuneration’
Anyone involved in such arrangements should seek advice to determine how best to proceed in future.

Recent blogs have considered the HMRC interpretation of reasonable excuse as requiring Death, Disease or Disaster. Although this latest case may not concern this interpretation of ‘reasonable excuse,’ it continues the theme of HMRC taking a hard line and refusing to consider circumstances.

In Maxwell v CRC, the taxpayer’s accountant, who had been responsible for preparing and submitting the tax returns, passed away. When the filing dates for Mr Maxwell’s self-assessment returns were missed due to the unfortunate death of his agent, determinations were raised by the HMRC. The determinations that were raised by HMRC were subsequently found to be excessive when compared to the tax due; the determination for the 2007/08 tax year was just under £5,000 whereas the tax liability for was found to be only £400. Unfortunately, the deadline to displace the determinations raised by HMRC was also not met by the taxpayer and HMRC stood by the original determinations refusing a claim for Special Relief.

Maxwell appealed under TMA 1970, Sch 1AB para 3A, which states that a claim for relief can be made where HMRC would believe it to be unconscionable to seek to recover the amount or to withhold the repayment of tax.  Maxwell had been unaware of his agent’s illness and believed that he had been handling his taxation matters efficiently so therefore felt it was unconscionable for HMRC to recover the excess tax.

The measures in question were introduced in 2011 with equitable liability replaced by the new statutory Special Relief.  In 2011 this ‘special relief’ was introduced as a form of relief which can apply to amounts charged in HMRC determinations for self-assessment where no other statutory remedy is available. Although conditions have to be met to be eligible for special relief, the relevant condition in question in Maxwell v CRC was whether HMRC found it unconscionable to seek to recover the amount charged by the determination.

The taxpayer appealed against HMRC’s refusal and the FTT tribunal ruled that the taxpayer had satisfied all conditions required. His appeal was allowed and relief was granted. Consequently, HMRC was found to have acted in a manner deemed unconscionable in this case.

Guernsey and Jersey signed Automatic Information Exchange Agreements with the UK on the 22 October 2013 – the ‘UK-Guernsey Agreement to Improve International Tax Compliance’ and the ‘UK-Jersey Agreement to Improve International Tax Compliance’.  This means transparency between the tax authorities will be higher, and taxpayers trying to hide funds offshore will find that details are sent to HMRC.
The new agreements mean that all the Crown Dependencies have now entered into automatic tax information exchange agreements with the UK, with the Isle of Man having signed on 10 October 2013.
The net is closing in on taxpayers trying to evade tax, but for those wanting to come forward, beneficial disclosure regimes are still in operation in the Isle of Man, Guernsey and Jersey, as well as the on-going Liechtenstein Disclosure Facility.
Eaves and Co have assisted a number of clients with making disclosures of offshore income to HMRC and would be happy to hear from anyone wishing to come forward under these schemes.

Further to previous posts, we are now aware that the Supreme Court heard HMRC’s appeal against the Court of Appeal verdict in HMRC v Cotter on 3 October 2013.  Whilst we await judgement, it seems a good time to review recent developments in terms of HMRC policy.
A recent First-Tier tribunal case on reasonable excuse found against the taxpayer, raising some interesting points on what constitutes ‘reasonable’.
The case, Rennie Smith & Co v HMRC, concerned filing of P35s and whether a reasonable excuse existed for the failure to file.
The appellants are a firm of Chartered Accountants in Scotland, but they failed to file their own P35 by the due date.  They appealed the penalty on the basis that they had logged on to the online filing system but had not filed due to an HMRC system ‘error’.  They argued that HMRC had acted unreasonably by delaying issuing a warning notice and penalty until 4 months after the deadline in addition to their confusion over whether the P35 had actually been filed.
The tribunal agreed with HMRC that the return was not submitted and that in the absence of records showing any technical faults, the error therefore lay with the taxpayer.
It is interesting that this was not found to be a reasonable excuse, however in other recent cases, it has been inferred that HMRC not monitoring their post is reasonable!  In the case of Smith v HMRC, HMRC were entitled to raise a discovery assessment outside of the enquiry window, despite the fact that the enquiry was only not opened in time due to the extended sick leave of the inspector, with no one apparently dealing with his post.
In light of Cotter and Smith, it is interesting to note the disparity between reasonable HMRC practice and the expectations placed on taxpayers.  We await the judgment on the Cotter appeal with interest and will provide an update once published.

The decision in the recent First-tier tribunal case of Smith v HMRC appears to have tipped the balance of discovery in HMRC’s favour and may have far reaching consequences for taxpayers achieving certainty on their returns.

The Case

In the tax year 2000/01 the taxpayer, Mr Smith, participated in a marketed tax avoidance scheme, the purpose of which was to create a tax deductible capital loss.  The case of Drummond v R&C Commrs (2009) ruled that the scheme, which involved the acquisition and disposal of second hand insurance bonds, did not work.

The taxpayer submitted his 2000/01 self-assessment tax return on time.  In the return the taxpayer included two ‘white space’ disclosures outlining the transactions involved in the scheme.  The return showed nil income and a capital loss on redemption of the bonds.

The normal enquiry window (TMA 1970, s.9A) closed on 31 January 2003, with HMRC not opening an enquiry into the return.

On 29 November 2006, HMRC raised a discovery assessment imposing capital gains tax on the taxpayer.

Taxpayer’s Argument

The taxpayer appealed against this assessment on the grounds that there had been no ‘discovery’ and the enquiry window had long since closed therefore there was no legal basis for the assessment.

During the document discovery exercise it was found that HMRC had spotted the issue back in 2002, before the close of the enquiry window.  It transpired that the only reason an enquiry was not opened was due to the extended sick leave of the inspector, with no one apparently dealing with his post.

The taxpayer argued therefore that the failure to open an enquiry was HMRC’s mistake.  No new information had come to light and there had been no concealment.  Thus the discovery assessment was not valid within TMA 1970 s.29.

HMRC’s Argument

HMRC contended that a ‘discovery’ had been made as there were ‘chargeable gains which ought to have been assessed to capital gains tax’.  They said that the discovery hurdle was an exceptionally low one; it covered a mere change of mind as to either facts or law.  They felt that the tribunal should consider what the notional officer could have been reasonably expected to be aware of at 31 January 2003 on the basis only of the information listed in TMA 1970, s.29(6).

The Decision

The tribunal agreed with HMRC.  They held that the ‘discovery’ condition of TMA 1970 s.29(1) was not a strict one.  They said that a discovery assessment could be made merely where the original officer of HMRC changed their mind or where a different officer took a contrasting view.

This decision appears to contradict the verdict in R&C Commrs v Charlton (2013).

However the tribunal felt there were two distinguishing factors:

  1. The DOTAS scheme (or similar) was not in place (as with Charlton) therefore there was no clear identification of an avoidance scheme and methods for dealing with them, and
  2. The decision in Drummond was still several years away as at 31 January 2003, and HMRC’s technical department were still ruminating on whether the scheme worked, and were still doing so a year later.

Therefore even if the notional HMRC officer could have spoken to the technical specialists, he could not have been reasonably expected to be aware, on the basis of the information available to him, of the insufficiency.

In Charlton, the case of Drummond had already been decided and HMRC were aware of the insufficiency.

The effect of this decision is that it appears to widen the discovery net.

This will likely have the biggest impact on complicated schemes, as it suggests HMRC no longer has to stick to the enquiry window to make an assessment, particularly if a technical decision is yet to be reached.

A recent case has again highlighted the recurring issue with taxation; the Devil is in the Detail.
In the recent case of Phair, the taxpayer appealed to the First Tier Tribunal to argue (broadly) that a complex Capital Accumulation Plan (CAP) should not be liable to UK income tax because at the time he received distributions under the plan he was not resident in the UK. The issues and arguments were complex, but the taxpayer lost because (to simplify) the units awarded to him under the CAP were UK source income to be treated as ‘employment related securities.’ As he was resident when the units were awarded, then they remained within the scope of UK tax.
So far so bad for the taxpayer! What made it worse was that his tax agent failed to take into account all the issues related to the Appeal process. Hence, when sent an official Notice of Appeal pack they did not make a formal application to ‘opt out’ of the legal costs regime associated with the hearing.
Thus, whilst the Tribunal expressed sympathy for the fact Mr Phair was ‘horrified of his potential liability for HMRC’s costs,’ nevertheless HMRC were fully entitled to claim them.
The case shows, once again the importance of addressing technical detail, especially as current HMRC attitudes appear to be relatively unsympathetic, or to use the jargon ‘to have a reasonable excuse’ requires Death, Disease or Disaster.

The recent HMRC repayments brief 28/13 outlines a new policy on withholding repayment claims, particularly in suspected avoidance cases.  In cases where it is HMRC’s opinion that an avoidance scheme was used, it is their intention to withhold repayments.  It is not clear on what legal basis this is to be achieved, especially bearing in mind the outcome of Cotter.

The Cotter decision was enforced in the recent case of Rouse v CRC, in which HMRC sought to enforce the payment of tax debts with immediate effect pending the resolution of enquiries into their claims for loss relief. In the Rouse case a repayment over an undisputed VAT repayment was also withheld from the taxpayer, and set against a disputed income tax liability, while waiting for the resolution of the enquiry with regards to his income tax.

Rouse v CRC

Background and facts: 

Rouse had been a VAT-registered, self-employed contractor of plant and machinery since about 1993. He was also a director of a civil engineering company. For the years 2007/08 and 2008/09 he paid tax and National Insurance amounting to £1,049,061 and £998,892 respectively. In 2008/09 Mr Rouse incurred a loss of £1.5 million. He applied to ‘carry back’ the loss and have it offset against the tax due for 2007/08 under ITA 2007, s.132 as part of his 2007/08 tax return.

Mr Rouse had also submitted a VAT return in 2011 which stated that he was owed a repayment of over £600,000.

The Case:

HMRC rejected the claim for loss relief as they argued that the losses were made through avoidance schemes and opened an enquiry under TMA 1970 s.9A into the 2007/08 and 2008/09 tax returns, and refused to give credit for the loss in the meantime.

However, they also withheld the VAT repayment that they accepted was due to Mr Rouse to set against the income tax debt they claimed was due. The central issue in the case was whether HMRC were entitled to set-off a VAT repayment against the disputed income tax.

The Decision:

Upon Rouse’s appeal, the Upper Tribunal were bound by the Court of Appeal decision in CRC v Cotter from 2012 whereby once HMRC had begun an enquiry into a return under TMA 1970, s.9A they could not also enquire under Sch 1A para 5.

Under TMA 1970, s.9A and Cotter there should be no debt on Mr Rouse’s account against which the VAT credit due to him might be set off.  The taxpayer’s application for judicial review was therefore granted.


HMRC repayments may become increasingly hard to obtain based on their stated intentions. Fortunately, the cases of Rouse and Cotter prove that the courts and tribunals do continue to provide a mechanism to challenge HMRC decisions that exercise powers disproportionately.  However, it is worrying that HMRC persist with such tactics, which they claim prevent the taxpayer from the right to appeal which should rightly be due.