In the recent Autumn Statement, George Osbourne announced several governmental counter-avoidance measures that confirm that the net is closing in on those who subscribe to tax avoidance schemes. A failed tax avoidance scheme marketed by Consulting Overseas Limited has been identified by a recent First-Tier Tribunal case of Boyle v HMRC. HMRC has vowed to pursue all other subscribers to the same scheme that Mr Boyle was involved with and will also target others who have used similar schemes to avoid tax.

Mr Boyle was a contractor who originally worked for a company called Sandfield Systems Limited (SSL) and subsequently worked for Sandfield Consultants Limited (SCL) when a significant fall in his income was noticed by HMRC. It is important to note that Sandfield Consultants Limited (SCL) was a company registered in the Isle of Man. The director of SSL was also the director of SCL and Consulting Overseas Limited (COL) which marketed the tax avoidance scheme. The scheme was marketed by COL to the employees as a remuneration package that could achieve income tax and national insurance contributions (NICs) savings.

The FTT found the conclusions of HMRC’s investigation to be correct. The significant fall in Mr Boyle’s income was explained by the fact that about 2/3 of the income generated by the taxpayer was withheld and then paid to him by way of a ‘loan’ made in Romanian, Byelorussian or Uzebekistani currency. When Mr Boyle entered into a contract of employment with SCL it was agreed that he would be paid a salary but he would also participate in the ‘soft currency loan scheme’ arranged by SCL to receive the remainder of his salary. All employees of SCL used the foreign broker Credex International SA, when taking out the loans in question. It was the currency trades organised by Credex that turned the earnings into what the scheme claimed to be “non-taxable foreign exchange gains”.

The FTT found that the loans were not genuine and also found no evidence to prove that the foreign currency ever existed or that Credex was a genuine dealer independent of SCL. Notably the FTT ruled that the monies which were allegedly paid to Mr Boyle as loans in foreign currency constituted emolument from employment/earnings under s.173 ITEPA 2003. Furthermore, according to s.188(1)(b), as the ‘loans’ that were made were essentially written off, the amount written off is deemed to be treated as earnings from employment for that year and therefore should have been subject to income tax and NICs. They also ruled that Mr Boyle was aware that the loans were a means of receiving his income to avoid tax.

The FTT also stated that even if they were wrong to state that the loans were emoluments of his employment, Mr Boyle should be liable to tax under the transfer of assets provisions so there would not be any further grounds for appeal. The numerous appeals raised by Mr Boyle including his claim that he was entitled to credit for income tax which ought to have been deducted by SCL, were rejected in their entirety. It was found that Mr Boyle was liable to income tax for the years 2001/02, 2002/03 and 2003/04 in respect of monies he received as employment income.

This case demonstrates that efforts to avoid tax using offshore vehicles are being increasingly targeted in the crackdown against tax avoidance. This case also suggests that schemes where employees receive ‘loans’ as a form of payment are also being treated with suspicion. It is estimated that more than 15,000 people have used schemes similar to Mr Boyle and that the pursuit of the outstanding tax and national insurance contributions associated with these schemes will amount to over £400 million.

With the courts continuing to find against avoidance schemes, and the host of new regulations designed to increase the pressure on such schemes, the viability of such schemes is seriously called into question. Genuine tax planning, rather than convoluted schemes, appears to be the way forward and Eaves and Co are here to help.

The case law surrounding the grounds on which HMRC can raise Discovery Assessments continues to develop. We have recently written on the Discovery Powers of HMRC and the evidence suggests that the future of HMRC’s powers of Discovery in favour or against the taxpayer is uncertain.   In Smith v HMRC the scope for discovery appeared to have been widened but the tribunal ruled that the conditions for a discovery to be raised were insufficient in a further recent case of Freeman v HMRC.

Smith v HMRC

In this case, Mr Smith had participated in a marketed tax avoidance scheme in 2000/01 with a purpose to create a tax deductible capital loss. The normal enquiry window on 31 January 2003 closed without any enquiries into the tax return being opened.

The taxpayer appealed against HMRC’s raising of a discovery assessment in 2006 saying that the failure to open an enquiry was HMRC’s mistake and the discovery assessment was invalid under TMA 1970 s.29. It was also found that HMRC had spotted the issue back in 2002, before the closure of the enquiry window but the reason why an enquiry wasn’t opened was due to the extended sick leave of the inspector and the fact that no-one was opening his post in his absence.

HMRC contended that a discovery had been made as there were chargeable gains which ought to have been assessed to capital gains tax. They also said that the discovery hurdle was a low one; it covered a mere change of mind as to either facts or law.  They also felt that the tribunal should consider what the notional officer could have been reasonably expected to be aware of at 31 January 2003 when the enquiry window closed.

The tribunal agreed with HMRC. They held that the discovery conditions of TMA 1970 s.29 (1) was not a strict one.  The discovery assessment raised and imposition of capital gains tax against Mr Smith was therefore upheld.

Freeman v HMRC

In 1997 Mr Freeman exchanged shares in a trading company for loan notes, with the company having received clearance from HMRC. In 2000 HMRC opened an enquiry into the return and in the course of the enquiry, the loan note documentation was provided to HMRC. In 2005, HMRC became aware that the loan notes were in fact QCBs. HMRC therefore raised a discovery assessment in 2007 in relation to Mr Freeman’s 2002/03 tax return as the enquiry window had closed.

The Tribunal found that whilst the disclosure in the 2002/03 return was not complete, the provision of the loan note instrument in 2000 did constitute information provided on behalf of the taxpayer. They also considered that the officer could reasonably have been expected to be aware of the insufficiency of tax if the loan notes had been considered fully.  The conditions for raising a discovery assessment were therefore not satisfied and the appeal against the Discovery Assessment was allowed.

The contrast between this case and the Smith case is interesting as the Tribunal did not appear to suggest that HMRC merely changing their mind was sufficient for a ‘discovery’ to have been made.  At present, taxpayers lack clarity on exactly what constitutes a discovery and the varying Tribunal cases appear to further muddy the waters.

Until 6th April 2013, the UK did not have statutory rules to determine an individual’s residence status. However, the Finance Act of 2013 enacted the Statutory Residence Test (SRT) to take effect from 2013/14 UK tax year.  The new SRT is fairly complex which is ironic when considering the objective of the statutory rules was to ‘replace the current uncertain and complicated residence rules with a clear statutory test that was easy to use.’

What’s changed?

Essentially the old regulations and SRT are based on very similar foundations; in theory most of the taxpayers who found themselves to be resident in the UK under the old regulations should find themselves to be treated as UK resident under the new system.  However, it is best to seek advice to clarify whether this is the case if in any doubt.

The detailed provisions are fairly complex as noted previously, and we will not attempt to go into the full details here.   However, the ‘sufficient ties test’ has introduced new elements for those that are not automatically non-resident or resident as defined by the previous two tests.

This ‘sufficient ties’ test considers ties to the UK associated with family, accommodation, work, number of days in the UK and whether you spend more time in the UK than elsewhere in conjunction with the number of days you spent in the UK.  A key point to note is that due to the  ‘sufficient ties test’ those who have previously relied on the 90 days rule to remain non-resident may now be caught out, depending on the number of days spent in the UK and the number of ‘ties’ that connect the taxpayer to the UK. 

As an example, if a taxpayer has been resident at least one year in the past three tax years and have 4 or more ties to the UK then the test means that you one could become UK tax resident having been present for only 16 days.

The measurable quantification element of the SRT is important. In a recent case of Rumbelow and Rumbelow (TC3022) the couple were considered as UK resident because they had not ‘substantially loosened their social and family ties.’ Interestingly, if the SRT had been in place in this case, the question about whether they had sufficiently loosened their ties to the UK would have been quantified and their residence status would have been measurable and defined.

It’s best to seek advice….

Essentially, to avoid any unnecessary confusion, penalties and costly HMRC enquiries we recommend that it is best to seek advice on your tax residence to ensure that your tax affairs are concurrent with the latest regulations.  Bearing in mind the potentially restricted days allowed in the UK, it makes sense to do this in advance to plan days accordingly.

The case law surrounding the grounds on which HMRC can raise Discovery assessments continues to develop, and a further case on the matter was recently heard in favour of the taxpayer.  In another recent case (Smith v HMRC), the Tribunal found that HMRC could still raise a discovery where post had not been opened due to staff illness and HMRC effectively changing their minds, despite having the facts available.
A further case, M Freeman v HMRC, appears to provide taxpayers with slightly more comfort than that particular case; the tribunal perhaps looked on the taxpayer more favourably due to the lack of an avoidance motive in the latest case?
In 1997 Mr Freeman exchanged shares in a trading company for loan notes, with the company having received clearance from HMRC that TCGA 1992, s.135 applied.
In 2000 HMRC opened an enquiry into the return and in the course of the enquiry, the loan note documentation was provided to HMRC.  An HMRC Technical Inspector stated “I agree that the facts point to this being a non-qualifying corporate bond”.
Mr Freeman redeemed two tranches of the loan note in 1998/99 and 1999/2000. He redeemed a final tranche in 2002/03 and claimed taper relief on the basis that the loan note was a non-QCB.
In 2005, HMRC subsequently became aware that the loan notes were in fact QCBs (a fact that the taxpayer also accepted), while looking into the affairs of another taxpayer who held the same loan notes.  HMRC therefore raised a discovery assessment in 2007 in relation to Mr Freeman’s 2002/03 tax return, as the enquiry window had closed.
Mr Freeman appealed against the assessment on the basis that HMRC could reasonably have been expected to be aware of an insufficiency in the tax return, based on the information provided.
The Tribunal found that, whilst the disclosure in the 2002/03 return was not complete, the provision of the loan note instrument in 2000 did constitute information provided in writing to the Board on behalf of the taxpayer.  If the hypothetical officer had considered the loan note provided, he could reasonably have been expected to be aware of the insufficiency of tax.
The conditions for raising a discovery assessment were therefore not satisfied, and the taxpayer’s appeal was allowed.
It will therefore be interesting to see if this case has implications for future cases on Discovery, and could prove useful in cases where information was provided in earlier tax years.

HMRC Offer EFRBS Settlement Opportunity

HMRC are giving employers the chance to settle open enquiries into the use of employer-financed retirement benefit schemes (EFRBS).
The settlement opportunity applies to contributions made by employers on or after 6 April 2006 and before 6 April 2011.
HMRC are of the belief that such arrangements do not work and therefore the settlements will avoid the need to take part in potentially costly litigation, thus benefiting both sides.
Firms will have until 31 December 2013 to enter into an agreement with HMRC.

Two Options Available

They will then be required to choose one of the following two options offered by HMRC:
i) No Corporation Tax deduction can be claimed on contributions to an EFRBS until the relevant benefits are paid out by the scheme, HMRC also expect PAYE and NICs will be due when they are paid out or
ii) A Corporation Tax deduction can be claimed when contributions are made to the EFRBS.  However, when those contributions are made they will be subject to PAYE and National Insurance contributions.
If an employer chooses to settle with HMRC by choosing one of these options they will have until 30 June 2014 to finalise the arrangement.

Interest & Penalties

Under option 1 interest will run from 9 months and 1 day from the end of the accounting period for which the additional amounts are due.
Under option 2 interest will run from 19 April following the end of the tax year in which allocations were made to the date the PAYE Income Tax and NIC is paid to HMRC.
HMRC have said that they will only seek penalties regarding any tax due in exceptional circumstances. However this is caveated by saying that every case will turn on its own facts.