Offshore Client Notifications – Are you Affected?

We have written previously on this blog about various HMRC offshore disclosure facilities designed to encourage taxpayers to come forward and declare any unreported foreign income or gains.

HMRC continue to acquire new powers in order to pursue taxpayers and one of the latest requires advisors themselves to write to certain clients on their behalf.

These rules apply to financial institutions like banks but also to so-called “specified relevant persons” (SRPs). Accountants and tax advisors are likely to be an SRP if they provided offshore advice or services over and above simple preparation and delivery of tax returns in the year to 30 September 2016 regarding a client’s personal tax affairs.

If the advisors fall within the rules and are not covered by certain exemptions they will be required to send a standard HMRC headed document to these clients (although writing to all clients is also permitted) with a covering letter that includes certain wording which may not be altered (these are the Offshore Client Notifications).

One of the key things to note is that HMRC’s document directs clients to submit their own online disclosure. You may suspect they are thus attempting to bypass the advisors. We could not possibly comment! If you need to send such letters, we recommend highlighting to the client the dangers of doing so!

The wording SRPs must include in their covering letter is as follows:

“From 2016, HM Revenue & Customs (HMRC) is getting an unprecedented amount of information about people’s overseas accounts, structures, trusts, and investments from more than 100 jurisdictions worldwide, thanks to agreements to increase global tax transparency. This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid.

If you have already declared all of your past and present income or gains to HMRC, including from overseas, you do not need to worry. But if you are in any doubt, HMRC recommends that you read the factsheet attached to help you decide now what to do next.”

If you are concerned about how these rules might affect your firm, or are an individual with unreported overseas income, please get in contact with us as we would be happy to assist.

Private Residence Relief Denied – A Oliver

The tax law surrounding the sale of residences and Private Residence Relief continues to cause disputes between taxpayers and HMRC.  With the disparity between capital gains tax rates on most assets and the higher rate now applicable to sales of residential property, this is only likely to continue.

In a recent case at the First-Tier Tribunal (A Oliver, TC5521), the taxpayer purchased a flat in January 2007 and then sold it in April 2007.  He claimed he purchased it following a trial separation from his partner (which was recommended by their counselling sessions).  However, the flat had a relatively short time remaining on its lease which made it difficult to sell.  Mr Oliver asked the vendor to begin the process to extend the lease before exchange of contracts; otherwise he would have had to wait two years before he could make the application following completion.

The extension of the lease resulted in a substantial increase to the flat’s value, and HMRC argued that Private Residence Relief (PRR) should not apply, on the basis that he had been ‘engaging in adventure in the nature of a trade’.  The rules state at TCGA 1992, Section 224(3) that PRR should not apply where a property is acquired with “the purposes of realising a gain from the disposal of it”.

Interestingly, the Tribunal agreed that Mr Oliverʼs actions did not amount to a venture in the nature of a trade and that he did not have an intention to sell the flat when he first acquired it.  However, they instead considered whether the taxpayer’s presence in the flat was sufficient for it to qualify as his main residence.  They found that there were inconsistencies in his evidence and ultimately concluded that the quality of occupation lacked any degree of permanence or expectation of continuity.

Mr Oliver’s appeal was therefore dismissed.  Had Mr Oliver made a more convincing witness, and perhaps been able to demonstrate his intent to reside in the property more permanently he may have succeeded.  In cases such as this, taking advice in advance would help to avoid problems arising later.  We would be delighted to hear from you if you or your clients might be caught by these rules.

HMRC Fail in Toothless Attack

HMRC use Eric Morecombe tactics according to judge. “Playing all the notes but not necessarily in the right order”

HMRC use Eric Morecombe tactics according to judge.
“Playing all the notes but not necessarily in the right order”

Readers of our blogs will know we are always interested in cases analysing the extent of HMRC powers and how they should be used. The recent case of Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs demonstrates (again) that HMRC powers are not infinite. It also brings out some highly topical points:

1) In Raymond Tooth the taxpayer filed a tax claim which HMRC later decided to challenge. They had though missed their normal time limit on raising an enquiry, so had to raise a ‘discovery assessment’.

2) The definition of a ‘discovery’ made by HMRC is confirmed to be very wide in scope and may include “a change of opinion or correction of an oversight” by the Inspector of Taxes raising the discovery assessment.

3) The general points in Cotter are good law and emphasise the requirements for good disclosure by taxpayers and a clear explanation of how they have computed their self-assessment.

4) The burden is on HMRC to demonstrate that their extended time limits for assessments under ‘discovery’ may be used only where they are saying that the loss of tax was brought about ‘deliberately’. Deliberately means intentionally or knowingly (Duckitt v Farrand).

5) All praise to John Brookes (Tribunal Judge in this case). He basically eviscerated the HMRC case. He said with regard to the issue of extended time limits,

“In my judgment this [assessment] cannot be right. The deliberate (or indeed careless) conduct necessary to enable the issue of a discovery assessment and extend the time limits for doing so must involve more than the completion of a tax return which, in itself, is a deliberate act. As a person completing a return must do so intentionally or knowingly, and can hardly do so accidentally, HMRC’s argument effectively eliminates any distinction between ‘careless’ and ‘deliberate’…[their] attempt to argue otherwise, saying that if the wrong figures were entered in the right boxes it might be careless but if the right figures were entered in the wrong boxes it would be deliberate, was somewhat reminiscent of, and about as convincing as, Eric Morecambe’s riposte to Andre Previn about “playing all the notes, but not necessarily in the right order.”

6) The case can also be linked to current concerns about ‘Making Tax Digital’ (MTD).

Evidence was presented about the problems created by a computer glitch on how the alleged loss claim should be shown. The computer system adopted was a respectable one, approved by HMRC. However, apparently it would not cope with the proposed claim. The advice given to the taxpayer – to fit in with electronic filing, was thus to use a computer ‘work around’. As most people with appreciate, this is quite a common suggested solution, because computer programming is never perfect. The work around meant the loss claim went in the ‘wrong’ data input box, but the taxpayer described this in the ‘white space’ on the Return and the final answer came to what he believed was the correct net tax liability. Despite this, HMRC when they wished to dispute the loss claim, accused him of ‘deliberately’ causing an underpayment of tax. Whilst HMRC lost in this case, it is easy to imagine the dangers of accidental non-compliance caused by seeking to meet tight computer deadlines for making tax digital. Then it appears from cases such as this that such computer errors may be seen as something more sinister by HMRC. I believe this emphasises the risks of making such a system compulsory, before it is thoroughly field tested and people are familiar with it.

I am pleased to see that most commentary from the profession seems to agree with this line.

There is an interesting contrast in the apparent view of HMRC on a balanced system, in that the proposals suggest taxpayers are to be given a compulsory deadline for compliance every three months, whereas if they get it wrong HMRC should be entitled to a time limit of 20 years to challenge it.

Compliance is a delicate flower, worth preserving. If the proposals are brought in, how many businesses will simply drop off the radar if they get behind for a couple of returns and then fear they have neither the time nor resources to catch up again?

Do people believe the MTD and new penalty proposals are fair? If not please lobby to try to get them amended. If computer filing is going to be so popular, as claimed by HMRC, there should be no need for compulsion. Penalties should be levied on people committing deliberate wrongdoing, not mere bystanders.

Worldwide Disclosure Facility – Last Chance to Disclose?

HMRC have announced the Worldwide Disclosure Facility (WDF) the latest in a long line of disclosure facilities designed to encourage taxpayers to come forward to disclose previously unreported offshore tax liabilities.

Unlike its predecessors, the WDF does not offer any favourable terms, other than the fact that HMRC state that where the disclosure is correct and complete and the taxpayer fully co-operates by supplying any further information they ask for to check the disclosure, they’ll not seek to impose a ‘higher penalty’, except in specific circumstances (e.g. where the taxpayer was already under enquiry) and they will also agree not to publish details of the disclosure. This last ‘benefit’ may appeal to higher profile individuals who may prefer to remain anonymous in their previous failures.

This is a marked difference to previous disclosure facilities that offered much reduced penalties (such as the 10% rate offered by the Liechtenstein Disclosure Facility) and guarantees against prosecution.

The WDF is targeted as a ‘last chance’ by HMRC before even more strict penalties come into force, as well as their claims that automatic exchange and data from the Organisation for Economic Co-operation and Development Common Reporting Standard (CRS) will then be available.

After 30 September 2018, new sanctions will be introduced that reflect HMRC’s “toughening approach”. They state that you will still be able to make a disclosure after that date “but those new terms will not be as good as those currently available”.

Previous experiences suggest that making a disclosure under one of HMRC’s facilities is usually a more streamlined process compared to simply writing to HMRC.

Eaves and Co would be very happy to discuss matters if you are concerned that you or your clients may have an undisclosed offshore liability, suitable for the Worldwide Disclosure Facility. We have extensive experience of making disclosures under previous facilities that HMRC have offered.

Bayliss – HMRC Seek Extra Penalties From Failed Avoidance Scheme

Another week and another case involving a failed tax avoidance scheme.

This time, perhaps more worryingly, HMRC were arguing that the return was submitted fraudulently or negligently by the taxpayer and therefore sought the extra penalties that would be due in such circumstances. This shows a new aspect of the targeting of anti-avoidance schemes and suggests users of schemes could expect the costs of failure to rise higher, whether in penalties or fees for defending them.

Ultimately, the taxpayer won in this case. Of particular interest was the fact that the Tribunal found that relying on the advice of a trusted accountant was helpful in suggesting that he had not acted negligently. It appears the courts confirm that obtaining suitable professional advice is worth paying for in the long run!

Mr Bayliss participated in a scheme marketed by Montpelier Tax Consultants (Montpelier). The scheme involved a Contract for Differences (CFD) and was sold as generating a £539,000 capital loss for Mr Baylis in 2006–07. It was agreed by all the parties that the scheme had failed and additional tax was due, however the taxpayer appealed against penalties raised by HMRC on the basis that ther return was submitted fraudulently or negligently.

The Tribunal determined that in accordance with established case law, in order to prove fraud HMRC had to prove that the appellant did not have an honest belief in the correctness of the return. The Tribunal was persuaded on the basis of the evidence and facts that Mr Bayliss did believe that his tax return was correct and so there was no fraudulent behaviour.

On the question of negligence, the Tribunal felt that the correct test was that set out in Blyth v Birmingham Waterworks Co (1856), that of ‘the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do’. They also considered the test in Anderson (decʼd) [2009], ‘to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done’.

HMRC used a number points to support their argument that Mr Baylis was negligent, including that:

  1. the transaction did not stand up to commercial scrutiny and the appellant failed to check the commercial reality;
  2. the appellant had not kept copies of the documentation, whereas a reasonable person would have done so;
  3. It was a complex financial transaction and the appellant should have obtained proper independent financial advice, but he relied on informal advice.

The Tribunal agreed with HMRC that some of the taxpayer’s behaviour could have been deemed to be careless, but on balance found that HMRC had not done enough to prove that the appellant was negligent in filing an incorrect return.

Interestingly, they felt that relying on his accountant was helpful in this respect, stating “We are persuaded that the appellant relied fully on Mr Mall, a chartered accountant on whom he had relied for a number of years, and on what he believed (based on Mr Mallʼs recommendation) to be Montpelierʼs expertise.”

The tribunal allowed the appeal on the basis that HMRC had not proven that Mr Bayliss acted fraudulently or negligently in submitting an incorrect return.

Beware New Rules on Liquidations – HMRC Refuse to Give Clearance

As you may be aware, new rules are being introduced with effect from April 2016 as part of the Finance Act 2016.  These relate to distributions in a winding-up/liquidation and are designed to target certain company distributions in respect of share capital in a winding-up. Where a distribution from a winding-up is caught, it is chargeable to income tax rather than capital gains tax.

The rules apply where the following conditions are met:

  1. The company being wound up was a close company (or was within the two years prior to winding-up)
  2. The individual held at least a 5% interest in the company (ordinary share capital and voting rights).
  3. The individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution
  4. It is reasonable to assume, having regard to all of the circumstances that there is a main purpose of obtaining a tax advantage.

Whether or not Conditions C or D are triggered could be a cause for some contention, and so HMRC note that they have received a number of clearance applications relating to these new rules.

In the absence of a statutory clearance procedure under the new legislation, HMRC have clarified that it is not their general practice to offer clearances on recently introduced legislation with a purpose test.  They have instead sent out a standard reply providing some examples of how they think the rules will apply.

Clearly this is a developing area and HMRC’s reaction is somewhat disappointing as taxpayers often require certainty before carrying out commercial transactions which could be caught.  HMRC have stated that further guidance will be published, however in the meantime we advise that care be taken, and seeking professional advice, as always, may save time and costs in the long run.

We would be delighted to assist if you think you may be affected by these rules and have any queries.

Entrepreneurs’ relief – What is an ordinary share?

We have written in previous blogs about the need to take care over Entrepreneurs’ relief (ER) and preference shares (see Entrepreneurs’ Relief – 5% Test and Preference Shares) and a recent case heard by the First-Tier Tribunal has shed more light on how the rules are to be interpreted.

One of the conditions for ER is that the taxpayer must hold at least of 5% of the company’s ordinary share capital and voting rights. For these purposes, ordinary share capital is defined as all share capital excluding fixed rate preference shares.

However, in the recent case of M & E McQuillan v HMRC [2016] TC05074 redeemable non-voting shares which did not carry rights to dividends were found to not constitute ordinary shares for ER purposes.  It was found that shares with no rights to dividends could be considered as having a right to a fixed rate of 0% and therefore could be excluded from the calculation of ordinary share capital.

In this case, this provided the right outcome for the taxpayers as they were selling their ‘ordinary’ shares in the company, of which they had 33% each.  Another couple had made a loan of £30,000 which had been converted into the 30,000 preference shares which were redeemable non-voting share capital with no rights to dividends.

Had the 30,000 extra shares have been treated as ordinary share capital, the taxpayers would not have had the required 5% holding.

The case highlights the importance of checking through all the details before making a sale of shares in your company.  In this case, the taxpayers were successful but others will not be so fortunate.  Eaves and Co have extensive experience advising on share sales and Entrepreneurs’ relief and would be delighted to hear from you if you are considering a sale in the near future.

The Season of Goodwill is (hopefully) not ended forever, but certainly the Tax Season is Upon Us – “Joseph also went up from Galilee…into Bethlehem to be taxed with Mary his espoused wife, being great with child” (Luke 2:4-7)

As the above quotation shows, paying taxes is nothing new.  As we approach the end of January and the deadline for filing and pay tax for the 2014/15 tax year we write to remind you that Eaves and Co are here to help.

Whether you are an individual struggling to understand your tax return form, or have not registered for HMRC’s Online Services in time, or an accountant needing extra assistance with a complex tax issue, we can help and hopefully ensure you are able to file before the 31 January deadline.   We have specialist extensive professional experience and expertise to deal with those knotty technical problems, plus relevant software and access to HMRC Online filing, so can file returns online at short notice.  All this with friendly service!

On another topic, and as a reminder for clients who are having difficulty raising finance, you may recall from previous messages that we have a contact who is involved in raising finance for all sorts of different purposes. Whatever weird and wonderful schemes your clients wish to consider – talk to Jonathan Smith on (Tel: 07778 523499) or (email jgsmith@jgsfinance.co.uk).  Quote reference ‘EVL’.  His website is www.jgsfinance.co.uk/asset-leasing-contract-hire-sale-leaseback.  This includes arranging loans to pay unpleasant tax bills.

As a reminder, Jonathan Smith qualified as a Chartered Accountant with Arthur Andersen but now works solely in raising finance. He is a man I have worked with over many years, and as a former partner of mine, a man who I trust and can recommend highly.

Careful with those Capital Gains Tax deductions

Accountants and clients used to the broad brush “commercial” approach to computing trading profits can get caught out by the different and stricter rules for calculating capital gains.

Payments which may make sense, or even be thought essential from a commercial perspective are not necessarily then allowable for capital gains tax purposes.

This is demonstrated by the recent case of J. Blackwell.  In exchange for £1m, Mr Blackwell agreed to act exclusively in voting his shareholding in BP Holdings in favour of the Taylor and Francis Group who wished to purchase BP Holdings.  Later another prospective purchaser came along for BP Holdings.  In order to extricate himself from the first agreement Mr Blackwell paid Taylor and Francis Group £17.5m which he then claimed under S38 TCGA 1992 as a deduction against his subsequent sale of the BP Holdings shares to the second purchaser.

The Upper Tier Tribunal found against him on the grounds that the expenditure was not reflected in the value of the asset disposed of to the purchaser.  Admittedly, it put him in a position to make the disposal, by releasing him from the previous restrictions, but it did not enhance the value of the shares themselves.  Similarly, the Courts held the payment did not create or establish any new rights over the underlying shares themselves.

This principle can be a factor in helping clients decide whether to accept an offer, by understanding what it would be worth after tax.  It can often be in point where a client is considering an offer from a developer for (say) housing.  On this principle, if the developer is buying a cleared site, where a bulldozer has taken down perhaps years of “enhancement expenditure” on the former trade site, then it is likely HMRC will seek to deny the cost of the previous building works, perhaps increasing the gain by a material amount.

Care in understanding the facts is crucial.

No Private Residence Relief on Uncultivated, Separate Land – Fountain & Anor v HMRC

Private Residence Relief (PRR) is a very useful relief for taxpayers and prevents Capital Gains Tax from being paid on the sale of a primary residence in most cases.  There are aspects of the rules which can be complex and these continue to cause difficulties for some taxpayers.

In a recent First-tier Tribunal case, Fountain & Anor v HMRC, the Tribunal found that the taxpayers in question were not entitled to claim PRR relief in respect of their disposal of a building plot, which they had argued was part of the grounds of the house.

The taxpayers owned an area of land behind their home which had previously been used in their haulage business. The business was closed and subsequently part of the property was divided into five building plots. Most of the plots were sold or gifted in 2006 and a new home was built on one of the plots for the Fountains, who moved in in January 2007. Their previous residence was then sold in February 2007 together with a field. The last plot (named ‘Plot 2’) was sold later, in December 2009 and led to the Tribunal case.

The taxpayers argued that Plot 2 formed part of the garden or grounds of their new residence on the basis that they were on the same title deed and the plot had formed part of the garden of their original home and continued to be used for their domestic use and enjoyment.

The Tribunal agreed that Plot 2 had indeed formed part of the grounds of their original home, however they did not believe this was relevant to the disposal in question. They also found that being on the same title was irrelevant.

The Tribunal found that Plot 2 was uncultivated and was physically separated from their new house by a separate plot which had a further house built on it and had been fenced off. They did not believe that Plot 2 has ever formed part of the garden or grounds of the new house.  No private residence relief was due and the appeal was therefore dismissed.

When dealing with PRR claims, it is important to thoroughly analyse the facts of the specific case and take previous case law into account.  Such planning at the time could help to prevent a nasty surprise in the future.  Eaves and Co would be delighted to assist if you have any queries on disposing of your home and the tax implications.