The Importance of getting ‘It’ Right

Recent Tax Cases reinforce the message : Get Advice : Get It Right : Document It.

The case of D. George shows the common promise of “you will be looked after on a third party sale” can fall foul of horrid tax consequences if there is no advance advice and documentation.

On a separate, and totally different technical argument, a taxpayer and spouse undertook (for presentational purposes) a development project through an associated company, which they owned jointly. Circumstances, with a crash in the development value, made their ideas change. In the end, the company was wound up without repaying the director’s loan which funded the development work. As a result, the owners were not deemed to have incurred the crucial enhancement expenditure on the development, and so obtained no tax relief on £250,000 paid out.

Painful lessons on both counts.

1. Get Advice
2. Get It Right
3. Document It.

If in doubt, repeat step one!

Brexit and the Route Map: Do all roads lead to Rome?

Brexit and the Route Map?

Do all roads lead to Rome?

Rome

Whatever people think of the merits or demerits of Brexit, if, as seems increasingly likely, we fail to agree on all aspects of a Brexit formula before March 2019 (now just a few months away) how are we supposed to advise clients?

It is the nature of our business that we often get asked about the more esoteric bits of tax practice, such as cross border matters and the impact of double tax.

Here is an example, which we have just looked at as part of researching advice for a client in respect of the Swiss/UK double tax treaty.  Of course, Switzerland is not a member of the EU.  However, Clause 18 (4) of the UK/Swiss Treaty only applies if the individual making the claim is “subject to the legislation of the Home State in accordance with the Agreement on the Free Movement of Persons”.

I appreciate this may only apply to a few people, although it should be noted the Governmental Authorities each thought the issue significant to incorporate specifically into the Treaty.  Anyway, are not individual citizens important?

Additionally, if EU concepts are so ingrained into UK tax procedure as to affect non-EU Treaty countries, surely there must be more issues lurking.

Professional bodies what are your views?

In this context, I commend the Article by Alistair Spencer Clarke in the August 2018 edition of ICAEW Tax Line.  Ownership of Spanish property is not an outlandish thought for many UK citizens, quite apart from many other cross border situations which are now common place in our shrinking world.

Please can we start a debate about how to approach this matter?  Here I am talking about practical reality and proper approaches for Tax Practitioners to ensure they are giving best advice to clients.  Constitutional jurisprudence is for another day!

Requirement to Correct – 30 September Deadline Looms

sun

The Weather Today – Scorchio!

 

BUT 30 SEPTEMBER DEADLINE LOOMS

 

WINTER IS COMING!

 

Requirement to Correct

 

Many people over the years of the world becoming smaller and more accessible may have acquired assets abroad.  For example, immigrants and emigrants may have UK interests, but also ones in other countries, whether because of family, work or just acquiring (and perhaps disposing of) a holiday home.

 

Sometimes (it may sound odd) it seems, perhaps when lying on the patio of their newly upgraded Spanish villa, the owner may reach for an escapist novel (such as Banker’s Draft by RG Lennon https://www.amazon.co.uk/Bankers-Draft-R-G-Lennon-ebook/dp/B07CW4JC1J) instead of the latest Taxes Acts.

 

The Taxes Acts would of course warn the reader of the forthcoming deadline of 30 September 2018.  This is to disclose any offshore liabilities (including say Capital Gains on the older villa used to help finance the new one) or the rent when you weren’t using it, or the sale of the home inherited from an uncle, or the apartment in Delhi where your Dad used to live and rental values have gone up so much it would be rude not to etc., etc.,

 

The world is small, families are dispersed; so are assets.  Thanks to automatic sharing of financial information across Governments – permitted in most international double tax treaties,  HMRC will receive bucket loads of data automatically.  Modern computers will allow this to be analysed.  No doubt HMRC will leap to conclusions and try to assess ‘evaded tax’.

 

Key points:

 

  1. Crucially, the time limit for assessment is planned to be extended to 12 years (going back from 4 years) which makes retaining records more important.

 

  1. There is to be a new criminal offence for ‘offshore evasion’, which means HMRC do not need to prove there was ‘deliberate intent’. This heightens the need for professional advice, because innocent ignorance is unlikely to amount to a successful defence.

 

  1. There will be new sanctions for ‘offshore evaders’ based on a penalty of up to 10% of the value of the underlying assets.

 

  1. Tougher sanctions come in for those who fail to disclose relevant offshore interests before 30 September 2018

 

IF IN DOUBT TAKE PROFESSIONAL ADVICE

 

Disguised Remuneration Schemes

 

Anyone involved or may have clients involved in what HMRC may consider to be caught in the new ‘disguised remuneration schemes’ should take independent advice soon, to ensure they can meet the deadline for any appropriate disclosure of 30 September 2018.  It is now less than 2 months away.

 

Settlement terms are available for appropriate disclosure made before the deadline.  After that date, HMRC are threatening more severe action.

Good News for EMI

The EU have signed off on ‘State Aid’ rules which mean that it should be possible to start granting EMI share options again shortly. It is believed HMRC will announce an exact date soon.

EMI is a very attractive and popular measure which allows selected employees in small trading companies to be rewarded in a tax efficient manner which is HMRC approved (and has been for 18 years, with cross party support).

Anyone wishing to get more information or advice, please call Paul Eaves on 01704 548698

Mind the Gap – EMI Share Options from 6 April 2018

Mind-the-GapHMRC have announced via their Employment related securities bulletin (No 27 – April 2018) that due to not having yet received EU State Aid approval for the EMI scheme (the previous approval expired on 6 April 2018) new EMI share options issued after 6 April 2018 will not be treated as tax-approved share option schemes and would therefore be taxed under the far less favourable non-approved regime.

HMRC do reassure taxpayers that options granted up to 5 April 2018 will continue to qualify, so there is no need to panic over existing share options.

However, if you or your clients are in the process of implementing an EMI share scheme, it would be advisable to delay granting options until the approval is granted. Of course, if this is not possible then clients should be made aware of the implications of options falling to be treated as unapproved, or consider other options such as a CSOP.

One of the big differences between approved EMI options and unapproved ones is that any tax paid on exercise is based on the value of shares at grant of the options for EMI schemes, and on the value at exercise for unapproved ones. Therefore any growth in value is sheltered under the EMI scheme.

EMI schemes also provide other valuable features including relaxations of Enterpreneurs’ relief conditions for employees.

Please get in contact with us if you have any concerns or if you require assistance with share option schemes.

J Hicks – Discovery Case Won by Taxpayer

The scope of HMRC’s powers in relation to raising discovery assessments outside of the normal enquiry window has been a contentious issue in recent years and a number of cases seem to have eroded the position of the taxpayer (see our earlier blog post for example).

A recent First-Tier Tribunal case, J Hicks v HMRC, seems to have taken a more reasonable approach and may therefore give hope to taxpayers for a more balanced approach in the future.

The taxpayer in this case took part in a tax avoidance scheme which was marketed by a firm specialising in such schemes.  The scheme in question was marketed at derivatives traders, which the taxpayer was.  Having taken part in the scheme it was reported on his 2008/09 tax return, with the relevant avoidance scheme reference included.  He had losses carried forward, which he claimed on his 2009/10 and 2010/11 returns, which were both filed in late January before the filing deadlines for each year.

HMRC opened a standard enquiry into the 2008/09 return, and this enquiry was ongoing when the later tax returns were filed.  However, HMRC did not open enquiries into 2009/10 or 2010/11.

In March 2015, HMRC issued discovery assessments for 2009/10 and 2010/11, which Mr Hicks appealed.  HMRC argued they could issue an assessment under either TMA 1970, s29(4), that the insufficiency was a result of careless behaviour, or under TMA 1970, s29(5) that a hypothetical officer could not have been aware of the deficiency within the normal time limits.

The tribunal found that a hypothetical officer should have had enough information by the end of the normal window to raise an enquiry, with the Judge noting that, “I do not consider that subsection (5) allows or is intended to allow HMRC to issue assessments which ignore the normal time limits while they spend further time in polishing a justifiable assessment as at the closure of the enquiry window into a knockout case.”

He also points out that these rules should not be seen as giving HMRC “carte blanche […] to omit to open an enquiry—whether intentionally or by omission—and then simply rely on subsection (5) in every case to issue assessments which would otherwise be out of time. The statutory time limits for assessments are a critically important safeguard for the taxpayer, just as the onus of disclosure on the taxpayer, and the duty not to act carelessly or deliberately, are a protection for HMRC where those limits are not met.”

It is interesting to note the Judge acknowledging that taxpayers deserve rights and safeguards from HMRC, particularly in light of HMRC’s continued attempts to obtain ever greater powers.

Looking at the matter of carelessness, the Tribunal found that reliance on the scheme provider for information included in the return was not careless, nor is the use of a tax avoidance scheme automatically careless.  The key point was whether careless behaviour led to the deficiency of tax.  In this case, it was found not to be careless.

The taxpayer’s appeal therefore allowed.

Non-resident penalty appeal allowed

In a recent First-Tier Tax Tribunal case, a non-resident’s appeal for reasonable excuse in relation to late filing penalties was denied, however, interestingly the Tribunal still decided to waive the penalties.

The appellant in A Newton v HMRC was resident in France and filed his 2012/13 tax return late.  He appealed against the higher later filing penalties on the basis that as he was living in France, he had not seen any advertising in relation to the new penalties.

We recently wrote about another case involving a non-resident appealing on similar principles, in relation to the introduction of the Non-Resident Capital Gains Tax (NRCGT) returns.  In that case the appeal was allowed because it was felt to be unreasonable to expect the taxpayer to have found the new rules independently.

However, the tribunal in this case did not feel the same principle would apply.  In this case, the taxpayer would have received documents showing the new penalty levels (for example on the notice to file) and the Tribunal therefore felt that, “a person reasonably trying to meet their tax return filing responsibilities would have realised from reading any of these documents that the penalties had changed”.

However the tribunal judge did overturn the penalties on the basis that the individual did not have a UK tax liability at all and stated that, “he would not have met the “SA criteria” that HMRC use, and he would not have had any obligation to notify chargeability under s 7 Taxes Management Act 1970”.  He was therefore, in the judge’s opinion, not legally obliged to complete the UK return.  The penalties were therefore reduced to nil.

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.

Response to Making Tax Digital – Sanctions for late submission and late payment

 

Eaves and Co have submitted a response to the HMRC consultation document of 20 March 2017 in relation to sanctions for late submission and late payment as part of Making Tax Digital.  We have reproduced our response below.

 

Please feel free to comment.

 

Response to Making Tax Digital – Sanctions for late submission and late payment. Consultation document – 20 March 2017

 

This is a very difficult document to respond to, because it is so wrong headed.  When Chancellor Osbourne announced it, it was alleged to be a liberating move.  He has since been relieved of his position.  The legacy of ‘Making Tax Digital’ remains.  My concern is that, as currently drafted, it runs a high risk of ‘Making Tax Dysfunctional’.

 

  1. Fundamentally, if it is such a good idea, and is going to work well, so that ‘businesses flock to it’, there is absolutely no reason to make it compulsory.

 

  1. In a free society, businesses should have the discretion to run their own affairs as they see fit.  The proposals extend the historic system of annual filing to filing 5 income tax returns per year.  This is not ‘liberating’, it is adding extra commercial pressure and cost.

 

  1. The Federation of Small Business puts the costs at 10 times the HMRC estimate.  For bigger businesses the extra costs may be more.  As one provider put it, even the cost of a training seminar may well exceed FSB estimate.

 

  1. These costs would just be a burden if the system was compulsory with ‘sanctions’, as proposed.  If there was a benefit, which added to efficiency businesses would (and should) pay for appropriate software at market price.  No need for Government interference.

 

  1. On this theme, which bit of the equation:-

Government + Big Computer Idea = Cost Effective Happiness

has even been proven true?

 

  1. HMRC say that the Making Tax Digital programme will not save them material costs.  If the benefits therefore ensue to business, should they not be given the choice?

 

  1. There should be no sanctions if they decide their current systems are adequate, or perhaps even better than the HMRC ‘private licensing’ proposals?

 

  1. Everyone should be equal before the law.  Self-employed tax payers already suffer extra burdens in that they are more often called upon to file annual tax returns.  To make it 5 returns per annum is unfair and oppressive, especially if the stress of potential sanctions is imposed.

 

  1. Businesses are already obliged to maintain and produce adequate records to prepare relevant annual returns.  Understandably most view it as an unprofitable burden, accepted as part of the benefit of being a citizen of a democracy such as the UK.  Politicians should recognise though that the equation and relationship are each fragile and based on mutual trust.  To multiply by 5 the burden risks suggesting a taxpayer is untrustworthy and (with sanctions) ought to be punished for errors in compliance.  This is not a route to encourage the levels of voluntary compliance that the UK has been fortunate enough to experience historically.

 

  1. Recent case law on ‘reasonable excuse’ highlights the lack of HMRC sympathy and understanding on the pressures imposed by tax compliance, so would not seem to be adequate protection.

 

  1. In any event, this is starting from the wrong perspective.  Individuals and businesses should be free to act as they see fit to benefit the economy as a whole.  They should not be restricted by regulation to act in accordance with Government dictat, unless the action they propose is harmful.  There is already an obligation on business to keep adequate records.  This should include the freedom to keep them in accordance with specific, tailored business requirements, suitably for the business concerned, rather than following a generic algorithm designed by someone with no knowledge/interest in the particular business.  Surely it is patently obvious such freedom must be better for the UK economy as a whole.

 

  1. To suggest that a single ‘app’ can successfully organise management accounts from every business from baking creak cakes to running a portfolio of investment properties is too bizarre to be believable.  Any accountant will tell you the key profit indicators are going to be different.  The business software market can respond, as appropriate, but buying a government approved Trebant (historic reference) will only end in tears.

 

  1. Distorting the business software market by imposing ‘Government Requirements’ is providing anti free market protection for the software houses concerned.  This must be unfair and an inappropriate use of Government power.  Why?  Would this not be illegal under EU rules whilst we are still a member, pending finalisation of Brexit?

 

  1. In a secular, capitalist society, why can there be an exemption for ‘religion’.  Why not allow a simple commercial decision: ‘This adds cost, stress and burden for (no) business benefit.  I choose (or choose not) not to do it’?  That would allow those believing in Making Tax Digital to move ahead, without distorting the rest of the crucial, small business economy.

 

  1. The benefit claimed by HMRC is that small businesses would keep better records.  Some small business have poor records, it is true, but they tend to be at the bottom end of the spectrum.  As businesses grow, especially when they take on staff, record keeping becomes more important.  To state the obvious, losing a cash receipt when it goes to a pilfering employee costs 100% of the receipt.  This is undesirable for the business!  Compare to saving 20% on income tax?  Bigger business have controls.  Bigger businesses tend (by definition) to make more profits, so the ‘tax saving’ by imposing MTD is I suspect mythical.

 

  1. In any event, to put it into context Tesco recently paid £108m to avoid being prosecuted for financial fraud, plus more again in compensation.  How many window cleaners taking the odd tenner in cash would that amount to?  Compulsory MTD looks like a sledgehammer to crack a nut, and so, in the way of many such initiatives has the appearance of overzealous behaviour by the State for little/no benefit.

 

  1. There may well be an argument to say that the idea is discriminatory in that it prejudices:-

a) Entrepreneurs who do not have English as their first language.

b) Those self-employed with learning difficulties etc., who may well earn a decent living with a ‘hands on’ a labouring job making them proud and independent, but would find quarterly reporting unfairly daunting.  Should they be forced on to Government benefits?  To what end?

c) Entrepreneurs who do not trust electronic intercourse for financial transactions.

 

  1. With regard to the latter HMRC have been somewhat patronising about ‘elderly’ taxpayers.  It is age discrimination in itself?  They have then pointed out that such people often use mobile telephones etc.  True, but there is a huge difference between making a telephone call and engaging with third party electronic transactions which may not be totally secure.

 

  1. The internet is inherently insecure as has been proven by a series of hacks into various Government and Business computer systems.  The NHS was recently severely disrupted by ‘relatively unsophisticated’ hackers.  The CIA has been hacked – despite (presumably) top quality security and operating protocols.  Why would any nation therefore risk putting much of its economic output on to a single system, which is also going to have the ability to demand money?  Do you think the odd criminal or foreign Government might fancy the ability to have even just a day of receipts (I’ll take 31 January, please)?

 

  1. The underlying ethos is that ‘Digital’ is the best.  It is new.  It is the way forward for the future.

 

Fine; then let it compete in the Market Place.  If it is good then there is absolutely no need to make it compulsory and penalise those who trundle along behind.

 

‘Digital’ is best [as a hypothesis].  Prove it by not requiring sanctions.  Freedom for taxpayers to choose.  Yes, comply with the law to submit annual returns but no to 5 times that obligation.  (Choice for business to focus on their own key profit indicators – not arbitrary rules set by centralised dictat.  If we were customers we would have gone elsewhere!]

 

  1. The proposed exemptions for MTD are noted.

 

There is a religious exemption.  How do HMRC intend to ‘police’ claims under that heading.  In this context I note the firm swearing by Elizabeth I on her Coronation, that the State should have ‘no desire to make windows into men’s souls’.

 

What is to happen if someone claims the exemption?

Making Tax Dysfunctional

Those Impossible Situations – A Fair Tax System?

HMRC have over recent years spent a fortune on “Management Consultants”.  Consultants preaching efficiency often talk about an 80:20 rule, pointing out that the majority of “profits” come from the “best” customers.  Great, if you are a focused, private sector profit generator.  What though if you are a Government body, which surely ought to be run by Civil Servants trained to treat all citizens equally?  We are not “customers”, despite HMRC Newspeak.  As a Firm we tend to deal with taxpayer exceptions and unusual situations, so understand that not everyone is “average”.  We believe that the tax system should cater for those who, for whatever reason, do not fit within the “normal” generality.

We are keen that the tax system should be administered fairly, in accordance with the law.

A current fear is that the present HMRC focus on penalties, with much greater fines than in the past, may result in unfairness.  The current system may result in a breakdown of trust.  Currently, it is common place for there to be greater penalties for innocent arithmetic errors in tax computations, compared to deliberate theft, say in terms of shoplifting, which apparently is below the police threshold in most cases.  Current treatment appears bias against the small business or individual taxpayer.

Here is a ‘hypothetical’ situation to consider:

  • A UK resident taxpayer leaves UK part way through year to take up a new job abroad

  • Technically, having been resident at the start of the tax year, he would be resident for the whole of it, but his new job contract means he can expect to meet the conditions for “split-year treatment” for full-time work abroad. This means he is treated as non-resident from the date he leaves the UK.  This would be common sense in most peoples’ view, not tax avoidance.  Practically, in such a situation, it also means he does not write to tell HMRC about his overseas employment.  He pays tax to the local country where he lives and works.

  • However, to get the split year UK treatment, the rules require that the taxpayer be non-UK resident in the following tax year too, by virtue of work abroad. Of course, the happy recipient of the new job offer expects to meet this, because he is going to be working abroad and intends this to continue.

  • Suppose though, for whatever reason; say, illness/ sickness/ redundancy/ war/ sheer misery at the job not being what was promised, the taxpayer returns to the UK after some months. As a result therefore, he becomes UK resident again.  Not only does this affect his tax residence status for the year of return, it also means he fails to meet the conditions for non-residence for the preceding year.

  • As a result of this, the worker is now taxable on all worldwide income for the whole of the previous tax year as well.

  • Technically, HMRC may then argue for late notification and issue penalties, even though the individual involved acted perfectly properly, in terms of his anticipated and existing circumstances at the relevant times for notifying HMRC. The required dates altered after the event, because of changed circumstances!

  • HMRC may say “They may not take the point.” With respect, that is not the principle at stake.  Ordinary, innocent actions should not be subject to a potential fine, which may [or may not] be released by State discretion.   That is not the Rule of Law, but the empowerment of bureaucrats, with obvious dangers of corrupt dealing.  We are not suggesting HMRC are corrupt, but experience with history and other jurisdictions makes the risk…kind of obvious!

We would be interested to hear people’s thoughts on how a fair tax system can potentially impose a punitive penalty on ordinary law-abiding citizens for being as “morally suspect” as to get unexpected illness?

Practical experience and thoughts on the principles welcome!