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.

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!

Brexit and European Tax Law

Here are some interesting questions. Well, I think them interesting anyway!

1. If we ‘do Brexit’, will we persist with VAT?

2. If so, how will it be administered, bearing in mind the current cross-border arrangements?

3. Will the European Court remain supreme, in terms of judicial opinion and interpretation?

4. On direct taxes, will we revert to double tax treaties, rather than the various European Directives?

5. If so, from what date?

6. If we do leave the EU, will the Courts go back to the ‘literal’ approach to interpreting tax legislation, a la Justice Rowlatt, or will it continue to dabble in the ‘purposive’ approach?

7. In the context of the above how would anyone define ‘The Purpose of Parliament’, in terms of (say) the formulae in the Emloyee Security/Benefit rules?

Je ne sais pas?

Opinions, s’il vous plait.

Offshore Update – HMRC Clamp Down and Starbucks EU Tax Case

HMRC have recently purchased advertising pointing out that offshore income and gains may be taxable in the UK. This is true. In general, for UK domiciled residents, all worldwide income and gains are taxable (even where you reinvested the proceeds and did not remit them to the UK). For non-residents, UK source income may be taxable.

This is where it gets complicated (as if it was not before!). Like many other matters in the international tax world, circumstances can alter cases . Domicile, double tax treaties and all the new statutory residence test may all have an impact.

If you have offshore assets, review them now, before HMRC really clamp down next tax year. If in doubt, seek tax expert advice.

In an interesting twist to the European Question, the EU authorities have just issued a decision on the advance tax ruling given to Starbucks by the Dutch Revenue, helping Starbucks avoid tax in other jurisdictions. This was done by Starbucks having higher tax deductible costs with a lower tax rate in the Netherlands, thus meaning there was only immaterial profit in countries such as the UK, so minimal UK corporation tax. The EU Authorities feel this amounted to illegal State Aid, such that Starbucks should be enforced to repay it in full.

The political question is whether this is:

a) A good example to tax abuse by multinational corporations?

b) An unacceptable interference in Dutch sovereignty because tax is not supposed to be controlled at EU level?

Is that the smell of coffee or the protagonists’ lawyer preparing their morning shot of napalm?

Mr Anson (Taxpayer) Wins : Other Taxpayers look to lose

The complexities of Double Taxation loom gain in our multinational global economy.

Has every investor in a foreign entity thought through the implications of the case of Anson v Revenue and Customs Commissioners?

Historically, HMRC have treated entities such as Delaware LLC’s as legal entities separate and distinct for tax from the identity of investors in it.  Bearing in mind ‘LLC’ stands for ‘Limited Liability Company’, this was perhaps unsurprising!  However, the Supreme Court has now decided, in the Anson case, that in fact such entities are more akin to Partnerships.  This means Mr Anson was entitled to double tax relief on the tax paid by the LLC.  Significantly though, it also means, logically, that he should suffer UK income tax on the proportion of profits which would be ‘attributed’ to him.  Bearing in mind such investors may have historically followed what they thought to be UK HM Revenue and Customs guidelines, and only declared income for tax when ‘distributed’, where does that leave them now?

A review of individual circumstances would seem sensible ~ so as to come up with a strategy on how best to move forward.

When HMRC win they (obviously) say – well that was the ‘correct’ view of the law all along.  If (as here) they lose though, presumably no-one should be punished for following their original views?

Both US and UK advisors need to think about how best to report matters from now on.

THOUGHTS/OPINIONS WELCOME

Fishing for A Commercial Rationale – Avoidance Motive in A Fisher, S Fisher, P Fisher  v HMRC

A recent case was heard at the First-Tier Tribunal regarding the conflict between commercial decisions and tax avoidance motives (A Fisher, S Fisher, P Fisher  v HMRC).  It can clearly be seen that legally reducing a tax liability could be a commercially sensible decision, but it was previously assumed that this would not be enough to override the anti-avoidance provisions that apply where there is a tax avoidance motive.

The case in question involved a family bookmaking business, who took the decision to move the business to Gibraltar in the 1999/2000 take year, in order to obtain more favourable treatment regarding betting duties than applied in the UK.

HMRC took issue with this and challenged the, under the anti-avoidance provisions on the transfer of assets abroad.  They raised assessments charging income tax the years 2000/01 to 2007/08 under the rules in force during those years.

The taxpayers appealed claiming that there was no avoidance as they had moved the business to Gibraltar as a commercial decision in order to compete with other bookmakers.  Saving tax was therefore a side effect and not the reason for relocating.

The First-tier Tribunal did not agree, finding that the transfer would not have gone ahead if it were not for the lower betting duty in Gibraltar.  This did not conflict with the decision to move being made for sound commercial reasons, however this did not prevent there being a tax avoidance motive.

The taxpayers made a further argument regarding the EU rights of freedom of establishment and freedom of movement of capital applied, but the tribunal determined that the rules were not relevant for movements between the UK and Gibraltar.  They did, however, apply to one family member who was an Irish national.

The taxpayers also made a claim that HMRC’s assessments were not valid, under the discovery provisions in TMA 1970, s 29, as the tax officer should have been aware of the relevant information as a result of responses to their enquiries.  The tribunal agreed that the conditions for making a discovery assessment were not satisfied for 2005/06 and 2006/07.  The appeals for the remaining years were dismissed.

Whilst the Tribunal confirmed that a tax avoidance motive could also be part of a commercial decision, it is clear that the anti-avoidance provisions are drafted widely enough to catch such situations.  This is because the existence of commercial reasoning does not overrule the fact that there was a tax avoidance motive as well which was inextricably linked.

Mehjoo v Harben Barker – Court of Appeal overturns Mehjoo Claim

The High Court case of Mehjoo v Harben Barker attracted a lot of attention both in the media and amongst accountants, regarding specialist tax advice. According to some media reports, the case meant that accountants were required to advise on complex tax avoidance schemes.  Whilst we did not originally agree that the verdict went this fact, the new decision given by the Court of Appeal should help to provide more clarity.

Background

Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including his first tax returns in the 1980s.

The case therefore revolved around whether the accountants had been negligent in failing to notice his non-domicile status and the impact this would have on his UK tax position on making a gain.

High Court Decision

The High Court originally found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs.

The accountants claimed that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so. This was found to be not the case, in part due to the fact that they had provided such advice on a number of occasions without express instruction. The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled.

Court of Appeal Verdict

In the latest decision, it was found that there was a distinction between the type of tax planning work usually carried out by the accountants, and the circumstances surrounding this case, stating that whilst “An accountant who is retained by a client to deal with his personal financial affairs will inevitably have to point out what might be the hidden tax consequences of any particular proposal[….], routine tax advice of this kind, though an important part of an accountant’s ordinary duties, is not what this case is about.”

Lord Justice Patten hearing the case stated that Harben Barker “were not and had never held themselves out to be specialist tax planners; and had never given Mr Mehjoo advice of that sort. It is therefore surprising to say the least that from a course of conduct which did not involve tax planning, they should be taken to have assumed a positive duty to give advice of that kind.”

It was therefore found that the accountants had not been in breach of their duty and their appeal was allowed.

Conclusion

Whilst the latest decision appears to be much more reasonable, accountants should still ensure that they seek suitable specialist advice when asked to advice on complex tax matters.  Eaves and Co have a wealth of experience dealing with such cases, and would be delighted to hear from you.

Tax Residence – An Interesting Break

Tax Residence continues to be an interesting area – and an active one for HMRC challenge.

Having burned many years of their own guidance in taking Gaines-Cooper to the highest court in the land – thereby ignoring their own ‘safe haven’ guidance in IR20, HMRC have made another challenge in the case of James Glynn.  In this case, HMRC HAVE LOST, [at least at the First Tier Tribunal].  The verdict of the judges, over a lengthy(?) day hearing was [simplifying] that the taxpayer had done enough to demonstrate a ‘definite break’ in lifestyle, so was entitled to look at a ‘day counting’ approach to tax residence.

Interestingly, the long memories of HMRC appeared to consider the idea of ‘available property’ relevant – a concept which had been abolished, but is now re-emerging in the new statutory tests.

Pleasingly, the judges looked at the case based on its specific facts.  They took into account factors such as social life, family and religious tradition, changes in business and investment interests, the conduct of the taxpayer’s wife and her charity work etc., – in fact the whole picture of his lifestyle.  This resulted in the conclusion that Mr Glynn had deliberately altered his lifestyle to such an extent that there was a ‘definite break’.

Again, hopefully this gives clarity taxpayers can depend upon.  Further the court went on to say that the fact that part of the motivation was tax avoidance was irrelevant, because the question of motivation should not have an impact on what is (especially under the new statutory rules) a question of fact.  Often the question of fact may not be an easy one, but one to be weighed in the balance, based on the complete picture.

Lessons to be learned include:

  1. The importance of reviewing all the facts and assembling appropriate technical arguments.
  2. The great depth to which HMRC went in investigating detailed elements of the taxpayer’s lifestyle.

Hossein Mehjoo v Harben Barker: Professional Negligence and Tax Planning?

The recent High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, regarding specialist tax advice.

 

According to some media reports, the case means that accountants are required to advise on complex tax avoidance schemes, but the reality is slightly more subtle than that.

 

Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including his first tax returns in the 1980s.

 

The case therefore revolved around whether the accountants had been negligent in failing to notice his non-domicile status and the impact this would have on his UK tax position on making a gain.  The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs.

 

In October 2004 his accountants considered the CGT position on Mr Mehjoo selling his shares in a company. Neither the firm’s general practice partner, nor the tax partner appeared to have considered the non-domicile status or the impact this could have.

 

The accountants claimed that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so.  This was found to be not the case, in part due to the fact that they had provided such advice on a number of occasions without express instruction.

 

The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself.

 

Tax is complicated, and the ever increasing tax legislation means it is harder than ever to keep up-to-date.  The key message for accountants is that they need to know enough to know that there is a problem, and seek out relevant specialists to assist.  Please feel free to contact us if you feel you may need specialist tax advice for your clients.