An Englishman’s Home is his Castle?

Or is HMRC undermining it?

CardiffCastle-Exterior41-med-A0013928-1

  1. “Everyone” knows a capital gain on your own residence is “tax exempt”.

 

  1. “Everyone” knows offshore gains are “tax exempt”.  Isn’t this in the Press on a regular basis?

 

Hence, people with “circumstances” which in reality encompass an awful lot of the nation, may actually discover that they need professional advice, because what they thought was tax exempt is not – in reality.

 

Things which may affect the above “tax exempt” analysis potentially include:-

 

a).   Being UK tax resident.

 

b).  Not being UK tax resident, but having property here.

 

(That just about covers everyone!)

 

Crucially, Private Residence Relief is a relief for qualifying periods of ownership.  This may (or may not) include the whole period of ownership as case law shows.  It is a very complex area; plus the changes in the October 2018 Budget may reduce the length of qualifying periods, particularly for those involved in “strange” lifestyle matters, such as moving house for career, inheriting property, getting divorced etc.

 

For many people their family home is the most valuable asset they will ever own.

 

There are opportunities to plan to mitigate tax.  Such steps are lawful and (presuming you love and respect your family more than HMRC) I believe, appropriate.

 

The only thing to note is, when you accidentally fall into assumptions (1) or (2) noted above, not only will HMRC lawfully demand the tax, plus interest for not paying on time, but also penalties.  The penalties may be up to 200% of the original tax, so you could be paying 3x the original undeclared bill.  For those not of an arithmetic mind, for a typical 28% tax rate on a residential property that is 84% of the gain, going to the Government.  In other words on a gain of £100,000, that is £84,000 plus interest that could go to the Government, just because you assumed ….

 

Of course, some people may say well that still leaves 16% of the gain, but that excludes interest, and experience says trauma and cost of getting caught.  Plus those who actually wished to use the money may have to sell their dream home.  Maybe leading to further complications?

 

However, with appropriate planning and making the right tax elections in some circumstances, the gain may be legitimately eliminated altogether.  A much better result!

 

  1. Get advice.
  2. Get it right.
  3. Document it.

 

No one likes spending money on professional advice – until they haven’t!

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!

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.

HMRC Publish New Research & Development (R&D) Guide

Research & Development (R&D) remains a highly beneficial area for those companies carrying out qualifying work.  Historically it has been an underused relief with HMRC and Government seeking ways to highlight the availability of the relief.

As part of this on-going initiative, HMRC have published a document on R&D designed to ‘Make R&D easier for small companies’.  It does contain some useful summaries and case studies for those who are unfamiliar with the relief.

As a reminder, R&D tax relief is available to companies that are developing a product through an advance in science or technology by overcoming scientific or technological uncertainty.

For small to medium sized companies (SMEs), the relief takes two forms:

  • Firstly, enhanced R&D tax relief – for every £1 of qualifying costs spent on R&D, the company receives a deduction in calculating their taxable profit for corporation tax purposes of £2.30.
  • Secondly, for loss making companies up to 33% of the qualifying cost can be available as a tax refund.

The Research and Development Expenditure Credit (RDEC) scheme which pays a taxable credit of 11% of qualifying expenditure may also be relevant to SMEs, for example where they are carrying out work for larger companies.

HMRC’s new guide goes through some of the factors to consider in determining whether projects would qualify for R&D relief, but does highlight that the relief is not just for ‘white coat’ scientific research, but also for other “development work in design and engineering that involves overcoming difficult technological problems”.

It also includes case studies on certain areas, such as food, ICT and construction.  The food case study for example notes that, “Creating an innovative chilled food container that provides a substantially longer shelf life than currently available, would […] qualify. The scientific or technological uncertainties to be addressed are in the interactions between the food, gas content and container to keep the food fresh for longer. By contrast, the work in dealing with authorities to comply with extended use-by date regulation would not qualify.”

Eaves and Co has dealt with a number of R&D claims and have a proven track record in completing successful claims and can offer assistance in all aspects of the claim process.  If you would like to discuss how we can help, please get in touch.

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.

Spring Budget 2017 and End of Year Tax Planning

This year’s budget did not bring a great deal for advisors to get their teeth into.  There are some points that will certainly affect millions of taxpayers though, so we have summarised the key points below.

There are also steps that taxpayers should consider taking before the end of the tax year, when various new rules and rates will come into effect.

  • The tax-free dividend allowance (the band on which dividends could be received free of income tax) is to be reduced from £5,000 to £2,000 from April 2018. Having only been introduced in April 2017 the allowance is already being reduced which will affect all taxpayers receiving dividends, including business owners and investors.

 

  • There will be a 1 year delay for quarterly reporting under the Making Tax Digital (MTD) rules for businesses that have a turnover below the VAT threshold (£85,000 for 2017-18). This will be good news for those businesses but unfortunately there do not appear to be any changes to these controversial proposals for other businesses.  Plus, the so-called pilot scheme will not have run its full course, so there is no chance of everyone learning lessons from the process.

 

End of Year Planning

 

  • Residential property rental. From April 2017 the phasing in of restrictions on relief for interest costs for higher rate taxpayers will begin. Initially 25% of such costs will be affected, however this will rise 25% each tax year until all higher rate relief on finance interest is blocked.

 

  • If pension contributions or pension scheme planning might be desired, setting up and contributing to a pension scheme before the end of the tax year (if one is not already in place) could ‘bank’ allowances for the year under the carry-back rules. Those with existing pension schemes have until the end of this year to use up any unused annual allowance from 2013-14.

 

  • If possible, consider declaring dividends where the tax free allowance of £5,000 has not been used up yet.

 

  • Consider new deemed domicile rules if non-UK domiciled. From April 2017 deemed domicile rules may apply to individuals who have been resident for 17 of the previous 20 years.  Previously these only applied to inheritance tax but the new rules extend to income tax and capital gains tax meaning those affected will have to report their worldwide income and gains on an arising basis.

The Dog Ate My….

The Dog Ate My [Homework] Tax Return

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There has been much publicity recently regarding the funny [!?] HMRC Press Release regarding failed excuses for failing to file Tax Returns on time. Generally, the ‘joke’ seems to be that they are such poor excuses that they are on a par, or even worse claims that ‘The Dog Ate My Tax Return’. This shows the poor standard of education and lack of discipline in our schools. Anyone who has failed with that excuse at school should have at least graduated to ‘A Crocodile Ate My Tax Return’ with an invitation to the Tax Officer to go and retrieve it(!).

No doubt HMRC have much to put up with, and lousy excuses will inevitably test their patience. However, they are Civil servants who should be courteous and sympathetic to all tax payers – not just those they like because of them being ‘compliant’. With this in mind, I refer to the cases of P. Miller and Coomber. Case law shows HMRC are not always correct in their views on penalties. Advisors should always consider whether a penalty being charged is correct, proportional, or could even be suspended.

In the recent case of P. Miller the Courts held that HMRC were wrong in dismissing an application for a penalty to be suspended. The Judge followed the case of Hackett in focussing on the general obligations for all tax payers (rather than the narrow, specific facts of the tax payer’s own mistake) in deciding that there were sensible suspension conditions which could encourage him to avoid a future careless mistake. Thus the immediate imposition of a penalty liability could be avoided. No doubt good news for the tax payer.

HMRC had more success in the case of Coomber, where the Judge rejected a suggestion that a tax payer had a reasonable excuse for late payment when the tax cheque he had written was unexpectedly dishonoured by his bank. Reading the case in detail, it appears to be an object lesson in presenting all relevant evidence and ensuring it is correct in detail. Quoting from Clean Car Co Ltd, the Judge said, ‘The test of whether or not there is a reasonable excuse is an objective one … Was what the tax payer did a reasonable thing for a responsible trader, conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the tax payer, and placed in the situation the taxpayer found himself at the relevant time a reasonable thing to do?’

From the Judge’s comments it may have proved better for the tax payer if he had produced evidence of why the bank dishonoured the cheque (any why it was unexpected) plus better documentary evidence as to the precise dates of events. It is plain details can affect the Judge’s view as to the strength of a case. In this new era of quasi-automatic penalties advisors need to be on alert for sensible mitigating circumstances. Reasonable excuses do go beyond ‘Disaster, death and disease’, to quote the HMRC general view, but throw the excuse ‘A Crocodile Ate My Tax Return’ on the fire!

What are advisors current experiences of penalties and mitigation?

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.

Open letter to ICAEW President – Subscriptions and Tax

Subject: Subscriptions and Tax

To the ICAEW President,

Imagine a world in which the Government suggested that a lawyer should be fined if their barrister lost a case. What would be the reaction of the Law Society?

Now, we have a Government proposal for something similar for the accountancy profession. It says (see 5 December – Sanctions and Tax Deterrents) that Government policy is to reduce the size of the tax advice ‘industry’, by threatening fines on ICAEW Members, even where they were acting legally and honestly, with a side effect of deliberately adding mayhem to Professional Indemnity Insurance quotes.

I fear this would affect all members in practice. Some may say, “I do not advise on tax avoidance,” but the trouble is that tax avoidance is not properly defined in the proposed legislation. The scope is wide, with the Government proposing that the State should have the power to fine professionals for ‘enabling advice to be given’ [not just advising] on what amounts to any commercial transaction which involves tax. Advisors would not necessarily know for some years whether their conduct was “incorrect”, because it would apply if the State subsequently won relevant litigation. Then, suddenly, advice given in good faith may become a punishable offence. Work out the justice in that.

Why should ICAEW Members, taught to act ethically and responsibly, be fined and punished, for example, for simply referring a client to advice from a QC?

This brings us to a key question. Are the ICAEW going to protect members from penalties, which are unjust? I feel the initial response from the ICAEW is disappointing. Yes, the new HMRC document is better than the original consultative work, but they are still far too broad and wrong in principle. HMRC admit this particular policy is not targeted at the true purveyors of ‘tax avoidance’, but to impose sanctions on “enablers”. Why should bystanders be punished, because HMRC find it difficult to administer the tax system?

The Institute document also notes that HMRC has announced that they “Do not expect that members acting ‘wholly within the spirit’ of the standards contained within the recently-updated Professional Conduct in Relation to Taxation” would normally be affected by the enabler provisions. Well super! So you can hope [not guarantee, note] you may not get punished, if you act under Ethical Guidelines. I would hope that all Members would act under ethical guidelines. However, if I acted under such guidelines to give independent advice, I would “hope” that I would be backed by ICAEW in saying I had acted in a proper professional manner. I would not expect it to be second guessed by some State Official most likely without similar professional training to determine if they agreed I was in the “spirit” of such guidelines.

I totally agree HMRC should be properly resourced to review the system they have to work with, with an efficient, trained and motivated staff, but then it must have a parallel, independent appeals system. It is the way of Dictators to “improve” an appeals system by persecuting appellants and their advisors. It should not be a route a UK Government aspires to, however “efficient” it seems to have no-one disagree with the State. Maybe the policy is designed to help in “Making Tax Digital”? If “enablers” of independent advice have been eliminated and if incorrectly arguing with an official means a fine, then surely 99.9% of the population will agree their tax assessment is correct, probably even if the Government computer “proves” it was 117.5% of them.

I worked hard to get my qualifications as an FCA. It has been something I have been proud of. Thanks to Government propaganda, it now feels like I am one step down from a shoplifter.

I believe such propaganda is lazy, because it suggests the problems in the tax system are down to ‘Accountants – and other such slimy creatures’. I could suggest other causes? HMRC staff and administrative cuts, poor policy co-ordination, vast systems and culture changes at HMRC which do not seem to have worked? Perhaps even a level of competence at Government level which drafts a referendum bill which then needs to go to the Supreme Court to determine whether Parliament meant “Yes or No”, or were only joshing? The Institute should point this out to the Press, rather than kow-towing to Press oversimplification because accountants seem ‘easy meat’.

ICAEW, please stand up for your Members. You want our subs. You should protect all of us, even if that means telling the Government they are wrong.

Manuel alive and well and working in Whitehall – Tax Avoidance Deterrents

After the recent tragic death of Andrew Sachs, there are rumours that his spirit for competence lives on in our legislation.

 TAX AVOIDANCE DETERRENTS

An open question for the above.  How do the current proposals (published on 5 December 2016 as Sanctions and Deterrents) fit with The Rule of Law?

I believe in the vital importance of the Rule of Law.

I believe it can only work with;

a) Clarity

b) Independent Judgement

c) Consent

Naively; having been trained as an Inspector of Taxes, I believe that the intention of Parliament was as set out in the words they enacted.  There is a lot of case law which supports this.

With 17,000+ pages of legislation the situation is complex.  There may be a dispute as to interpretation.  That arises, almost certainly, through lack of clarity (see (a) above).  The disputing parties are then dependent upon ‘independent judgement’ which hopefully they can both trust – effectively the Rule of Law (cf Tom Bingham).

If they do not trust the independent judgement then (c) Consent is lost.  That is dangerous.

Probably with good intentions (I am told they pave the Road to Hell) HMRC are saying that certain professionals need their behaviour modifying.  To quote the ‘Strengthening Tax Avoidance Sanctions and Deterrents in their paragraph 5.4:-

The government noted the views and responses provided. It recognises that the avoidance market is not static but is constantly evolving. HMRC will further develop the options set out in Chapter 5 of the discussion document to supplement the important work undertaken in this area to date, whilst looking at new and emerging threats in the avoidance market. Alongside this, HMRC will continue to explore ways to further discourage tax avoidance by:

  • working collaboratively with businesses, individuals, industry and representative bodies to identify opportunities to further shrink the avoidance market
  • exploring how behavioural change techniques can positively affect decisions and choices for enablers and users
  • tailoring communications and engagement with users to support them to make the right choices and decisions including outlining the risks and consequences of entering into these kinds of arrangements
  • meeting the challenges and opportunities that current and proposed legislation, HMRC’s Making Tax Digital Programme and other cross-sector initiatives may present

In paragraph 5.5 they go on to say:

The government will continue to take decisive and necessary steps to ensure that those who seek an unfair tax advantage, or provide services that enable it, should bear the real risks and consequences for their actions.

So that is clear now?

Quite apart from their appalling grammar, and resulting lack of clarity, the proposed result of this appears to be:

i) An advisor may introduce a client to (say) a Queens Counsel who suggests a course of action he believes to be legal.

ii) Sometime – [likelihood, at least 10 years from final date of action bearing in mind current complex litigation process] – advice and action may be proven correct.  End of story.

iii) Alternatively, in the litigation lottery of the Courts (talk to lawyers!) the advice may prove to be incorrect.  In this case penalties would be sought against the person who introduced the QC, in all good faith!  Is asking for professional advice to be subject to a penalty?

iv) The proposed legislation encompasses virtually all commercial arrangements, not just ‘artificial’ ones.  ‘Tax Avoidance’ is not properly defined.  It rests on ‘losing’ under untested legislation.  There is no safe harbour.

v) The level of penalties (see time line) may be after the advisor retired.  If the professional involved advised clients wealthier than him, which I am sure the majority do, then they could result in severe financial embarrassment, perhaps even bankruptcy, of said pensioner.

The tone of the HMRC document of 5 December 2005 suggests that would be [perhaps in Chairman Mao’s words?] a good behavioural adjustment.

vi) Maybe?  In contrast, if the advisor had introduced his client say to a robber or a drug dealer, rather than a (presumably respectable) Queens Counsel, then these sanctions would not apply.  In considering this, what is ‘the Clear Intention of Parliament’ to quote a phrase.

I would be grateful if any of the parties to whom this is addressed could explain to me how it fits in with the idea of any penalty fitting in with the criteria proposed in HMRC’s 2015 penalties discussion document:

  • The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance.  Penalties are not to be applied with the objective of raising revenues.
  • Penalties should be proportionate to the failure and may take into account past behaviour.
  • Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  • Penalties must provide a credible threat.  If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  • Customers should see a consistent and standardised approach.  Variations will be those necessary to take into account customer behaviours and particular taxes.

From an initial review, the proposed penalties fail all counts.  Specifically, they do not seem

1)     Fair

2)     Proportionate, nor even remotely consistent.

They are potentially an invite for state bullying.

An easy way around the problem is the one which worked for many years historically.  It was for independent, disinterested advice with proper, well-resourced HMRC review.  In such a case ‘reasonable care’ all round could be provided by someone, properly qualified, who was not rewarded as to outcome and gave independent advice as to the law, with subsequent full disclosure of any relevant arrangements.