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.

Law, Interpretation and Common Sense

Here is a conundrum.

A long, long time ago … in a galaxy far, far away (a.k.a. York, England 1981) I was a newly created Inspector of Taxes.

I was taught that the tax rules were strict and should be followed to the letter. However, that should not mean artificial impositions and ridiculous decisions. In those days (what is now HMRC) had ‘care and management’ of the Tax System.

Hence, my training was that, if during a Tax Investigation (of which I did quite a few!) I ‘discovered’ (see S29 TMA 1970) that some profits from one year, really ought to have been taxed in a different year, I should adjust it accordingly – but on both sides. So, in adding the profit to one year (per the correct accounting) I should then deduct the profit from the year I have moved it from. I should not seek to tax it twice, because that would be blatantly unfair!

A recent case [Ignatius Fessal v HMRC] reached the same conclusion, albeit using complex legal arguments concerning the European Human Rights Act. In this case the question was one of interpretation. In analysing it the Tribunal have resorted to the Human Rights Act to get to a fair conclusion. In other (older) leading cases, Justice Rowlatt, said that there was no ‘Equity’ in tax, you just read the words stated by Parliament and interpreted them strictly. However, the fact that there was no ‘Equity’, did not mean there should be no fairness. It was simply a method of how best to analyse the statute, bearing in mind the underlying fundamental principle that no Government would wish to impose double taxation.

So the answer should be – No Double Tax.

That truly should be the end of the story.

BUT NO!

In the Fessal case (which as Andrew Hubbard rightly says is complex in the 19 May issue of the leading professional magazine, Taxation) the First Tribunal spent 36 rather closely argued and difficult pages, including analysing a key issue as to whether the ‘European Human Rights Act’ should apply?

To be fair to the Tribunal, they gave detailed legal analysis, which is impressive in scope and response. However, should it have been necessary to invoke such complexity on what surely should have been determined as a simple question of fairness? As certain Old-Fashioned English Common Law Chaps might have concluded – You cannot tax a person twice on the same profits!

To use the current jargon “End of …”

Would the Revenue in the days of their duties for ‘care and management of the tax system’ objected to this ‘as a matter of law?’ It would be hoped not.

In present times though – they did. As the Court pointed out, the way HMRC handled the matter put the taxpayer in a worse position than if they had not made a Tax Return at all! Surely, this could not be just and would (fairly quickly) lead the tax system into disrepute? This would cost HMRC far more in lost goodwill and compliance.

In addition, the Fessal case does raise rather interesting issues as to the impact of Double Tax Treaties, where maybe they do not work as well as anticipated. Could the Human Rights principle established against Double Taxation assist in cases where there is effective Double Taxation not strictly protected by a Double Tax Treaty? (See the Anson case?)

Moving on, business needs certainty. If the system is to be strictly on a ‘rules basis’ then surely that should be the same for both sides – taxpayer and HMRC. This brings us on to the latest Finance Bill proposals for penalties under GAAR. Are these well thought out and balanced?

Taxpayers who have indulged in tax avoidance have obeyed the law, by definition. Otherwise they would be guilty of tax evasion – a criminal offence.

I hold no brief for artificial tax schemes. In my experience, many of them fail either because they do not meet the underlying commercial requirements, or in truth they depend upon a sham. Some are correct under the law though. Surely they should not be punished severely because the opinion of a bureaucrat finds them objectionable? The Finance Bill proposal for a tax geared penalty of up to 60% may seem disproportionate? Could this be challenged as a breach of ‘Human Rights’?

My opinion is that to protect Government Revenue, HMRC do not need greater powers, nor heavier penalties. They need more, better trained personnel, so that cases can be dealt with and if necessary investigated properly.

I believe the issue is an administrative one – not one for even more legislation.

Opinions please?

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.

Farce: Manchester United and HM Treasury

Hello,

1)      Sorry for the informality of the greeting but if you were doing a training exercise on fake bombs and security, would you not (at least) count up the number of imitations you had hidden – and then count them back in to avoid scaring/annoying 75,000 people?  See Manchester United and fake security issue?

2)      Secondly, if you were trying to convey ‘good news’ about the ‘initiative to automatically exchange information on beneficial ownership’ (See HM Treasury Press Release), there may be ‘marginal’ concern about the absence of countries [on HM Treasury List dated 13 May 2016] such as China, Russia and the USA (for example)

3)      Thirdly, by definition, dishonest people are going to tell lies, especially if they can get away with it.  Hence, how (for example) is a relatively poor country (say the UK (?)) going to enforce disclosure?

What happens when laws collide?

Here is a case which emphasises points about pre-planning for tax purposes.  It may also be one for legal philosophers!

In the recent case of G4S Cash Solutions (UK) Ltd v CIR, the Courts followed the old case of CIR v Alexander von Glehn and held that payments of fines should not be allowed as tax deductible.

So far, so good.  It even sounds sensible as public policy: but –isn’t there a ‘but’ in tax matters – the fine in Alexander von Glehn was for ‘collaborating with the enemy in time of war’; maybe many business owners may distinguish this from parking fines incurred by getting armoured cash delivery vans close to shops/banks to protect employees and the public from extra risk of armed robbery, but by doing so infringing parking regulations.  The statutory fines in the G4S case were for parking infringements.

The Courts accepted:-

  1. It made sense (and was accepted by the police) to minimise the time/distance that the person delivering the cash had to spend outside the van.
  1. G4S owed a duty of care to their staff, customers and the general public, so parking close by, even in crowded shopping centres made sense.  Thus, health and safety law was to a degree in conflict.
  1. Parking infringements were not on a par of severity with ‘collaborating with the enemy’.

Nevertheless, the Courts decided that it was inappropriate to grant a tax allowance for the payment of statutory fines, so G4S lost out on a substantial tax relief to what they had generally seen as an occupational hazard.  Interestingly, G4S did ‘advance deals’ with some Councils whereby in exchange for a lump sum in advance, they got an agreement that the parking wardens would not issues tickets for certain G4S parking infringements.  These were agreed to be tax deductible, showing that a different structure can lead to the same commercial end, but in a more tax efficient manner.

In the G4S case the First Tier Tribunal quoted the judge in McKnight v Shepherd as an illustration of how the tax picture may be altered by minor distinctions.  Mr Justin Lightman said, “The authorities reveal what a fine line may need to be drawn between what is within and what is outside the trader’s profit earning activities and there are to be found subtle distinctions not immediately obvious to minds of mere ordinary intelligence”.

Lessons to be drawn:

  1. This case could be a rich earner for HMRC with tax, interest and penalties falling on the multitude of delivery firms set up to provide services in these days of internet shopping.  No doubt a number of them will face similar traffic fines and treat them as an incidental cost of doing business.
  1. Forewarned is forearmed, so checking future accounts for fines etc., and then adding them back, would seem prudent.  This is unlikely to be the outcome desired by the business, but HMRC are getting stricter with imposing penalties on even ‘technical’ mistakes.
  1. Advance thought and planning can help the same commercial ends be achieved – with a better tax outcome.

HMRC Use Incorrect Procedure – A Revell v HMRC

We recently highlighted the importance of ensuring HMRC have taken the right steps in terms of the use of their powers – see Make Sure HMRC Notices are Valid! – Technicalities and Human Rights Law. This has been confirmed by a further recent case which again shows the importance of checking the facts.

In A Revell v HMRC the First-Tier Tribunal was asked to consider whether HMRC had acted correctly within the legislative framework for their powers. The taxpayer in the case had voluntarily submitted a tax return for 2008/09. HMRC had sent the request to deliver a return to the wrong address, despite having received the updated address for the taxpayer.

HMRC attempted to enquire into the return and determined that further tax should have been due. The taxpayer, however, appealed on the basis that the enquiry was invalid because he had not received a notice requesting a return under TMA 1970, s8.

The First-tier Tribunal agreed that no request to deliver a return had been made due to it being sent to the wrong address. They found that the taxpayer had not waived the requirement for the issue of a notice to file under TMA 1970, s8 by submitting a voluntary return. As such, they determined that his return should be treated as a notice of liability to income tax under s.7 and not a self-assessment return.

The appeal was therefore allowed. In addition, as the time limit to request a return had expired HMRC’s only further option would be to issue a discovery assessment. This would appear to then bring further technical considerations into play, as to whether such a discovery assessment itself would be valid based on case law (see our blog post on some of the case law in this area for further information).

This case again shows the importance of ensuring HMRC are acting within their powers as a first step. It also appears to raise some interesting questions as to the implications for making a voluntary tax return, as the Tribunal found that these should not be treated as a self-assessment return.

Osbourne Budget – IR35 Targeted Again!

I thought you may be interested in this story I found on MSN regarding IR35: Budget to close tax loophole which disguises employees as freelancers:  http://bit.ly/1RZho2f

Unfortunately, I was unable to contact Sam Lister ahead of posting this blog.  I will continue to try and get in touch with Sam at the Press Association so that I can update this blog as necessary, but my initial comments follow:

“Sources” can be saucy, especially pre-budget!

1. 90% of earners do not comply?  Is there real evidence of this?  On what basis?  As a former Inspector of Taxes and now a Chartered Accountant, I can truly say in my opinion HMRC do not (for perhaps understandable reasons) empathise with small business.

2. Depending upon the wording of this new legislation, it seems likely that state-backed organisations will be naturally risk averse and so deduct tax at source.  Sounds good?  Except then the individual earner will be having to pay taxes out of post-tax income.  How will this affect the economics related to (say) an independent worker who is expected to travel from job to job (at their own expense) whilst not being paid in the interval between jobs?

3. Will the “deemed employee” automatically get the same rights to employment protection/pension etc?  if not, how is this fairer?  If they do, will it cost more?  If not, how is the new arrangement “fairer”?

4.  The distinction between “Employed” and “Self-Employed” is complex.  It is not a clear line.  It never has been simple as case law has shown over many years.  The Chancellor may try to define it on one sheet of paper – but I fear he will fail, and/or create a mindless tick box bureaucracy which restricts business innovation.  Does a Government really wish to discriminate against independent small business?  They are not all “rich BBC Fat cats”!

5.  Why should there be different rules for “state” organisations vis a vis the private sector?  Should there not be a single law for all?

6.  Paying the “right” amount of tax under the law is surely correct.  The rules and rates though are a matter of policy and should be subject of thought and debate.

Example; An independent computer programmer with a project to help develop systems for a large corporation earning say £60,000 a year will face a marginal tax rate of 42% (income tax plus NIC).  The large corporation on the other hand would face a tax rate of 20% whether it earned £60,000, £60m or £600m.  The tax rate for the large corporation is down from 30% less than 10 years ago.  Fairness and where best to invest scarce HMRC resources are questions which may be coloured in the eye of the beholder.

The proposed rules seem to be designed to hinder certain small businesses from operating as limited companies.  Is it good policy to hamper independent commercial choice?

7.  If the independent earners did operate as a limited company, the earners would still have to pay extra tax to extract any money for their own use.  If they are genuinely independent, what is the “abuse”?

8.  If there is a genuine lack of compliance with existing rules, would it not be more efficient to employ more HMRC staff to police them, rather than adding another set of bureaucratic and complex rules?

A properly informed debate would be useful.  Anyone wishing to contribute to this debate, please leave a comment below.

Changes to Tax Benefits and Expenses Rules – Reminder

From April 2016 the rules on reporting of expenses and benefits are due to be reformed.

Previously, expenses reimbursed to employees that were wholly, exclusively and necessarily incurred by the employee in the performance of their duties were treated as an allowable expense for the employee; however the payment of the expense was treated as a benefit. Historically, such matters have required reporting on Form P11D, or to be covered in advance via a written dispensation from reporting, agreed in writing with HMRC. As there was no overall tax liability in such instances, HMRC allowed companies to agree dispensations for certain expenses which did not need to be reported in this manner.

The whole of this system is being abolished, and a new one imposed. From April 2016, it is proposed that existing dispensations will no longer be in force. Instead, where an employee is entitled to a fully matching tax deduction, employers will no longer have to apply for a dispensation, or report those expenses on form P11D. In theory this may cut back on reporting for the future, but HMRC expect there to be an underlying checking mechanism. If this is not in place and also formally verifiable then tax penalties may be imposed.

There is also a change to the way bespoke, pre-negotiated rates for expenses work. A new exemption will provide an option for employers to agree a scale rate with HMRC where they do not want to use the benchmark rates. These bespoke rates can be used for up to five years.

In order to apply for a bespoke rate, employers will need to provide HMRC with evidence, based on a sampling exercise, to demonstrate that the proposed rates are a reasonable estimate of the expenses actually incurred by the organisation’s employees.

It would certainly be prudent for employers to review any existing dispensations which are in place prior to 6 April 2016 and to consider any changes that may be required to be made to processes to ensure that expense payments are dealt with correctly from April 2016 onwards. We have prepared a questionnaire for employers to use to ascertain what steps might be needed and would be delighted to speak to you if you would like our assistance.