An Englishman’s Home is his ‘Tax Exempt’ Castle – Private Residence Relief (PRR)

CardiffCastle-Exterior41-med-A0013928-1“Everyone knows” that:-

“A person’s home is exempt from capital gains tax” – SIMPLES!

Well, no actually! In law it may get up to 100% tax relief, but it remains a chargeable disposal.

Imagine:-

1. You own more than one property (including say a holiday home overseas) OR
2. You buy a property to live in, but actually live elsewhere (say in rented accommodation) OR
3. Circumstances change over your period of ownership.

Each of these (quite common) circumstances could give rise to a nasty, unexpected tax liability. We have seen a number of situations where advice has been sought ‘Just Too Late’. This can mean a relatively small outlay “saved” on proper professional advice, results in an expensive (and potentially unnecessary) tax bill – plus, on occasion penalties, for naïve belief in the somewhat misleading phrase, set out above.

Some of the benefits of this suggestion are reflected in the recent case reported below.

Private Residence Relief Claim Rejected

Private Residence Relief (PRR) can be a very beneficial relief where the conditions are met, providing for up to 100% of a gain to be exempted where a property has been a taxpayer’s main residence throughout ownership.

Of course though careers, inheritance, divorce and the general messiness of real life, things do not always quite pan out as simply as “always” living in one house. As a result, claims made perhaps in ignorance and good faith, can lead to disagreements between HMRC and taxpayers over whether, and the extent to which, properties may qualify. This can lead to appeals, so a number of cases end up being dealt with through the courts.

One such recent case was P Lam v HMRC at the First-Tier Tribunal. The case found that a taxpayer’s occupation of the property was not sufficient to meet the conditions. HMRC accepted the taxpayer had spent some time in the property whilst she was renovating it, but they argued that the nature and extent of that occupation was not enough to qualify for relief, which requires a degree of permanence.

What may be useful for taxpayers is that the Tribunal provided a list of things that the taxpayer in this case was not able to provide as evidence. Such factors therefore appear to be key in being able to prove that occupation in a property should be sufficient for the relief. This list included:

• Proof of how many days she lived in the property
• utility bills to establish the time spent there
• moving any furniture into the house
• bringing items that would have made occupation more comfortable
• providing evidence of a change of address

Taking professional advice in advance and keeping good records will certainly make matters easier in the event of an HMRC challenge into a PRR claim. Perhaps an easier route would have been to file a timely election for the relevant property to be deemed the qualifying property.

To quote an old motto, regarding getting matters in order in advance …

“A stitch in time, saves 9”.

Appeal Rights

Like any large organisation, HMRC sometimes acts in a way that can make individuals, who may be challenged by this monolith feel intimidated.  Fortunately, there are general rights of appeal.  Recent cases have shown that these rights are useful in ensuring HMRC do not overstep the mark and abuse their powers.

In M. Miron, it was held that the taxpayer’s accountants were at fault in not following a fairly simple procedure.  However, that did not excuse the ‘terrible muddle’ that the taxpayer ended up in.  The fact that HMRC was a large organisation could not justify a situation where one hand did not know what the other was doing.  “The whole purpose of maintaining a file was to ensure knowledge is disseminated across an organisation”.  Thus the taxpayer had a ‘reasonable excuse’ in not filing her appeal in a more timely manner.

Similarly, in M. Capuano the ‘staggeringly bad’ service provided by HMRC generally, contributed towards the taxpayer having a ‘reasonable excuse’ for late filing.

M. Beardwood was also held to have had reasonable excuse for late filing.  Indeed the First Tier Tribunal said it was ‘difficult to see what more the appellant could have done’.  They considered HMRC had wasted everyone’s time in bringing a case which had very little merit on the side.

This contrasted with R. Popat, where the taxpayer (who again won) was allowed an appeal where he wished to postpone payment of tax assessed on an assessment.  The taxpayer only had a low hurdle to overcome to get tax postponed, pending settlement of the relevant appeal.  The purpose of the postponement hearing was not to settle the appeal finally on its merits, but to allow tax collection to be postponed pending a full rehearsal of all the relevant facts.

For advice on HMRC powers and penalties please contact either Paul Eaves or David Stebbings.

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.

Valantine v HMRC – Partnership or Not?

partnership agreement

(Photo credit: o5com)

The case of Mrs Pauline Valantine v HMRC (TC 01644) demonstrates that in certain cases it may be useful to engage in discussions/meetings with HM Revenue and Customs as this could prevent cases being taken to Tribunal unnecessarily.

The key issue in the case concerned whether Mrs Valantine was in partnership with her husband.  If Mr & Mrs Valantine were in partnership then Mrs Valantine would become liable for unpaid income tax/NICs on her share of the partnership profits and unpaid VAT for which she would be joint and severally liable.

The question of liability was particularly relevant because Mr Valantine was expected to declare bankruptcy, therefore if a partnership did not exist then Mrs Valantine would not be liable for the unpaid tax and HM Revenue and Customs could not expect to receive payment.

Based on the evidence before them the Tribunal found in favour of the taxpayer on the basis that the relationship between the taxpayers made it unthinkable that they would have entered a business partnership.

Interestingly however, the Tribunal concluded that HM Revenue and Customs should not be criticised for their handling of the case or for bringing the case to Tribunal.  They went on to say that had the taxpayers been willing to meet HM Revenue and Customs to discuss the case then the case may never had been brought to appeal.

Taxpayers involved with investigations/enquiries from HM Revenue and Customs may find professional advice useful to ensure that matters are concluded both quickly and robustly.

For information regarding our tax investigation/enquiry services please contact Paul Davison on 0113 244 3502 or visit our website www.eavesandco.co.uk

HMRC Argue for Self-Employment – T Coffey T/A Coffey Builders and Dr M Selvarajan (TC1888)

A recent First-tier Tribunal case was unusual in that HMRC were arguing for self-employment, whereas they would normally take cases to Tribunal arguing against self-employment, due to the extra National Insurance costs and less relief for expenses.

Yellow hard hat. Studio photography.

(Photo credit: Wikipedia)

Mr Coffey had been in partnership with his wife as a builder, but had retired through poor health. He claimed that he had been employed by Dr Selvarajan to supervise the refurbishment of the Doctor’s clinic.

Mr Coffey was paid a set weekly amount, regardless of hours worked. There was no written contract, no invoices were raised and there was no right of substitution.

The tribunal found that Mr Coffey had control over the building project. In the absence of a written contract, two documents were considered. The first was a document which Mr Coffey had signed which referred to him as, “principal contractor” and “planning supervisor”. The second was a note in his diary setting out the payments to contractors, which was held as evidence that Mr Coffey was in charge of these payments. Dr Selvarajan was still responsible for actually making these payments.

The tribunal also noted that there was a lack of financial risk, but that this was not “necessarily determinative”.

The Tribunal determined that Mr Coffey was self-employed, with one key indicator apparently being the fact that Mr Coffey had previously been a builder for a number of years and that he had not checked with his accountant how his new engagement would be taxable.

Whilst the outcome of this case, and the approach taken by HMRC, might be surprising, there may be some elements that could be used to build a case in favour of self-employment.

HMRC Release Tax Appeal Success Details

HMRC have recently published figures detailing the success rate of their internal review process compared with taking cases to tribunal.  Taxpayers can ask HMRC for an internal review if they are not satisfied with a decision of the Inspector, prior to taking it to the tax tribunal.

 There were some interesting figures revealed:

 On internal review – 44% of non-penalty cases were overturned, whilst 75% of VAT penalty cases and 35% of non-VAT penalty cases resulted in a cancelled or reduced penalty.

 This compares to a success rate at the tribunal for taxpayers of only 21% (according to HMRC).

 HMRC also state that only a ‘small minority’ of their decisions are challenged, meaning many incorrect decisions could remain in place.

These figures show that requesting an internal review can be a cost-effective step for taxpayers before the need to resort to the tribunal, and should be considered more often.