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!

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?

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

Inheritance Tax Series – Overseas Issues

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

Inheritance Tax – Overseas Issues

General Rules

Where a person is UK domiciled their estate will be subject to inheritance tax on their worldwide assets.

Therefore overseas assets such as foreign bank accounts, holiday homes etc. will be subject to inheritance tax in the UK.

Relief is given for foreign liabilities (for example an overseas mortgage) by deducting the amount of the liability from the value of non UK property.  Any excess can then be set off against UK property.

 Foreign Property – Deduction for Expenses

Where the estate includes overseas property, the personal representatives may incur additional expenses in connection with the disposal.

It is possible to claim a deduction for expenses of administering or selling overseas property up to a maximum of 5% of the value of all foreign property in the estate.

Thus, where the estate of a UK domiciled person includes a house in Spain worth £250,000, the personal representatives may claim a deduction for expenses of up to £12,500 (£250,000 x 5%), potentially saving inheritance tax of £5,000 (£12,500 x 40%).

Double Tax Relief

Where an estate is subject to inheritance tax in both the UK and another country on the same assets the estate may be subject to double tax.

The UK has double tax treaties for inheritance tax purposes with the Republic of Ireland, USA, South Africa, France, Netherlands, Sweden, Switzerland, Italy, India and Pakistan.

These double tax treaties set out the taxes that qualify for relief under the agreement, the taxing rights of each country in respect of different types of assets as well as the mechanism for double tax relief where inheritance tax is payable in both countries.

It is important that care is taken to review the appropriate double tax treaty carefully because the personal representatives will need to understand whether relief should be claimed in the UK or abroad.

Where inheritance tax is payable in the UK and a similar tax is payable in a country that does not have a double tax treaty with the UK, double tax credit relief should be available in relation to assets situated in the other country under the unilateral relief provisions.

For these purposes the location of the asset is determined in reference to UK law.

The amount of double tax relief under the unilateral provisions is limited to the lower of (i) the UK inheritance tax, or (ii) the foreign inheritance tax.

In cases where tax is payable in both the UK and another country in relation to an asset that is situated in a third country, or treated as situated in the UK under UK law and the other country under that country’s law, a proportion of the tax may be relieved in the UK.

Interpretation of Double Tax Treaty – Meaning of “Subject to Tax” TC02178

In the recent case of Paul Weiser v HMRC (TC02178) the first tier tribunal considered the interpretation of the double tax treaty between the UK and Israel and in particular the meaning of the phrase “subject to tax”.

Article XI of the UK-Israel double tax treaty provides that UK source pensions will not be subject to UK tax where they are received by a resident of Israel and subject to Israel tax in respect thereof. However under Israeli tax rules, UK pension income is excluded from tax in Israel during the first 10 years of residence.

HM Revenue and Customs therefore argued that because the pension income was exempt from tax in Israel it could not be said to be subject to tax.

On the other hand, the taxpayer claimed that he is within the charge to tax in Israel by virtue of living there even though Israel does not levy tax on his UK pension income because of the exemption.

Following the decision in Bayfine UK v HMRC (STS 717) the tribunal found that the double tax treaty should be interpreted using a purposive rather than a literal approach. The primary purpose of the double tax treaty is to eliminate double tax and prevent the avoidance of tax, the purpose is not therefore to enable the double non taxation of income.

The case therefore centred around the meaning of the phrase “subject to tax” and the difference in international tax treaties between this phrase and the phrase “liable to tax”.

HM Revenue and Customs presented various examples of case law from other countries and academic articles that examine the distinctions between the two phrases. The tribunal noted that whilst such authorities are not determinative they are relevant.

In HM Revenue and Custom’s view, the distinction between the two phrases is that the expression “liable to tax” requires only an abstract liability to tax (i.e. a person is within the scope of tax generally irrespective of whether the country actually exercises the right to tax) and therefore has a much broader meaning than the phrase “subject to tax” which requires that tax is actually levied on the income.

The first tier tribunal decided the case in favour of HM Revenue and Customs such that relief was not available under the UK-Israel tax treaty to exempt the pension from UK tax because the pension was not subjected to tax in Israel.

The tribunal’s interpretation of the UK-Israel double tax treaty and meaning of “subject to tax” will be of interest to taxpayers relying on double tax treaties and those practitioners who advise on double tax treaties.

Double Tax?

Eaves & Co Leeds, have advised recently on two areas where tax might have been paid twice on the same income:-

  1. A FURBS which paid tax on its income and the trustees suffered PAYE on the same income. Tax credit relief and ESC A68 may be available.
  2. Two cases where profits have been taxed in the US and our UK client wishes to avoid double tax by also paying UK tax.

If you have a case where tax may be payable twice we would be pleased to discuss how relief may be available.