The importance of the motive behind the transaction

In the recent case of Land Securities PLC v HMRC, the appellant Land Securities PLC appealed against the decision of the First Tier Tribunal, who had agreed with HMRC’s arguments to disallow claims made to deduct a capital loss from profits subject to corporation tax on the basis that the creation of the loss, and therefore the avoidance of tax, was the underlying motive behind the transaction.

The series of transactions involved Land Securities PLC selling shares in a subsidiary called LM Property Investments Limited (LMPI) to a subsidiary of Morgan Stanley in the Caymen Islands (C) with a put option being set up whereby C could sell the shares back to Land Securities PLC at any time after 29 February 2004. On 1 August 2003 C injected funds of around £200m into LMPI. On the same day C also agreed to sell back the shares in LMPI to Land Securities PLC for over £200m more than they had originally been purchased for.

The Upper Tier Tribunal denied relief, finding against the appellant on the basis that the transaction did not exist to create a commercial profit but that the materiality of the transaction was to create a loss for Land Securities PLC to offset against its profits and as such pay a lower amount of tax.

A further recent case (PA Holdings),involved a company constructing a complex arrangement in order to divert employee bonuses to be taxed as dividends rather than employment income, therefore saving tax and NICs. The Court of Appeal found that the payments were remuneration for employment and subject to Income tax and NICs accordingly.

PA Holdings’ appeal to the Supreme Court following this ruling has now been withdrawn and the decision at the Court of Appeal is therefore final. Further details of the case can be found at:

 http://eavesandco.co.uk/blog/2012/01/18/a-payment-cannot-be-both-dividend-and-employment-income/.

The Boundaries of Fairness – Joost Lobler v HMRC (TC2539)

In the recent case of Joost Lobler v HMRC (TC2539) the taxpayer was Dutch and had sold property in Holland after moving to live in the UK. He invested roughly $1.4m of the proceeds in a number of Zurich life insurance policies arranged through HSBC Private Banking.

Without taking financial advice, over the course of the next two years Mr Lobler withdrew the funds invested in order to buy a UK property, leaving the policies with comparatively negligible value.

The taxpayer opted for partial surrender out of the 4 options available when completing the form to make a withdrawal. He did not mention the withdrawals from the policy on his tax returns for 2006/07 and 2007/08 as he assumed that no taxable gain had arisen, having not withdrawn more than he had paid into the policies.

Unfortunately, technically he was wrong, and because of the options he chose Zurich carried out their legal obligation to inform HMRC of the withdrawals, which led HMRC to determine that tax was due and assessed the taxpayer to $560,000 under ITTOIA 205 s.461.

The taxpayer appealed saying that a mistake had been made when filling in the surrender forms. Had he made a full surrender no tax would have been due and he did not realise the consequences of making a partial surrender claim.

The first tier tribunal dismissed the taxpayer’s appeal on the grounds that they could not find a different way to interpret the legislation. It was suggested that the taxpayer’s situation was “outrageously unfair” as he had made no profit or gain, but had become liable to tax which could potentially bankrupt him.

The moral of the story is of course that tax is complex and it is prudent to take professional advice. Anyone drawing a comparison between HMRC’s aggressive use of obscure legislation to their own financial advantage and those indulging in “tax avoidance” must of course be mistaken.

HMRC Crackdown on Tax Evaders Continues

HMRC’s crackdown on tax evaders continues. A recent case saw a London barrister being convicted of tax fraud and sentenced to 3 and a half years in prison. HMRC investigators found he had failed to declare or pay over £600,000 of VAT over 12 years.

Mr Pershad’s VAT registration was cancelled by HMRC in 2003 with effect from 1999, after a history of failure to submit tax returns and also not telling HMRC about a change of address. This resulted in him being unable to legally trade above the VAT threshold, which was between £54,000 in 2001 and £67,000 in 2008.

On completion and submission of his self-assessment tax returns, they showed his income had increased from £85,000 in 2001 to £346,000 in 2008, hence breaching the VAT registration limit.

During this time he continued to use his invalid VAT number on invoices, hence collecting the VAT on the fees he charged his clients but keeping the money for himself.

In another case, two businessmen have been jailed for fraud and tax evasion after hiding £500,000 in offshore bank accounts over a 6 year period.

The business men were given the opportunity to disclose their offshore accounts through HM Revenue & Customs’ Offshore Disclosure Facility (ODF). One of the two men did not register for the facility whilst the other only disclosed one of the 12 accounts he controlled.

The men ran a company offering computer technology to the automotive industry, with many of their clients based in Germany. After close inspection, sales in Germany were in the region of £1.26m, while only £49,650 of this money in sales for the same period was declared to HM Revenue & Customs. The balance was divided into offshore accounts of five shell companies registered in Mauritius and the Isle of Man, created solely for the purpose of tax fraud.

The men were jailed for 15 months and 12 months respectively. Confiscation orders were issued under Proceeds of Crime legislation in respect of amounts totaling £500,000 which must be paid within 24 months or the men will be jailed for a further 15 and 12 months respectively.

Penalties for deceased persons in prior years contradicts human rights | IHT Planning

Penalties for deceased persons have been an area of contention recently.  For those individuals who die not having their tax affairs in order, HM Revenue & Customs are able to go back and enquire into an individual’s tax affairs for the 6 tax years prior to the date of the deceased’s death, in the case of careless or deliberate understatement of tax.

However, HM Revenue & Customs are no longer allowed to apply penalties for deceased persons in relation to the tax affairs of the 6 tax years preceding the individual’s death as it is deemed to be a contravention of an individual’s human rights.

Eaves and Co have been able to apply this to a recent client situation where an individual had died not disclosing trading income to HM Revenue & Customs. This had led to undisclosed profits resulting in unpaid tax for the 6 years prior to their death. This would have incurred significant penalties for non-disclosure without the case law findings against the application of penalties.

Julian Martin v HMRC – TC 02460 – Income Tax where Employee Obliged to Refund Earnings

In the recent case of Julian Martin v HMRC (TC 02460),  the appellant agreed to enter into an employment contract under which he received a signing bonus of £250,000 in 2005/06 the terms of which required him to work for the company for a period of 5 years.

The signing bonus was subject to income tax and NIC’s through PAYE and the net amount received was £147,500.

Mr Martin gave early notice and therefore became liable to repay £162,500 to his former employer.

The appellant made an error and mistake claim for 2005/06 on the basis that whilst the full bonus had been taxed in that year, in retrospect the full amount had not been earned in that year and as such the repaid amount of £162,500 should not be taxable.

HM Revenue and Customs rejected Mr Martin’s claim for relief and argued that the full amount remained taxable despite the fact that most of it was later repaid.

This gave rise to an anomalous position whereby Mr Martin was worse off than if he had never accepted the signing bonus because the tax and NICs were in excess of the amount of the bonus that he actually retained.

The first tier tribunal found that relief should be available on the basis that the repayment of the bonus amounted to negative taxable earnings in Mr Martin’s hands.

 

Prevailing Practice becomes Harder to Apply

“Prevailing Practice” prevents HMRC from recovering underpaid tax which has arisen from over claimed reliefs provided that the claims were made through practice prevailing at the time.

The recent case of Boyer Allen Investment Services v HM Revenue & Customs may make the application of prevailing practice more restrictive than previously thought.  The ‘prevailing practice’ in question was the tax treatment of contributions to an EBT prior to the case of Dextra.

The tribunal dismissed the company’s appeal on the basis that “to be a practice, it must be something capable of being clearly articulated, and articulated not just by the Revenue, or just by taxpayers’ advisers, but by both, and by both in the same terms”.

The Tribunal also noted that there is a difference between what simply happens in practice and the identification or establishment of a particular practice.  A common misunderstanding of the legislation cannot therefore give rise to a “prevailing practice”.

The taxpayer lost because th Tribunal did not believe that advisers would have been able to articulate HM Revenue & Customs’ supposed practice and it was agreed that there was a common misunderstanding of the interpretation of the rules by both HM Revenue and Customs and the tax profession.

HMRC Taskforces set their sights on London Legal Professionals

Following HM Revenue & Customs crack down on tax avoidance, taskforces introduced in May 2011 are now focusing on the activities of various London barristers and other legal professionals who they feel may have unpaid taxes.

HMRC believe that these investigations along with other groups such as hairdressers, tattooists and restaurants in various locations around the country will bring in approximately £19.5m.

This will help them to meet their target of £50m being recovered by the 30 taskforces launched last year.

With the aggressive tactics, it is probable that investigations and enquiries will be on the increase, with HM Revenue & Customs warning that they are “coming after you”.