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.
Of course, all first year law students will bellow ‘No’ to what has long been thought a standard legal principle. However, in today’s complex, highly regulated society a strand of case law is emerging which suggests that in certain circumstances a lack of knowledge of the detail of the law can be a reasonable excuse, thus preventing a penalty from being levied.
The recent First Tier Tribunal hearing in respect of A and R Bradshaw is a case in point. The taxpayers lived in the UK for many years before emigrating to Canada. Their former marital home was put on the market, with the sale going through after the couple had left the country. No capital gains tax was due, because the property had qualified as their principal private residence.
However, HMRC sought to impose a late filing penalty, because strictly a return should have been made under the Non Resident Capital Gains Tax Regime (NRCGT). The judge in giving his verdict acknowledged that a return should have been made under the law. He did dismiss he HMRC penalty demand though. The judge said that the rules were new and had not been well publicised despite marketing a significant departure from previous, well established tax policy in imposing CGT on non-residents. He also noted the new legislation demanded a novel and onerous reporting deadline of only 30 days after the disposal.
This may be very tight especially if a complex capital gains tax computation was required or information needed to be garnered from earlier years. Citing the cases of Perrin v CRC, McGreevy and Scowcroft the judge accepted that in this case ignorance of the law amounted to a reasonable excuse.
It is pleasing to see the Courts accepting that in the real world of unfortunate circumstances and human foibles that ‘reasonable excuse’ can go beyond the trite triple of ‘disease, disaster and death’ Taxpayers and their advisors should therefore look at the whole picture and consider mitigating factors before accepting an HMRC demand for penalties.
Of course, certain excuses are unlikely to succeed. Crafting an argument around ‘The Dog Ate My Tax Return’ would I suggest remain doomed to fail.
We are confident though we can help on more reasonable arguments and are always interested to hear of practitioners experience in this area.
“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.
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 …
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.
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.
In a recent First-Tier Tax Tribunal case, a non-resident’s appeal for reasonable excuse in relation to late filing penalties was denied, however, interestingly the Tribunal still decided to waive the penalties.
The appellant in A Newton v HMRC was resident in France and filed his 2012/13 tax return late. He appealed against the higher later filing penalties on the basis that as he was living in France, he had not seen any advertising in relation to the new penalties.
We recently wrote about another case involving a non-resident appealing on similar principles, in relation to the introduction of the Non-Resident Capital Gains Tax (NRCGT) returns. In that case the appeal was allowed because it was felt to be unreasonable to expect the taxpayer to have found the new rules independently.
However, the tribunal in this case did not feel the same principle would apply. In this case, the taxpayer would have received documents showing the new penalty levels (for example on the notice to file) and the Tribunal therefore felt that, “a person reasonably trying to meet their tax return filing responsibilities would have realised from reading any of these documents that the penalties had changed”.
However the tribunal judge did overturn the penalties on the basis that the individual did not have a UK tax liability at all and stated that, “he would not have met the “SA criteria” that HMRC use, and he would not have had any obligation to notify chargeability under s 7 Taxes Management Act 1970”. He was therefore, in the judge’s opinion, not legally obliged to complete the UK return. The penalties were therefore reduced to nil.
A recent VAT case heard by the First-Tier Tribunal (Gekko & Company Ltd v HMRC (TC06029)) highlighted worrying aspects of HMRC’s handling of the case and even awarded costs against HMRC. The Tribunal clearly felt strongly about the case, with the decision stretching over 29 pages for a case involving an assessment to VAT of £69 and three assessments of penalties of £780, £8.85 and £10.35 respectively.
The decision begins by stating that it , “is a great deal longer than we would ordinarily write in a case involving such small amounts: this is because there are a number of disturbing features about the way the case has been conducted by the respondents (HMRC).”
The case involved a property developer company who HMRC claimed had made errors on their VAT returns, with the biggest one being an omission of £5,200 of output tax (which the Tribunal later found to actually be £4,880).
The penalty notices were found to be invalid because the original assessments had been withdrawn and new ones had not in fact been issued. The tribunal found that, even if they had been valid, the penalty of £780 should have been reduced to nil as the behaviour was careless but the disclosure was unprompted and that the other two penalties should be cancelled as there was no inaccuracy.
In deciding to award costs to the taxpayers, the Tribunal were particularly critical of HMRC. We enclose a passage from this below regarding HMRC’s change of opinion from an unprompted to prompted disclosure:
“We consider, having thought about this long and hard, that there are two possible explanations for this volte face. One is that there was incompetence on a grand scale. The other is that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue. The facts that have caused us not to dismiss this possibility include the minimal information about the change with no explanation and the hopelessly muddled response with its spurious justification that Miss Pearce sent when the appellant spotted the change. Of course we have had no evidence from those involved and do not intend in this decision to make any findings about the matter. But it is something we have to take into account in deciding whether HMRC’s conduct in this case was unreasonable.”
The Tribunal cancelled the VAT and penalties and awarded costs to the taxpayer.
Overall, this case seems to echo our recent experiences with HMRC and shows a worrying trend in decreasing quality of HMRC case handling and emphasis on winning at all costs, regardless of the merits of individual cases.
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?
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.
Readers of our blogs will know we are always interested in cases analysing the extent of HMRC powers and how they should be used. The recent case of Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs demonstrates (again) that HMRC powers are not infinite. It also brings out some highly topical points:
1) In Raymond Tooth the taxpayer filed a tax claim which HMRC later decided to challenge. They had though missed their normal time limit on raising an enquiry, so had to raise a ‘discovery assessment’.
2) The definition of a ‘discovery’ made by HMRC is confirmed to be very wide in scope and may include “a change of opinion or correction of an oversight” by the Inspector of Taxes raising the discovery assessment.
3) The general points in Cotter are good law and emphasise the requirements for good disclosure by taxpayers and a clear explanation of how they have computed their self-assessment.
4) The burden is on HMRC to demonstrate that their extended time limits for assessments under ‘discovery’ may be used only where they are saying that the loss of tax was brought about ‘deliberately’. Deliberately means intentionally or knowingly (Duckitt v Farrand).
5) All praise to John Brookes (Tribunal Judge in this case). He basically eviscerated the HMRC case. He said with regard to the issue of extended time limits,
“In my judgment this [assessment] cannot be right. The deliberate (or indeed careless) conduct necessary to enable the issue of a discovery assessment and extend the time limits for doing so must involve more than the completion of a tax return which, in itself, is a deliberate act. As a person completing a return must do so intentionally or knowingly, and can hardly do so accidentally, HMRC’s argument effectively eliminates any distinction between ‘careless’ and ‘deliberate’…[their] attempt to argue otherwise, saying that if the wrong figures were entered in the right boxes it might be careless but if the right figures were entered in the wrong boxes it would be deliberate, was somewhat reminiscent of, and about as convincing as, Eric Morecambe’s riposte to Andre Previn about “playing all the notes, but not necessarily in the right order.”
6) The case can also be linked to current concerns about ‘Making Tax Digital’ (MTD).
Evidence was presented about the problems created by a computer glitch on how the alleged loss claim should be shown. The computer system adopted was a respectable one, approved by HMRC. However, apparently it would not cope with the proposed claim. The advice given to the taxpayer – to fit in with electronic filing, was thus to use a computer ‘work around’. As most people with appreciate, this is quite a common suggested solution, because computer programming is never perfect. The work around meant the loss claim went in the ‘wrong’ data input box, but the taxpayer described this in the ‘white space’ on the Return and the final answer came to what he believed was the correct net tax liability. Despite this, HMRC when they wished to dispute the loss claim, accused him of ‘deliberately’ causing an underpayment of tax. Whilst HMRC lost in this case, it is easy to imagine the dangers of accidental non-compliance caused by seeking to meet tight computer deadlines for making tax digital. Then it appears from cases such as this that such computer errors may be seen as something more sinister by HMRC. I believe this emphasises the risks of making such a system compulsory, before it is thoroughly field tested and people are familiar with it.
I am pleased to see that most commentary from the profession seems to agree with this line.
There is an interesting contrast in the apparent view of HMRC on a balanced system, in that the proposals suggest taxpayers are to be given a compulsory deadline for compliance every three months, whereas if they get it wrong HMRC should be entitled to a time limit of 20 years to challenge it.
Compliance is a delicate flower, worth preserving. If the proposals are brought in, how many businesses will simply drop off the radar if they get behind for a couple of returns and then fear they have neither the time nor resources to catch up again?
Do people believe the MTD and new penalty proposals are fair? If not please lobby to try to get them amended. If computer filing is going to be so popular, as claimed by HMRC, there should be no need for compulsion. Penalties should be levied on people committing deliberate wrongdoing, not mere bystanders.