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.

HMRC Wins Cotter Appeal on Tax Collection – But Still Hope For Some Taxpayers

The verdict of HMRC’s appeal to the Supreme Court in Cotter v HMRC has now been released.  The case concerned procedural matters as to whether a claim for loss relief was included on a return and therefore under which regime HMRC could raise an enquiry.  Whilst this sounds dull, HMRC publicity is announcing at as a victory over “tax avoidance” enabling it to collect an extra £500m.

The Supreme Court found in favour of HMRC in the case of Cotter. However, it was on a very narrow point and  hope remains, following the verdict, for taxpayers who calculated their own tax liabilities.

Background

The taxpayer, Mr Cotter, filed his tax return for the 2007/08 tax year on 31 October 2008.  He did not make a claim for loss relief and left HMRC to calculate the tax.

In January 2009, Mr Cotter’s accountants wrote to HMRC enclosing a “provisional 2007/08 loss relief claim” with amendments to his 2007/08 tax return.  They stated that no further tax would be due for 2007/08 but did not provide a tax calculation.

HMRC amended the return and opened an enquiry into the return but refused to give effect to any credit arising from the loss relief claim.  They held that the claim had not been made in a return and as such were not required to give effect to the claim until the enquiry was closed.

HMRC eventually issued legal proceedings for collection of the tax at the County Court, and a series of cases ensued.  In February 2012, the Court of Appeal found in favour of Mr Cotter, finding that HMRC would have to raise an enquiry under Section 9A of TMA 1970, thus giving Mr Cotter the right to appeal and postpone the tax until resolution.

Supreme Court Decision

The Supreme Court found that where the taxpayer had included information in his tax return that did not feed into the year’s calculation, it did not mean that HMRC were obliged to give effect to it. The tax return form includes other requests for information which do not impact on the income tax chargeable for the year, and as such the word “return” should refer to “information in the tax return which is submitted ‘for the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax’ for the relevant year”.

As Mr Cotter had not calculated the tax due, HMRC were not required to include a claim for 2008/09 loss relief in the 2007/08 assessment.

However, Lord Hodge noted that “matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by…completing the tax calculation summary pages of the tax return”.  By including a calculation with the tax return, the calculation then becomes part of the self-assessment and must be enquired into under section 9A.  “The Revenue could not go behind the taxpayer’s self-assessment without either amending the return or instituting an enquiry under Section 9A of TMA”; with either option providing the taxpayer with an opportunity to appeal.

It is also worth noting that Lord Hodge suggests that HMRC could remove uncertainty in the tax return by highlighting which boxes are not deemed relevant to that tax year’s calculation.

Conclusion

We now have an interesting situation whereby HMRC have won their appeal on Cotter, but the verdict may not have the level of impact that HMRC were hoping for, as taxpayers who calculated their own tax liabilities ought, from reading the case, to be able to use the decision to their advantage.

It remains to be seen how HMRC will seek to apply the decision to such cases, and whether they will update their tax return forms as suggested by Lord Hodge.

Taxpayers who may be affected by the decision should take further advice before surrendering to a new HMRC demand which may not be valid.

The CDF – HMRC’s Contractual Disclosure Facility

The Contractual Disclosure Facility or CDF is the new way in which HMRC tackle suspected tax fraud.

The CDF facility provides an option for the taxpayer to declare all their tax irregularities and settle them along with interest and penalties.  In return HMRC will not bring criminal charges, provided the declarations under the CDF are complete and accurate.

We have seen a number of examples of HMRC applying the new CDF process recently.  It is important to note if the taxpayer does decide to make a detailed declaration that good consideration should be given the content of the “Outline Disclosure” that HMRC request within 60 days of their initial letter.   HMRC do put a lot of emphasis on what was said in the Online Disclosure during the rest of their investigation, in terms of penalties and threatening to bring criminal charges.

Tax Investigations and Enquiries – The Importance of Advisors

With recent crackdowns on tax avoidance (highlighted by media coverage), and the introduction of a number of HMRC task forces, the spectre of tax investigations and enquiries is more apparent than ever.

Qualified tax advisors can help by giving advice on HMRC powers and procedures; disclosures, penalties and negotiating settlements when HMRC undertake investigation proceedings.

Such investigations can involve both business and individuals, including those involving potential allegations of serious fraud and Proceeds of Crime Act implications.

More commonly, HMRC will adopt a civil settlement approach, where experience in preparing relevant disclosure reports and negotiating settlements can be vital in ensuring that the taxpayer is able to settle the problem areas in as efficient and cost-effective manner as possible.

Serious investigations can be traumatic, exerting significant pressure on both business and family life. Having experienced advisors is an essential part of the objective of reaching a satisfactory settlement with as little drama as possible.

Technical Enquiries cover another aspect of possible dispute with HMRC.  They give the ideal opportunity to deal with potentially grey areas in the legislation, to ensure the client is defended robustly.

Despite the claimed ‘simplification’ of tax rules, the volume of tax legislation continues to increase. The 2012 Finance Bill was the largest ever, weighing in at 686 pages. With this ever-increasing pool of rules, it is inevitable that gaps in the intended legislation will occur.

Experience tax advisors are vital to ensure that the taxpayer’s position is represented fully in such situations. Eaves and Co are very experienced and specialise in providing advice on these sorts of tricky areas and would be delighted to hear from anyone with such concerns.

Is an Accountant’s Negligence a Client’s Negligence? (TC02208)

In the recent case of Mr Shakoor v HMRC, the appellant had failed to disclose the sale of two flats in July 2003 which resulted in significant capital gains. HMRC subsequently raised a discovery assessment for CGT of £49,014 plus a penalty of 70%.

The appellant contended the penalty on the basis that he had taken reasonable care by seeking advice from his accountant. He said the failure to disclose the gain was as a result of negligent advice from his accountant.

The accountant did advise that there was no CGT to pay, and that the disposal of the properties was not reportable on the tax return. However the accountant kept no notes of his advice but said he had relied upon two extra-statutory concessions relating to private residence relief. These clearly did not apply as the appellant had never resided in either property but the taxpayer asked for no explanation of this advice.

The Tribunal found that the taxpayer must have been aware that CGT was due on the properties, and it appeared to be “a case of shutting one’s eyes to what either was or ought reasonably have been seen as incorrect advice”.

The Tribunal did in fact cut the penalty to 30% giving the appellant the “benefit of the doubt” as a result of the poor advice given by his adviser. It observed that the appellant was content to “take a chance on the basis that his accountant had given him comfort, albeit in the rather dubious circumstances”

Deferred Payments – CGT on Sale of Shares – Tax Advice

A fairly common feature on a sale of shares in a private company is an element of consideration which is delayed, either for a set period of time or based on certain conditions being met.

The tax impact of these innocuous looking payments can often be surprising and can lead to unwanted tax liabilities arising before any funds have been received.  In most cases, the tax will be payable in the year following disposal, regardless of when the deferred proceeds are received.

In a recent case which Eaves and Co have been involved with following an HMRC enquiry, a sale was agreed with an element of the sale price becoming payable only when dividends were paid by the company in the future.  No tax advice was sought at the time the sale was agreed.

HMRC had stated that the contract was unconditional and that the proceeds were simply deferred.

Our analysis was that the payments are contingent, as something has to happen (the payment of dividends) before the amounts are due.  However, having established that the payments are contingent, we then have to determine whether the proceeds are ascertainable or not.

If the proceeds are ascertainable, they will be taxed in full as part of the proceeds of the disposal, despite the fact that they may not become payable until some time into the future.  The position is more complex if the proceeds are unascertainable, as the value of the right to receive the funds in the future is taxed on the original disposal.

In this case, the chances of dividends being declared are thought to be low, and as such the right could potentially be valued at a substantial discount and therefore bring down the initial tax cost.

The distinction between ascertainable and unascertainable can be quite subtle, but the key is whether or not all the events that can affect the amount occur before the disposal.  For example, where the proceeds are based on a percentage of future profits, this would be unascertainable as the future profits are not known at the date of the sale.

We successfully argued that the payments in this case are unascertainable, because whilst there is a limit on the maximum that can be received, there is no way to determine what dividends will be declared in the future.

HMRC confirmed that they accept our position, despite having previously argued that the payments were not even contingent.  We have begun negotiations with HMRC as to the value of the potential right to future consideration and have begun with a low valuation due to the facts of the case and the likelihood that any funds will be received in the future.  The downside to this is that any further receipts would be taxable without Entrepreneurs’ relief being available, however the cashflow benefits are thought to outweigh this drawback.

The key point is that taking tax advice at the time of the disposal would have prevented this unexpected tax treatment, and the contract could have been worded in order to provide a more clear outcome without the expense of negotiating with HMRC.

HMRC Targets Electricians in New Disclosure

On 14 February 2012 HMRC launched a tax amnesty aimed at electricians called the Electricians’ Tax Safe Plan (ETSP). Initially around 50,000 individuals will be sent letters inviting them to report previously undisclosed earnings.

Individuals who disclose using the ESTP will only have to report undeclared income from the last six tax years and will suffer a reduced penalty of between 10% and 20% of the tax due.

To disclose using the ETSP, the individual must notify HMRC of their intention by 15 May 2012, with the deadline for finalising the disclosure and payment being 14 August 2012.

HMRC have warned that electricians who have undisclosed income and do not come forward may face criminal investigation and prosecution.

If you would like assistance in making a disclosure, Eaves and Co would be happy to assist.  Please call our Leeds office on 0113 2443502.

Business Property Relief (BPR) on Holiday Rental Property

Important Update: See details of Upper-tier Tribunal ruling here

The taxpayers, challenged an HMRC decision to deny business property relief (BPR) on their late mother’s share of a property. The property was let fully furnished as a holiday home.

The case (N V Pawson (deceased) (TC1748)) was heard by the First-tier Tribunal, who accepted the property had been run as a business for the requisite two years before the taxpayer’s death.   It had been profitable for two of the three years before the mother died and the tribunal was therefore satisfied that the business was being run with a view to gain.

It was then necessary for the tribunal to decide whether the business was one that consisted wholly or mainly of the holding of an investment, with the judge concluding that, “an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading”.

The property was a business asset being used to provide a service and was not equivalent to holding an investment; the taxpayer’s appeal was therefore allowed.

The case will be of interest to taxpayers operating holiday rentals where the activities can be shown to constitute a business.

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.

Take Advice and then Action

The Tax Tribunal heard that Mr Shanthiratnam cashed in 1/3 of a bond as collateral for his business.

When he submitted his tax return HMRC enquired and corrected his tax return so that his tax bill was increased by about £20,000.  Had he gone about sourcing collateral from his bonds in a different way he could have avoided further tax.

The Judge said he sympathised with the taxpayers view that double tax had been suffered; but that he should have understood what the tax result of his actions would be, before proceeding.  The taxpayer’s appeal against the additional bill was dismissed.