HMRC: Reasonable Excuses and Suspended Penalties

Many years ago, as a young Inspector of Taxes, my District Inspector taught me not to take a harsh line on “late” submissions on behalf of the Inland Revenue.  His policy was that it was not the job of the Government to fine or penalise citizens if they were broadly trying to comply with their tax obligations but were slightly late in doing so.  The thinking behind this idea was that people were far more likely to be co-operative and compliant – factors key in having a capable and cost effective tax system – if citizens felt they were dealing with people who were reasonable and flexible, rather than hide bound by bureaucratic rules.

Perhaps as a result of such benevolent views, Accountants rarely thought about questions of Revenue powers and procedures, trusting the administrative reasonableness of the ‘Powers that be’.  It appears to me that such flexibility and judgement has been eroded from the Revenue lexicon.  This may be because of a desire to be more consistent, but in any event Accountants should help clients by considering carefully whether penalties have been correctly and legally levied or whether they can be eliminated or mitigated via concepts such as reasonable excuse or the use of suspended penalties.

Examples of cases where the Revenue line taken to the courts could appear harsh include;-

Cotter, where the Revenue sought to deny a taxpayer the right to claim a stand over of collection of tax which was in dispute pending resolution of the appeal.  The taxpayer won in the Court of Appeal, but HMRC are now taking it to the Supreme Court, demonstrating their effective limitless resources compared to individual taxpayers.

Business Women’s Coaching, where the taxpayer was fined for filing a return due by 31 December on 11 February.  The return in question was updated as originally it had been submitted on 9 December, but was then rejected as being incomplete.  The taxpayers did not advance a ‘reasonable excuse’ so their appeal was rejected, but would taxpayers consider HMRC’s behaviour as reasonable and proportionate in imposing a fine on being just 6 weeks late in adding extra material to a return originally submitted in time?

F Weerasinghe, where an accountant had lost the client’s papers and HMRC then rejected updated figures from a new accountant on the basis that they were too late.  The taxpayer won on a technicality because the tribunal held the time limits did not apply, because HMRC had not issued a formal demand for the Return in question.  They also found that the taxpayers figures appeared more reliable than those calculated by HMRC.

Hard cases make bad law and HMRC have a very difficult job to do.  It is a question of balance but perhaps it may be worth reflecting on the original responsibility of the Inland Revenue for the “care and management” of the tax system in Section 1 of the Taxes Management act 1970.  This was changed in 2005 to “collection and management”.  Maybe a little more “care” to mitigate pure “collection” may pay dividends in keeping taxpayers happy and compliant?

The other lesson is that accountants should be helping their clients by seeking to identify circumstances winthin the scope of “reasonable excuse” or the regime for suspending penalties.

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.

Tribunal Finds Against Services Partnership – Car Benefits

D J Cooper and Partners was formed as a partnership to provide services to one customer.  The customer was a limited company which traded as a builders merchants.  The partners were also shareholders / directors of the limited company.

HMRC challenged the tax treatment of cars which were owned by the partnership and used by the partners (who were also directors of the limited company).  HMRC said that the directors of the limited company should have declared a benefit in kind for usage of the cars which they said were provided because of their office.

The tribunal case hinged on the commerciality of the arrangements and the court held that the partnership was wholly dependent on the company.  This structure would not have existed without the connection and the partnership was seen as an attempt to avoid paying tax on what was primarily a personal benefit.

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 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.

HMRC – Alternative Dispute Resolution

HM Revenue and Customs have issued draft guidance on the use of Alternative Dispute Resolution (ADR) to resolve tax disputes.  The draft guidance is available at http://www.hmrc.gov.uk/practitioners/lss-intro.htm

If you/your client have reached an impasse in a dispute with HM Revenue and Customs and believe that the issue could be resolved without the need for litigation then ADR could  be suitable for you.

HM Revenue and Customs believe that in certain cases, ADR may be a cost effective alternative to litigation through the Tribunal/Court system.

Under ADR, different types of mediation may be used depending on the nature and status of the dispute:

  • Facilitative mediation – the mediator tries to bring the two sides together but without offering an opinion on the merits of each side’s arguments.
  • Evaluative mediation – similar to facilitative mediation however the mediator will offer an opinion.
  • Expert determination – uses a third party expert, such as a valuer, to provide a view.

Eaves & Co have extensive experience with tax investigations and enquiries. For more information please contact Paul Davison on 0113 2443502.

Success for our Client

After 18 months of correspondence with HMRC we are proud to mention an excellent outcome for an Eaves & Co client.

The case revolved around whether a late election should be allowed. HMRC resisted the election until the pressure to bear from Eaves & Co regarding case law and the legislation became too much.

A significant amount of tax, interest and penalties will be saved by the client, which is down to our thorough and robust approach.

If you are under a tax investigation and live in Yorkshire or Lancashire call Eaves & Co for an initial conversation.

Employer Financed Retirement Benefit Schemes: Going Down?

An Employer Financed Retirement Benefit Schemes (EFRBS) is a pension scheme that is unqualified.

Contributions into EFRBS are tax neutral, between employer and employee.

In recent times they have become increasingly popular with footballers and bank staff. They are routinely offered as part of contract negotiations. The trusts’ funds can be used to buy assets such as property and can for example, be very attractive to foreign players who intend to leave the UK when they finish their football careers.

An EFRBS can be used as part of a tax strategy for owner managed businesses also. However, the Treasury and HMRC has announced that they intend to shut the opportunity, and limit contributions to EFRBS to the same level of contributions that will be permitted to qualifying pension schemes.

For alternative tax planning methods or to talk about EFRBS why not give our Leeds office a call?

Construction Industry Scheme (CIS) in Leeds

The Construction Industry Scheme remains a difficult beast with which to comply.

Here at Eaves & Co in Leeds we are dealing with a case where tax was not deducted by a contractor on a certain category of payment to its subcontractors.

The case has been ongoing for a good of time and we have been introduced to mitigate the CIS tax exposure to the contractor.  Our well considered case that the contractor took “reasonable care” in implementing the CIS has been put to HMRC.  We await to hear whilst still claiming evidence that the subcontractors have actually paid all relevant taxes, which is the second line of defence.

Reasonable excuse is a well tested path in CIS terminology with a number of recent cases taken to Tribunal in attempt to avoid the consequences of non-CIS compliance.  We expect our case of reasonable care to be thoroughly tested by HMRC.