Recent tax case law has brought out some interesting points on how the Courts view operational issues.

1. Tax avoidance schemes associated with the film industry seem to follow inevitably (with various complications) from the complex tax reliefs which are designed to promote film finance. It seems to lead to a slightly odd dichotomy where the Chancellor sets law to give relief on film investment and is then surprised and upset when schemes are set up to exploit the reliefs. In Samarkand the tax avoidance scheme failed, partly because the Courts found emails which included phrases such as ‘Don’t mention this, it smells of pre-ordained’. This reinforced HMRC’s case that the scheme was not a straightforward use of the relief, but an artificial tax avoidance scheme, with no real commercial substance. A good rule of thumb would be to train staff not to put anything on file which they would be embarrassed to read out in court.

2. An interesting one in terms of postal submissions is the recent case of O’Keeffe. The taxpayer claimed his wife had posted his Return some weeks before the deadline. HMRC said they had not received it until a month after the deadline. They succeeded with their imposition of a late filing penalty.

Whilst the First Tier Tribunal agreed that mail may go astray, which could be a reasonable excuse, there was no proof of postage in this case. It would be interesting to hear what evidence HMRC put forward in terms of date of receipt, as mail does seem to go astray more often than it used to and with the closure of so many Post Offices obtaining routine proof of postage would be difficult for many.

3. Final procedural point – and statement of the obvious – encourage clients to keep proper records. The lack of a clear trail of what was owing led to the taxpayer in Michiels losing a bad debt relief claim against profit, because on balance the outstanding sums related to a later period.

A recent tribunal case (F Berrier v HMRC – TC03584) involved the use of a relatively little known aspect of the legislation, namely that HMRC have the power to reduce penalties, “if they think it right because of special circumstances” (FA 2007, Sch 24, para 11).  The more cynical might suggest that HMRC might never think it right to reduce a penalty, but a recent case showed that the courts may have the power to apply such reductions as well.

Background and Facts

The taxpayer began working for a securities broker in 2009 and received a sum of £25,000 in addition to his starting salary.  He claimed to believe this was a “golden hello”, but his employers were treating it as a “forgivable loan”, as noted in his employment statement.

The loan was subsequently written off in February 2011, and it included on his P11D as a taxable benefit for the 2010/11 tax year.  He was also provided with a note telling him to include the amount in his tax return for the year.

One completing his return, however, he did not include the loan. HMRC amended the return to include the £25,000 and levied a penalty for carelessness.

The taxpayer appealed the penalty, as he had referred to the sum in his 2009/10 return.

Tribunal Decision

The First-tier Tribunal agreed that the sum was a loan, and therefore the taxpayer was liable to income tax when the loan was written off under ITEPA 2003, s.62 and on the beneficial interest rate (i.e. 0%) under s.175. The charges were applicable to the 2010/11 tax year.

The tribunal found that the taxpayer should have shown this income on his 2010/11 return and agreed that the omission was careless.  He did not have reasonable excuse, as his claim that his wife had tidied away the P11D only made matters worse.  He should have gathered together the necessary documents before preparing his return.

However, as the taxpayer had referred to the loan on his 2009/10 return and therefore drawn HMRC’s attention to it, the tribunal felt that there were special circumstances under FA 2007, Sch 24 para 11 and that HMRC’s decision not to apply a reduction under this provision was incorrect.  The tribunal therefore applied a 25% reduction to the penalties.

The facts of this case were perhaps quite unusual, however it demonstrates the importance of pursuing all aspects of the legislation that could provide taxpayers with a reduction on penalties; seeking reductions due to special circumstances could well be another option where the a “reasonable excuse” cannot be applied to entirely wipe out a penalty.

Under the new penalty regime, which covers the majority of taxes, there are minimum and maximum penalty levels prescribed under the legislation based upon the behaviour and quality of disclosure made by a taxpayer.

However many are unaware that HMRC have the discretion to reduce a penalty below the minimum percentage if the failure (resulting in a penalty) arises as a result of ‘special circumstances’.

HMRC guidance states that this means the circumstances have to be  “exceptional”. However a recent tax tribunal found that if this definition was used the results would be too restrictive.  The judge said  that special circumstances were more akin to “something out of the ordinary, something unknown” and therefore they did not necessarily have to be exceptional.

The effect of this  was that HMRC had not correctly considered whether “special circumstances” applied.  Upon considering the facts the tribunal found that ‘special circumstances’ did in fact apply and therefore the original penalty was reduced by 60%.

It will be interesting to see whether HMRC use their power of discretion to reduce a penalty more widely in light of this case.