A recent case at the Upper Tribunal considered this question with regard to late payment penalties charged on self-assessment tax returns (B Edwards v CRC, Upper Tribunal (Tax and Chancery Chamber).
The taxpayer incurred penalties in relation to his 2010-11, 2012-13 and 2013-14 self-assessment tax returns of £3,880 despite there being no tax due.
The taxpayer had already been unsuccessful at the First-Tier Tribunal and so appealed to the Upper Tribunal on the grounds that the notices to file returns had not been issued correctly and with the argument that the penalties were disproportionate to the tax due.
The taxpayer’s appeal was dismissed again. The Upper Tribunal found that there had been no error in law in the First-Tier Tribunal’s decision regarding the notices to file returns.
On the issue of proportionality, they found that in terms of the European Convention on Human Rights, the penalties were ‘harsh’ but not ‘plainly unfair’ and was therefore not a relevant ‘special circumstance’ which HMRC should have taken into account.
The moral of the story is therefore to file tax returns on time – even where there is no tax to pay! It is a requirement to file a return where a notice to file has been issued. Eaves and Co would be very happy to assist if you have a tax return that needs filing.
The recent High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, regarding specialist tax advice.
According to some media reports, the case means that accountants are required to advise on complex tax avoidance schemes, but the reality is slightly more subtle than that.
Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including his first tax returns in the 1980s.
The case therefore revolved around whether the accountants had been negligent in failing to notice his non-domicile status and the impact this would have on his UK tax position on making a gain. The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs.
In October 2004 his accountants considered the CGT position on Mr Mehjoo selling his shares in a company. Neither the firm’s general practice partner, nor the tax partner appeared to have considered the non-domicile status or the impact this could have.
The accountants claimed that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so. This was found to be not the case, in part due to the fact that they had provided such advice on a number of occasions without express instruction.
The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself.
Tax is complicated, and the ever increasing tax legislation means it is harder than ever to keep up-to-date. The key message for accountants is that they need to know enough to know that there is a problem, and seek out relevant specialists to assist. Please feel free to contact us if you feel you may need specialist tax advice for your clients.
In the recent case of Paul Weiser v HMRC (TC02178) the first tier tribunal considered the interpretation of the double tax treaty between the UK and Israel and in particular the meaning of the phrase “subject to tax”.
Article XI of the UK-Israel double tax treaty provides that UK source pensions will not be subject to UK tax where they are received by a resident of Israel and subject to Israel tax in respect thereof. However under Israeli tax rules, UK pension income is excluded from tax in Israel during the first 10 years of residence.
HM Revenue and Customs therefore argued that because the pension income was exempt from tax in Israel it could not be said to be subject to tax.
On the other hand, the taxpayer claimed that he is within the charge to tax in Israel by virtue of living there even though Israel does not levy tax on his UK pension income because of the exemption.
Following the decision in Bayfine UK v HMRC (STS 717) the tribunal found that the double tax treaty should be interpreted using a purposive rather than a literal approach. The primary purpose of the double tax treaty is to eliminate double tax and prevent the avoidance of tax, the purpose is not therefore to enable the double non taxation of income.
The case therefore centred around the meaning of the phrase “subject to tax” and the difference in international tax treaties between this phrase and the phrase “liable to tax”.
HM Revenue and Customs presented various examples of case law from other countries and academic articles that examine the distinctions between the two phrases. The tribunal noted that whilst such authorities are not determinative they are relevant.
In HM Revenue and Custom’s view, the distinction between the two phrases is that the expression “liable to tax” requires only an abstract liability to tax (i.e. a person is within the scope of tax generally irrespective of whether the country actually exercises the right to tax) and therefore has a much broader meaning than the phrase “subject to tax” which requires that tax is actually levied on the income.
The first tier tribunal decided the case in favour of HM Revenue and Customs such that relief was not available under the UK-Israel tax treaty to exempt the pension from UK tax because the pension was not subjected to tax in Israel.
The tribunal’s interpretation of the UK-Israel double tax treaty and meaning of “subject to tax” will be of interest to taxpayers relying on double tax treaties and those practitioners who advise on double tax treaties.
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.
The question as to whether or not monies are taxable as employment income is a common area of dispute in tax. However, the First Tier Tribunal case of Colin Collins v HMRC involved a particularly unusual set of circumstances to which the question needed to be applied.
The case itself involved the payment of $2 million by a former shareholder of a Company to the taxpayer who had worked for that Company, before subsequently leaving and later being re-employed under the new ownership.
The precise facts of the case led the Tribunal to consider that the payment amounted to a gift by the former shareholder. HM Revenue and Customs had contended that it was a payment in connection with the taxpayer’s former or current employment.
Of significant interest is that the Tribunal set out in their written judgement a list of key points that lead them to their decision:
Was the payment gratuitous?
Was the payment expected?
Was it proportionate (for example in terms of past salary)?
Was there any regularity in the payments?
Who made the payment?
Was there a time delay in making the payment and if so was this delay cosmetic?
What was the occasion/reason for the payment?
While the list is of interest, the old adage remains that each case must be considered on its own merits.
A recent Employment Appeal Tribunal case was of interest for tax purposes as it considered whether an individual was employed or self-employed in fairly unusual circumstances, as well as a related legal point on whether illegality in reporting the income from the engagement could prevent a claim being made in relation to the contract.
The case concerned Ms Quashie, who had worked as a dancer at Stringfellows from June 2007. An interesting element of the case concerns the fact that the dancers were not paid by the the club, but actually paid the club to be able to work there.
The tribunal considered whether the elements of control and mutual obligation still created an overarching “umbrella” contract of employment despite this.
The key factors appeared to be the requirement for dancers to turn up if they were rostered to appear, and a requirement to attend team meetings every Thursday morning. Fines were levied for failures to attend in these circumstances.
Based on these factors, the tribunal found that there was an employment contract which covered the full period of her engagement.
A further interesting aspect of the case related to illegality. Ms Quashie had completed tax returns on the basis that she was self-employed and had claimed a number of expenses which the tribunal believed had been misrepresented. These included £20 per week for the use of her home, motor expenses and “depreciation and loss of profit”.
The judge pointed out that false returns to HMRC can make the performance of a contract illegal and therefore prevent a claim being made by the taxpayer for a breach of the contract.
The case was referred to a full employment tribunal to consider Ms Quashie’s claim for breach of contract on the basis that she was employed but direction was given for the tribunal to consider the illegal performance aspect further.
The case of Orsman v HM Revenue and Customs (TC01921) highlights that care should be taken when attributing sale proceeds between land and ‘chattels’ such as fixtures and fittings.
In this case the taxpayer sold a property for £258,000 of which £8,000 was attributed to chattels and was not therefore included in the sale price for SDLT purposes.
The sale agreement contained a list of fixtures and fittings to which the £8,000 consideration related and this included (amongst other items) fitted units in the garage.
For SDLT purposes the value of fixtures and fittings that are ‘part of the land’ should be included in the sale proceeds for SDLT.
The rate of SDLT is 1% where the sale proceeds are between £125,000 and £250,000, rising to 3% where the proceeds are in excess of £250,000 but less than £500,000.
Therefore if some of the proceeds attributed to chattels were in fact attributable to the land then the rate of SDLT would increase from 1% to 3%.
In determining whether a chattel is part of the land the following two tests should be considered:
1. the degree of annexation of an item to the land (ie is furniture fixed to the wall, what damage would be caused by removing the item?)
2. what is the purpose of the annexation (for example, was the item put in place in order to better enjoy the land or the item?)
In this case the tribunal found that the fitted garage units were provided in order to increase enjoyment of the garage by creating a work space. Thus the value of the units (agreed to be £800) should have been included in the sale proceeds for SDLT purposes.
HM Revenue and Customs recently announced that a plumber who failed to disclose income tax of £91,000 has been jailed for tax fraud for 12 months.
This case highlights that HM Revenue and Customs are cracking down on tax evasion; clients and their advisers should carefully consider making voluntary disclosures now.
There are a number of disclosure schemes available which may offer benefits such as; reduced penalties, the ability to limit the number of years that HM Revenue and Customs may go back to assess tax, payment of tax by instalments and protection against criminal prosecution.
Current disclosure facilities include:
The Liechtenstein Disclosure Facility (LDF) – where taxpayers do not currently have assets in Liechtenstein it may be possible to transfer assets now so as to qualify for the terms of the LDF
E-Markets Disclosure Facility – this facility is aimed at people who sell goods or services on online websites (such as eBay or Amazon) and whose activities are treated as a trade for tax purposes
Electrician’s Tax Safe Plan (ETSP) – please note that the deadline to notify intention to disclose under this facility is 15 May 2012
The UK-Swiss Tax Treaty – whilst not strictly a disclosure facility the impact of the UK-Switzerland Tax Treaty should be considered carefully by those with undisclosed Swiss income.
At Eaves & Co we have experience of preparing voluntary disclosures and have successfully submitted disclosures under the LDF for a number of clients. For further advice regarding the disclosure of unpaid tax please contact Eaves & Co Specialist Tax Advisors’ Leeds office on 0113 244 3502.
HM Revenue & Customs (HMRC) raised assessments to PAYE and NIC’s for the years 1998/99 to 2006/07 totalling £3.6m on the basis that the consultants were employees of the taxpayer.
The taxpayer supplied individuals for counter and promotional work to major cosmetic companies at duty free shops at airports. It had a database of 100 individuals (consultants) upon which to call upon. The taxpayer was under no obligation to offer the consultants work and the consultants were under no obligation to accept work offered. In addition there were no formal contracts between the taxpayer and the cosmetic company or consultants.
Talentcore Ltd successfully appealed HMRC’s assessment to the First Tier Tribunal (FTT). HMRC then appealed to the Upper Tier Tribunal (UTT) challenging the FTT’s application of ITEPA 2003 s.44.
The rules state that the consultants would not be deemed to be employed by the taxpayer for Income Tax and NIC’s, if the individual was not:
(a) Providing, or under an obligation to provide personal services; or
(b) Subject to (or to the right of) supervision, direction or control.
The Tribunal found the consultants had complete freedom to arrange for substitutes if they wished. This amounted to an unfettered right to substitution. Therefore condition (a) was met as the consultant was not obliged to perform the services personally.
The Judge dismissed HMRC’s appeal saying “Since the First Tier Triubunal held, correctly in my judgment, that the terms of the contract did not oblige the consultant to provide the services personally, it is not an ‘agency contract’”.
The case shows if it is possible to structure contracts so that either or both of the conditions (personal service and supervision) are not met, then PAYE and NIC obligations can be avoided when providing temporary workers.