Here are some interesting questions. Well, I think them interesting anyway!
1. If we ‘do Brexit’, will we persist with VAT?
2. If so, how will it be administered, bearing in mind the current cross-border arrangements?
3. Will the European Court remain supreme, in terms of judicial opinion and interpretation?
4. On direct taxes, will we revert to double tax treaties, rather than the various European Directives?
5. If so, from what date?
6. If we do leave the EU, will the Courts go back to the ‘literal’ approach to interpreting tax legislation, a la Justice Rowlatt, or will it continue to dabble in the ‘purposive’ approach?
7. In the context of the above how would anyone define ‘The Purpose of Parliament’, in terms of (say) the formulae in the Emloyee Security/Benefit rules?
Je ne sais pas?
Opinions, s’il vous plait.

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.

Many Accountants and Tax Advisors will have a number of Trusts as their clients.  They may or may not have known that the ‘Rule in Hastings-Bass’ referred to a legal defence Trustees could use to prevent HMRC collecting tax on steps which resulted in extra tax liabilities [NB:  Those who thought the Hastings-Bass rule was to do with the offerings of a South Coast pub should read on to protect their PI insurance].  Effectively, the Hastings-Bass rule was used as a way to unwind actions which had unexpected, adverse tax effects.  Essentially, it was a ‘Get out of Jail Free’ card.

Trusts are often misunderstood.  They have suffered recent adverse publicity, but they can still serve valuable roles in protecting minors, the vulnerable and inter-generational family wealth.  This is the reason many Trustees may only be involved in one Trust, and many Advisors will only have a few on their client list.  Such diversity is helpful, in my opinion, because it keeps those most affected by the outcome closely involved in the decision making process.  The underlying personal and commercial issues are generally more important, and those who are close can give a more balanced view, than just technical input.  It does not stop the latter being important though.

This month the Supreme Court issued its judgement in Futter and Another v The Commissioners for HM Revenue and Customs and Pitt and Another v The Commissioners for HM Revenue and Customs.  They were disparaging about the Hastings-Bass rule and Trustees claiming that they had acted in an ‘un-Trustee like fashion’ such that they should be able to void as a ‘mistake’ actions which gave rise to an unexpected tax bill.  The Supreme Court compared such a defence with the lack of relief which would be due to an individual beneficial owner of property who may have made a similar mistake.

The Court Opinion is elegantly written but raises a number of potentially complex issues for advisors.  Those who may be affected should read the judgement carefully.  Perhaps the first thing which springs to mind though is that Trustees and Advisors need to protect their own interests (as well as the Trusts) by ensuring they have evidence of obtaining appropriate professional advice.

The Supreme Court recently upheld the Court of Appeal’s decision that Mr
Gaines-Cooper was a resident of the UK despite spending the majority of his
time in the Seychelles.

Mr Gaines-Cooper’s main argument centred on the application by HMRC of their guidance set out in the IR20 booklet on residence.  This has since been replaced by HMRC6.

Despite following HMRC’s guidance on residence, Mr Gaines-Cooper was found to be UK resident.  The case revolved around whether there was an ‘implied’ requirement for there to be a distinct break from the UK in order to become non-UK resident.

The case highlights the fact that HMRC guidance is not the law, and following it will not necessarily provide protection. Similar principles have applied in the taxpayers’ favour in recent cases on ‘reasonable excuse’ which have found HMRC’s guidance to be stricter than the actual wording of the legislation.

Going forward, the new statutory rules on residency should provide taxpayers with more clarity, however for prior years the case law principles will still apply.

The importance of substitution in determining employment status was again confirmed in the recent Supreme court case, Autoclenz v Belcher.  The case arose from an employment law perspective rather than taxation, however the principles will apply across the board.

Autoclenz provide car cleaning services and the case involved a number of valeters who had been engaged as self-employed workers, although it was Autoclenz that drew up the contracts.

The contracts explicitly stated that the valeters were self-employed and provided a right of substitution.  The court found that if a genuine right of substitution exists this “negates an obligation to perform work personally and is inconsistent with employee status”.  A genuine right of substitution would therefore mean the valeters had to be self-employed.

The court found however, that it is possible for the written contract to be seen
through, in cases where the way in which the parties practice is so persuasive that they show the true obligations of the parties.

In this case, the court found that there was no right of substitution in practice;
the valeters had to do the work personally and were not in fact in business on
their own account.  They were therefore found to be employees regardless of the contract.

 At Eaves and Co, Specialist Tax Advisors, we have always advised that it is best practice to ensure that the written contracts are consistent with the actual
facts and practices.  It is now more important than ever to ensure that this advice is followed.

In October 2010, the Court of Appeal judged that legal professional privilege should not be extended to accountants and would only apply to qualified lawyers.  The case is Prudential v HMRC.

However The Supreme Court has now granted leave for an appeal to be made against the Court of Appeal’s decision, which is somewhat unexpected. 

The case could have a significant impact on the documents which HMRC are able to attain from accountants in tax investigation cases.