Payroll Schemes and the Isle of Man Disclosure Facility

Over the years, a number of agency workers and related workers, will have entered into arrangements to try to reduce their tax burdens.  In certain cases, these may have involved Payroll Schemes run through the Isle of Man.

HMRC have been cracking down on such schemes for a number of years and have been successful in pulling them apart in a number of cases.  With the original scheme providers often no long in existence, the tax is pursued from the end users of the scheme, potentially leading to financial hardship, especially when interest and penalties are also brought into the equation.

In appropriate circumstances, the Isle of Man Disclosure Facility (MDF) could provide an option for users of such schemes to come forward and pay the tax at a reduced penalty rate.  The MDF provides a useful framework for making disclosures and would enable the taxpayer to start again with a clean slate.  In our experience, this feeling of relief is often the most significant outcome for clients from disclosing.

Eaves and Co have had extensive experience in dealing with the Liechtenstein Disclosure Facility, which operated in a similar manner, and can bring this experience to bear in assisting with a disclosure under the MDF.

For more details on the terms of the MDF, please see our earlier post here.  If you think you may be able to benefit from the MDF, please do not hesitate to contact us.

Principal Private Residence: The Importance of Intention

D Morgan (TC2596)

The first-tier tribunal case dealt with the taxpayer’s claim for principal private residence relief (PPR). The area of contention was whether the taxpayer’s occupation of the property was sufficient to justify its description as his residence for PPR purposes.

The key message from the outcome of this case is that, according to the tribunal, it is a taxpayer’s intention, and not the quality of the occupation, that is more important in determing whether the relief applies.

Background

The taxpayer purchased the property with the intention of moving into it with his fiancée, and making it their marital home. However, shortly before completion his fiancée broke off the engagement suddenly, giving no explanation.

The taxpayer, on the lack of evidence to the contrary, felt that his fiancée was merely having cold feet. He assumed that they would soon reconcile and she would move into his new house with him. He therefore went ahead with the property purchase and moved in.

Some weeks later it became apparent that they were not going to reconcile as she was seeing someone else. The taxpayer, whilst purchasing the property in his own name, had budgeted on his fiancée paying for groceries and household bills etc. As a result this left him in financial trouble and he had to assess his options.

After living in the property 3 months the taxpayer moved back in with his parents and rented the property out. The property was rented out for just under 5 years, at which point the taxpayer moved back in with the intention of selling the property. The property was then sold within 4 months.

HMRC assessed the taxpayer to capital gains tax on the gain, saying that the two periods he had stayed in the property had been temporary and it therefore did not qualify for principal private residence relief.

The taxpayer appealed.

Ruling

The tribunal said the case was “extremely finely balanced”. It was their view that it is not the ‘quality’ of the occupation, but the intention of the occupier that matters when determining whether or not the property is an individual’s principal private residence.

If Mr Morgan had moved into the property fully furnished, and all the bills had been addressed to him personally, and if he had already intended to let the property, then the quality of his occupation would be irrelevant.

The tribunal accepted the taxpayer’s assertion that he had hoped, when he occupied the house, that his fiancée might return. Therefore when purchasing the property he had intended for it to become his principal private residence.

After learning his fiancée would not be returning, an early repayment charge clause in the mortgage made it clear it would have been financially unviable to sell the property straightaway. Therefore the tribunal said that it was understandable that, after he found the cost of living too high, the taxpayer decided to let the property and move back in with his parents.

The taxpayer’s appeal was allowed and he was entitled to principal private residence relief.

Liechtenstein Disclosure Facility (LDF): Further Update from HMRC

HMRC have written to tax advisors who have taken part in the Liechtenstein disclosure facility (LDF), informing them on common errors that lead to “unnecessary delays” in the system.

From 1 April 2013, HMRC have said they will be taking a more robust stance on whether LDF certificates are issued in such circumstances.  Incomplete disclosures may be taken as a sign of lack of co-operation, leading to the withdrawal of the beneficial terms under the facility.

According to HMRC, the most frequently omitted items are:

  • A narrative explanation detailing the background to the previously undisclosed items;
  • Computations showing how the taxable figures in the disclosure have been arrived at;
  • A fully completed certificate of full disclosure;
  • The statement of assets and liabilities at the end of the final year covered by the disclosure;
  • Completed letter of offer; and
  • Full payment of the tax, interest and penalties due in the offer.

It is therefore essential to take suitable advice from experienced advisors, in order to ensure the terms of the LDF can be met.  Eaves and Co have successfully completed a number of disclosures under the LDF and would be happy to assist.

 

HMRC Crackdown on Tax Evaders Continues

HMRC’s crackdown on tax evaders continues. A recent case saw a London barrister being convicted of tax fraud and sentenced to 3 and a half years in prison. HMRC investigators found he had failed to declare or pay over £600,000 of VAT over 12 years.

Mr Pershad’s VAT registration was cancelled by HMRC in 2003 with effect from 1999, after a history of failure to submit tax returns and also not telling HMRC about a change of address. This resulted in him being unable to legally trade above the VAT threshold, which was between £54,000 in 2001 and £67,000 in 2008.

On completion and submission of his self-assessment tax returns, they showed his income had increased from £85,000 in 2001 to £346,000 in 2008, hence breaching the VAT registration limit.

During this time he continued to use his invalid VAT number on invoices, hence collecting the VAT on the fees he charged his clients but keeping the money for himself.

In another case, two businessmen have been jailed for fraud and tax evasion after hiding £500,000 in offshore bank accounts over a 6 year period.

The business men were given the opportunity to disclose their offshore accounts through HM Revenue & Customs’ Offshore Disclosure Facility (ODF). One of the two men did not register for the facility whilst the other only disclosed one of the 12 accounts he controlled.

The men ran a company offering computer technology to the automotive industry, with many of their clients based in Germany. After close inspection, sales in Germany were in the region of £1.26m, while only £49,650 of this money in sales for the same period was declared to HM Revenue & Customs. The balance was divided into offshore accounts of five shell companies registered in Mauritius and the Isle of Man, created solely for the purpose of tax fraud.

The men were jailed for 15 months and 12 months respectively. Confiscation orders were issued under Proceeds of Crime legislation in respect of amounts totaling £500,000 which must be paid within 24 months or the men will be jailed for a further 15 and 12 months respectively.

Penalty for Late payment of PAYE challenged on grounds of disproportionality

In the recent case of Franco Vargo UK Limited, the company appealed against a penalty of around £4,500 for the late payment of PAYE for numerous months in the tax year 2011/12.

Background

The appellant company had its head office in Italy. The UK branch of the company was in financial difficulty and was receiving funds from the head office. The appellant’s accountants paid the salaries and informed the company of how much PAYE was payable.

A letter was sent to the accountants saying that PAYE was due for payment, but the appellant was not aware of a PAYE liability being outstanding. Even if they had known they were not in a position to pay the liability until they received funds from Italy.

HMRC had records showing that the appellant had been contacted on several occasions and that messages had been left on an answer phone on one occasion.

Appellant’s case

Mr Earle, a director of the appellant stated that it had not been realised that a problem existed and that the problem had been left too long without any action being taken.

He informed the tribunal that the appellant had no answer phone so it would have been hard for HM Revenue & Customs to have left a message as suggested was the case. He also stated that due to its nature, the business always had someone available to answer its telephone and, as such, any attempts to contact the appellant would have been successful.

Mr Earle claimed that the amount of the penalty was disproportionate and that there was a duty of care on HMRC’s part to inform the appellant.

HMRC’s case

Mrs Orimoloye stated that HMRC had spoken to Mr Newman, the accounts manager, and that no mitigation of the penalties was possible as they had complied with the legislation.

She suggested that the appellant’s accountants should have informed the appellant of the penalty regime and that there had been history of late payments in prior years and that the appeal should be dismissed.

Decision

The tribunal found that the penalty was not disproportionate as it was imposed correctly under the legislation.

They also found that Mr Newman, the accounts manager had spoken to HMRC and that the appellant’s accountants should have notified the appellant of a liability being due. However, the tribunal were somewhat concerned that HMRC claimed to have left an answer phone message when the appellant did not possess an answer phone.

The appeal was allowed in part and the penalty in respect to the first 2 of the 11 months outstanding was cancelled as it was accepted that the appellant had no option but to wait for funds from Italy.

The following 9 months penalties were upheld on the grounds that the accounts manager had spoken to HMRC and should have taken steps to understand the situation.

HMRC Wins Important Business Travel Expenses Case: Dr Samadian

A recent test case was heard by the tax tribunal regarding whether certain business travel expenses were allowable, in terms of the interpretation of the “wholly and exclusively” rules.

Summary

Dr Samadian worked full time as an employee for the NHS at two hospitals in London and had a permanent NHS office. He also worked at two private hospitals holding weekly out-patient sessions.

The tribunal acknowledged that Dr Samadian had a dedicated office in his home which was necessary for his professional activity; however the Tribunal did not accept that Dr Samadian’s home office could be treated as the start for calculating his allowable private practice business mileage for habitual journeys.

The decision could potentially have an impact on all self-employed professions in cases where there is a home office and another business base from which they operate on a regular basis.

Taxpayer’s Case

The taxpayer argued that the business base should be regarded as the place from which the business is run and not the place where the professional services are carried out (as was argued by HMRC).

In particular the taxpayer said there was no general principle that meant any travel to/from a taxpayer’s home must always be disallowable due to having an element of non-business duality. He said that each case should be judged on its own facts.

The taxpayer submitted that on the facts, his home was the business base and therefore there was no non-business purpose in his travel between the home and the private hospitals.

HMRC’s Case

HMRC’s argument was that the cost of travelling to and from home and a place of work is generally not allowable as the journeys are not wholly and exclusively for business.

The motive, object and purpose of Dr Samadian’s disputed journeys were to take him from his home, where he lives, and to then undo this journey.

Past Cases Considered

The tribunal considered various cases put forward by the taxpayer and HMRC, however rather unusually they also considered an additional case – Mallalieu v Drummond, with a view to explain the statutory words “expended for the purposes of the trade”.

Mallalieu related to a claim for professional clothing for use in court by a barrister. The tribunal concluded that this claim had failed “because although she had conscious motive for incurring the expenditure which was not a business motive, the facts were such that there must necessarily have been a non-business motive in her mind as well”

The judge felt this case made it clear that it was possible for him to “look behind the conscious motive of a taxpayer where the facts are such that an unconscious object should also be inferred”.

Tribunal Ruling

The tribunal accepted that Dr Samadian has a place of business at home, but there must have been a “mixed object” in the travelling between home and the private hospitals, because part of the object of the journeys must “inescapably” be to maintain a home in a separate location.

The journeys between the NHS hospitals and the private hospitals were also regarded as non-deductible by the panel on the grounds that “the object of the travel is to put the appellant into a position where he can carry on his business away from his place of employment; the travel is not an integral part of the business itself”.

Holiday Letting Business Does Not Qualify for Business Property Relief

CRC v Lockyer and Robertson (as the personal representatives of N Pawson, deceased) – Business Property Relief

HMRC have successfully appealed the landmark Business Property Relief case of N Pawson deceased which, if it is upheld at the Court of Appeal, is likely to have a significant on the potential Inheritance Tax liabilities of individuals with a holiday letting business.

HMRC success in this case is perhaps not as surprising as the fact they originally lost at Tribunal.  The judge gives some extra useful guidance on the distinction between active trading and property letting.

The First-tier Tribunal initially ruled that as long as additional services were provided in conjunction with a holiday let then the  business property relief (BPR) would be available and therefore obtain relief from Inheritance Tax (IHT) at 100%.

HMRC subsequently appealed the above ruling.

The Upper Tribunal Judge focused on “the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity”.

He said that a property could be managed actively and still be retained as an investment.

The services provided to clients, such as cleaning, providing a welcome pack, and being on call to deal with queries and problems, were unlikely to be significant or sufficient to stop the business from being “mainly one of property investment”.

These services all enhanced the capital value of the property and made it possible to obtain a regular income from its letting.

The judge concluded the First-tier Tribunal should have found that “the business… did indeed remain one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property”.

He did not accept the taxpayer’s argument that the innate character of a holiday letting business rendered it outside the scope of a normal property letting business. Rather, it was a typical example of a property letting business.

As a result business property relief was disallowed and the letting operation fully charged to IHT.

Julian Martin v HMRC – TC 02460 – Income Tax where Employee Obliged to Refund Earnings

In the recent case of Julian Martin v HMRC (TC 02460),  the appellant agreed to enter into an employment contract under which he received a signing bonus of £250,000 in 2005/06 the terms of which required him to work for the company for a period of 5 years.

The signing bonus was subject to income tax and NIC’s through PAYE and the net amount received was £147,500.

Mr Martin gave early notice and therefore became liable to repay £162,500 to his former employer.

The appellant made an error and mistake claim for 2005/06 on the basis that whilst the full bonus had been taxed in that year, in retrospect the full amount had not been earned in that year and as such the repaid amount of £162,500 should not be taxable.

HM Revenue and Customs rejected Mr Martin’s claim for relief and argued that the full amount remained taxable despite the fact that most of it was later repaid.

This gave rise to an anomalous position whereby Mr Martin was worse off than if he had never accepted the signing bonus because the tax and NICs were in excess of the amount of the bonus that he actually retained.

The first tier tribunal found that relief should be available on the basis that the repayment of the bonus amounted to negative taxable earnings in Mr Martin’s hands.

 

Loan Loss Relief Claim Allowed in Part – Goldsmith (TC2197)

The recent tribunal case of Goldsmith (TC2197) dealt with availability of loan loss relief for capital gains tax purposes and its subsequent conversion as an Income Tax loss.

Mr Goldsmith was the Director of a property trading company. The company took out loans from a bank in order to purchase two flats, which Mr Goldsmith personally guaranteed.

One flat was sold and the other was let out, however the rent received from the flat was less than the interest payments on the loan. As a result Mr Goldsmith made payments directly to the bank to make up the shortfall.

As a result of the situation the bank demanded full repayment of the loan, with the second flat sold at a loss and the company dissolved.

The taxpayer claimed loan loss relief under TCGA 1992 s.253 (loans to traders) and for the loss to be offset against his other income under ICTA 1998 s.574.

HMRC denied the loan loss relief claim as they argued that the loan was irrecoverable at the outset and therefore did not become irrecoverable. Furthermore HMRC felt that there was no evidence that the repayment was required through the bank guarantee and therefore did not meet the statutory conditions.

The tribunal ruled in favour of the taxpayer in relation to the loan loss relief claim. They said because the bank had decided to lend money to the taxpayer’s company this meant that the loan cannot have been irrecoverable at the outset as a bank would not make such a loan.

It was also found that lack of evidence of a demand to the guarantor was not on its own sufficient to deny the loan loss relief claim.

The borrowed money was used for the purposes of the company’s trade and the money was paid by the taxpayer as interest on the loan. As a result the tribunal ruled he was entitled to claim loan loss relief under s.253 for the difference between the rent received and the interest payments made.

HMRC argued additionally that even if loan capital loss relief was allowed there was no basis for setting the amount against general income. The tribunal agreed and so the taxpayer’s appeal was only allowed in part.

UK-Swiss Tax Treaty – Swiss Banks to Contact UK Taxpayers

Following the UK-Swiss Tax Treaty which was signed in October 2011, Swiss banks are now sending letters to all account holders that have a connection to the UK and may therefore be liable to tax charges under the UK-Swiss Tax Treaty.

Some banks have already posted the letters, whilst others will send them out during the next month or so.  Eaves & Co have already been contacted by concerned taxpayers in receipt of letters from their Swiss bank.

If you/your client receive letters regarding the UK-Swiss Tax Treaty then you should ensure that swift action is taken if you wish to avoid the one off levy in May 2013 and on-going withholding taxes.

Where there are undisclosed tax liabilities in issue then it will be necessary to consider whether to continue under the withholding system set out in the UK-Swiss Tax Treaty and retain anonymity or make a disclosure to HMRC – perhaps by taking advantage of the Liechtenstein Disclosure Facility (LDF).

It is important that clients with no undisclosed liabilities do not simply ignore the letters because the terms of the UK-Swiss Tax Treaty mean that the Swiss bank will need to receive confirmation from a UK tax professional certifying that the income has been disclosed to HMRC (or that the taxpayer is non UK domiciled and claims the remittance basis so disclosure is not required) before they can dis-apply the one off levy and annual withholding tax.