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.
HMRC have published further changes to Entrepreneurs’ Relief (ER) in response to consultation with the professional bodies over the changes brought in with the Budget in 2018.
As we noted in our post, HMRC Challenges on Entrepreneurs’ Relief and Dividend Planning – BEWARE, the original changes had the potential to prevent ER from applying in situations where there were different classes of shares with potentially different dividend rights.
The new amendments are designed to combat this, although unfortunately the way in which they are implemented is perhaps not as clear as it could have been.
The changes relate to qualifying as a ‘personal company’ which is one of the requirements for ER to apply on sales of shares. For a company to be the seller’s personal company the shareholder must meet four conditions with regard to their shares:
hold at least 5% of the ordinary share capital
control at least 5% of the voting rights
have a right to at least 5% interest in the distributable profits
have a right to at least 5% of the net assets due to the equity holders on a winding-up of the company.
The new tests 3) and 4) were brought in from 29 October 2018 and have now been joined by a further new test per the amendments of 21 December 2018 to the Finance Bill at , Sch 15, para 2.
This adds an alternative test for a “personal company” based on the shareholder’s entitlement to proceeds in the event of a hypothetical sale of the whole company and requires the shareholder to instead be entitled to at least 5% of the proceeds in the event of such a disposal of the whole company. This test can be used instead of tests 3) and 4), however those tests remain in force as well.
This new test can have interesting implications in certain cases, and may be particularly relevant in buy-out situations where the terms provide for certain additional proceeds on a future sale depending upon meeting certain targets. Being entitled to a larger share of the profits could then conceivably make the difference between obtaining ER or not. The exact treatment will depend on the exact situation and terms, and so advice on these aspects will be vital in ensuring any expected ER is maintained.
To add to the complication, any disposals made between 29 October 2018 and 20 December 2018 must apply tests 3) and 4) and cannot apply the new test which only applies to disposals after 21 December 2018. This means the position could change in certain circumstances depending upon whether the sale was before, during, or after this interim period.
These changes make it more important than ever that professional advice is sought before making a disposal. This way, the position can be ascertained in advance, with suitable planning undertaken where necessary/possible to improve the position. Eaves and Co would be delighted to assist if you or your clients have any queries in the area.
Following on from our recent New Year’s Philosophers’ Blog, I recently received a ‘Practicewire’ from the ICAEW [The Institute for Chartered Accountants]. They are the leading professional organisation concerned with helping businesses with preparing their financial accounts, plus advising on business practice, strategy and tax. I am proud to be a member.
Their email is lengthy with many links.
It starts with results of a survey of 500 businesses. Close to half said they had never heard of MTD (Making Tax Digital). Current proposals say it will be compulsory on a day to day basis very, very soon.
The huge number of fans of Harry Potter will shrug their shoulders and anticipate that Harry will just wave his magic wand and all business owners and managers will simply be transformed into having all systems in place and fully functioning in the calm waters and easy decision making which represents our current relations with our neighbours; Celtic, European and International. Obviously 70+ days is acres in time.
As a sincere devotee of the Rule of Law, I believe the Chancellor of the Exchequer should simply say, “We encourage every relevant business to sign up for MTD, but it will not be compulsory for the present; nor will there be penalties for inadvertent mistakes until we have ironed out the (inevitable) glitches”.
As a Mere Accountant may put it: SIMPLES
Government may never be loved, but at least they can be kind.
The American War of Independence, the French Revolution, the English Civil War, the Peasants Revolt. Each of these cataclysmic events in history were preceded by breakdowns in citizen’s trust in tax administration. The Boston Tea Party, tax protests and the Gabelle, Ship Money and the Poll Tax are not as well-known as their dramatic progeny, but a bomb may be ignited by a spark from a small fuse.
These events show tax administration, presentation and perception is vital in achieving successful governance. This is not just ‘historic’. It is a current lifetime experience for many European employees and business owners, so far as attitude to tax compliance is concerned. Remember, within living memory, the majority of Europe has suffered from military dictatorship. People adapt, it is not an evolutionary mutation, but obviously it affects their attitude towards paying taxes to Government. This is a commentary regarding tax compliance, not Brexit.
In my experience, in Europe citizens (say in Catalan, Spain) ruled over by in their view a fascist had no desire to ‘comply’ with tax rules. When questioned, they said ‘If you had been invaded by Hitler in 1940 would you readily have paid taxes to the 3rd Reich?’
Tax compliance, in my view, is a fragile flower. In the UK we are lucky in that compliance is (generally) better than in many other jurisdictions. It should not be taken for granted. The Tax Profession, Chartered Accountants, the legal profession and CTIOT should seek to work together with HMRC to create a successful and fair administration. As a result of seeing certain ‘schemes’, I confess I am as mad as HMRC, in that the underlying fundamentals were rarely disclosed. The professions collectively ought to recognise the effect this has on HMRC and the body politic generally. We need to buck up our ideas.
Similarly, as an ex-Inspector of taxes, I believe HMRC should endeavour to support and indeed ‘make friends with’, the vast majority of honest professionals who actually make the current system work. It is a collective responsibility to preserve with integrity and if we can head dishonesty off with plain professional integrity we will have ‘Done Our Bit’.
Keeping up to date with technical developments is difficult, especially with so many updates these days, when it is difficult to sort the wood from the trees.
With the possibility of dividend planning many companies have chosen to have different classes of shares. In our experience they have not always thought through the wording of the proposed amended Articles or had legal advice, which has led on occasion to HMRC challenges. Many though have probably not been subject to HMRC enquiries so have muddled through, because the parties internally ‘knew what they meant to say’.
Attacks on dividend planning are now getting more ‘fashionable’ with HMRC seems to be the underlying message, taking in certain arrangements with ‘alphabet shares’ and dividend waivers.
The latest development may go beyond those arrangements and affect long term capital gains tax planning.
The current Finance Bill contains provisions whereby if there are different classes of shares in a company it may be difficult for a shareholder to show he has met all the new requirements to qualify for Entrepreneurs’ Relief. Of course, this is not yet law, but checking the position on such a valuable relief would be prudent. With the new qualifying period due to increase to 2 years from 1 year it would be wise to do this sooner rather than later, so as to implement any changes necessary as early as can be managed.
As the Pantomime Season approaches there may be a lot of it about? By this, I do not mean the standard of scenery in the local production of Robin Hood, but the naïve way many people seem to view the “exemption” due under what strictly is private residence relief S222 TCGA 1992. It is a relief because the rules apply to give a deduction against real chargeable assets. The need to do a computation of a gain applies invariably. The quantum of tax is subject to the amount of relief. Admittedly, in many circumstances, this relief may amount to 100% of the gain, but that is by no means all circumstances.
There are (no doubt) many parents eagerly awaiting the return of their beloved offspring from University for Christmas. They may even have helped purchase accommodation for them away from the family home. How many are hoping any gain on such property will slip through, as a gain the particular child is “entitled to” on their “own home”?
Might they be correct in such interpretation?
Well, it depends ~ to use a famous technical phrase.
The recent case of K Lo demonstrates this. In this case the taxpayer claimed private residence relief on a flat but this was rejected by the Tribunal. They found it was for the taxpayer to show she was entitled to it, not HMRC to disprove her claim. They found her story regarding her long term intentions for it to be her main home did not quite ring true. Although they accepted the taxpayer stayed in the accommodation at weekends and during University vacations, they did not accept the “quality of residence” was sufficient to make it her main residence. This “quality of residence” point was based on the Tribunal’s view of the facts, perhaps with an implication the taxpayer and her boyfriend would have done more (in the few months she owned the property) to clean up what was plainly a run-down, badly maintained house, full of rubbish hoarded by the previous elderly tenant, if they had truly intended to make it their first home.
The fact that she was not on the electoral roll at this address was another factor against the property being treated as her residence. Thus, the Courts found not only was she chargeable to CGT with no private residence relief but also exposed to penalties because she had been negligent in not making proper disclosure and not taking professional advice to understand the areas of possible doubt.
The result equals one unhappy taxpayer, I imagine.
Interestingly, if she had taken professional advice, it may have been perfectly possible legally to make an appropriate election and thus eliminate both the capital gains tax and also the associated penalty.
Another Tax Tribunal noted recently (in George Edwards Consulting Ltd) it was ironic that by trying to save costs by not seeking professional advice, this inaction cost the taxpayer 3 times as much in penalties!
The penalty regime is now raising significant money for Government. Getting professional advice to get things rights is a prudent protection.
“Everyone” knows a capital gain on your own residence is “tax exempt”.
“Everyone” knows offshore gains are “tax exempt”. Isn’t this in the Press on a regular basis?
Hence, people with “circumstances” which in reality encompass an awful lot of the nation, may actually discover that they need professional advice, because what they thought was tax exempt is not – in reality.
Things which may affect the above “tax exempt” analysis potentially include:-
a). Being UK tax resident.
b). Not being UK tax resident, but having property here.
(That just about covers everyone!)
Crucially, Private Residence Relief is a relief for qualifying periods of ownership. This may (or may not) include the whole period of ownership as case law shows. It is a very complex area; plus the changes in the October 2018 Budget may reduce the length of qualifying periods, particularly for those involved in “strange” lifestyle matters, such as moving house for career, inheriting property, getting divorced etc.
For many people their family home is the most valuable asset they will ever own.
There are opportunities to plan to mitigate tax. Such steps are lawful and (presuming you love and respect your family more than HMRC) I believe, appropriate.
The only thing to note is, when you accidentally fall into assumptions (1) or (2) noted above, not only will HMRC lawfully demand the tax, plus interest for not paying on time, but also penalties. The penalties may be up to 200% of the original tax, so you could be paying 3x the original undeclared bill. For those not of an arithmetic mind, for a typical 28% tax rate on a residential property that is 84% of the gain, going to the Government. In other words on a gain of £100,000, that is £84,000 plus interest that could go to the Government, just because you assumed ….
Of course, some people may say well that still leaves 16% of the gain, but that excludes interest, and experience says trauma and cost of getting caught. Plus those who actually wished to use the money may have to sell their dream home. Maybe leading to further complications?
However, with appropriate planning and making the right tax elections in some circumstances, the gain may be legitimately eliminated altogether. A much better result!
Get it right.
No one likes spending money on professional advice – until they haven’t!
Recent Tax Cases reinforce the message : Get Advice : Get It Right : Document It.
The case of D. George shows the common promise of “you will be looked after on a third party sale” can fall foul of horrid tax consequences if there is no advance advice and documentation.
On a separate, and totally different technical argument, a taxpayer and spouse undertook (for presentational purposes) a development project through an associated company, which they owned jointly. Circumstances, with a crash in the development value, made their ideas change. In the end, the company was wound up without repaying the director’s loan which funded the development work. As a result, the owners were not deemed to have incurred the crucial enhancement expenditure on the development, and so obtained no tax relief on £250,000 paid out.
Recent surveys suggest that only 50% of affected businesses are aware of the new rules being brought in from April 2019 in relation to VAT. Even those who are aware of the changes are not prepared, with 20% of those who are aware of them currently have no plan at all.
If you have followed this blog, you will be aware that we have been critical of the proposals under MTD (see here) however HMRC and the government have continued to press ahead with them and it appears very likely that the rules for VAT will be coming in in April 2019, and will be compulsory!
From that date, all businesses who are required to be VAT registered (i.e. they are above the VAT registration threshold) with be required to comply with the MTD for VAT rules. From April 2019, such businesses will be required to keep business records digitally from the start of their accounting period and will need to file in an MTD approved manner.
A spreadsheet can be used to keep records, however MTD-compatible software will be needed to send HMRC the VAT returns and so bridging software might be required in order to transfer the data between systems. HMRC have announced a ‘soft landing’ for digital links, giving businesses until April 2020 to make sure there are digital links between software products, but preparation now makes sense, because it is a radical departure in terms of there being a Government prescribed method for record keeping.
If you are concerned about the new rules and would like help understanding them, please get in touch with David Stebbings. It is better to be prepared now rather than waiting until April!
Of course, all first year law students will bellow ‘No’ to what has long been thought a standard legal principle. However, in today’s complex, highly regulated society a strand of case law is emerging which suggests that in certain circumstances a lack of knowledge of the detail of the law can be a reasonable excuse, thus preventing a penalty from being levied.
The recent First Tier Tribunal hearing in respect of A and R Bradshaw is a case in point. The taxpayers lived in the UK for many years before emigrating to Canada. Their former marital home was put on the market, with the sale going through after the couple had left the country. No capital gains tax was due, because the property had qualified as their principal private residence.
However, HMRC sought to impose a late filing penalty, because strictly a return should have been made under the Non Resident Capital Gains Tax Regime (NRCGT). The judge in giving his verdict acknowledged that a return should have been made under the law. He did dismiss he HMRC penalty demand though. The judge said that the rules were new and had not been well publicised despite marketing a significant departure from previous, well established tax policy in imposing CGT on non-residents. He also noted the new legislation demanded a novel and onerous reporting deadline of only 30 days after the disposal.
This may be very tight especially if a complex capital gains tax computation was required or information needed to be garnered from earlier years. Citing the cases of Perrin v CRC, McGreevy and Scowcroft the judge accepted that in this case ignorance of the law amounted to a reasonable excuse.
It is pleasing to see the Courts accepting that in the real world of unfortunate circumstances and human foibles that ‘reasonable excuse’ can go beyond the trite triple of ‘disease, disaster and death’ Taxpayers and their advisors should therefore look at the whole picture and consider mitigating factors before accepting an HMRC demand for penalties.
Of course, certain excuses are unlikely to succeed. Crafting an argument around ‘The Dog Ate My Tax Return’ would I suggest remain doomed to fail.
We are confident though we can help on more reasonable arguments and are always interested to hear of practitioners experience in this area.