Termination payments, specifically a payment in lieu of notice, were considered in the recent First-tier tribunal case of Kayne Harrison v HM Revenue & Customs.
Mr Harrison had been dismissed on 16 February 2006 without written notice and had successfully won a small amount of compensation from an Employment tribunal.
Three days after he was dismissed, his employers made a termination payment, consisting of a payment in lieu of notice. This termination payment was made in line with the terms of his employment contract. Mr Harrison argued that as his position was terminated without written notice, the payment was not contractual as it had been made in circumstances outside of his contract. He believed that the findings of the Employment tribunal backed up this belief.
The tribunal found that Mr Harrison’s interpretation of the Employment Tribunal was incorrect in that they found the payment in lieu of notice had been made in accordance with the contract. Despite the issues raised at the Employment Tribunal, Mr Harrison’s employment had ended on 16 February 2006 and the payment had been made in accordance with his contract.
HMRC were therefore correct to argue that the payment was taxable and the tribunal dismissed Mr Harrison’s appeal.
The First Tier Tribunal Inheritance Tax Case of Silber v HMRC looked at how a settlement of cash made between the beneficiaries of the deceased’s estate and the deceased’s sister should be treated for Inheritance Tax.
The sister challenged the will of the deceased and she was paid an out of court settlement of £400,000 by the beneficiaries.
The Beneficiaries claimed the £400,000 as a liability of the estate and thus a reduction in Inheritance Tax payable of £160,000 (£400,000 x 40%).
The Court held that the money paid was not a liability incurred by the deceased and thus wasn’t allowable for IHT relief.
The taxpayers’ case was not helped because of the fact that they did not turn up for the Tribunal hearing (even though they were expected) although there is little doubt that the tribunal reached the right conclusion anyway.
Eaves & Co are experienced in inheritance tax planning and compliance, please call if you have IHT concerns.
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.
HMRC have successfully appealed against the decision of the first tier tribunal in the case of Hok Ltd v HMRC.
In the original case (see our blog http://wp.me/p2JyHb-7i), Hok Ltd claimed that HMRC’s practice of delaying sending out penalty notices for the late submission of form P35 (PAYE end of year return) by 4 months was unfair as they had already built up penalties of £500 before they knew they had to submit the return.
Following the decision in Hok Ltd and a number of similar cases being found against them, HMRC changed their practice such that employers will now receive earlier correspondence regarding the late submission and penalties.
The upper tier tribunal found that the first tier tribunal erred in its judgement on the basis that the company (Hok Ltd) did not deny that the return was late nor attempt to argue that they had a reasonable excuse, as such the first tier tribunal did not have the jurisdiction to mitigate the penalty.
The upper tier tribunal considered that the first tier tribunal has no statutory power discharge or adjust a penalty because of a perception that it is unfair. Thus in the absence of a statutory route of appeal, the only option available to the taxpayer is to seek a judicial review.
Important Update: See details of Upper-tier Tribunal ruling here
The taxpayers, challenged an HMRC decision to deny business property relief (BPR) on their late mother’s share of a property. The property was let fully furnished as a holiday home.
The case (N V Pawson (deceased) (TC1748)) was heard by the First-tier Tribunal, who accepted the property had been run as a business for the requisite two years before the taxpayer’s death. It had been profitable for two of the three years before the mother died and the tribunal was therefore satisfied that the business was being run with a view to gain.
It was then necessary for the tribunal to decide whether the business was one that consisted wholly or mainly of the holding of an investment, with the judge concluding that, “an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading”.
The property was a business asset being used to provide a service and was not equivalent to holding an investment; the taxpayer’s appeal was therefore allowed.
The case will be of interest to taxpayers operating holiday rentals where the activities can be shown to constitute a business.
UPDATE: The verdict in the case of Hok Limited v HMRC has now been overturned by the Upper Tier Tribunal in favour of HMRC. See our blog on the case for more details.
We recently posted a case where the tribunal found that HMRC’s policy of waiting 4 months before issuing a penalty notice for late P35s was unfair.
This finding was also confirmed in the recent case of Hok Limited v HMRC. The judgement stated that HMRC’s practice was, “unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of an organ of the state”.
The tribunal went further than in the previous case by stating that “the statute does not provide that the penalty or any part of it must be levied.”
They go on to assert that merely being ‘liable’ to a penalty does not mean that the penalty stated is the minimum penalty but rather the maximum and therefore it is possible to impose a lower penalty.
It will be interesting to see if this principle could be applied to other ‘fixed’ penalties which had previously not been seen as mitigable.
A very recent First Tier Tribunal decision was held in favour of a taxpayer, Mr Noor.
Mr Noor called HMRC’s National VAT helpline to take advice about construction costs.
He followed the advice given, but on his claim for a repayment of input tax HMRC denied a chunk of money under the rules about time limits for claims.
Mr Noor claimed that after taking the advice over the phone his expectation was that he would be able to claim all the VAT back if he followed the guidance suggested, which he did.
In a very interesting decision HMRC believed Mr Noor in relation to the phone conversation, even though no written confirmation of the advice line’s comments was obtained. They also held that he would have taken a different course of action if he hadn’t received the comments on the phone.
It was found that HMRC were due to pay the full amount of VAT back to Mr Noor.
Perhaps the life of the Advice Line is limited!