The first-tier tribunal has ruled that Bridge is not a sport and as a result tournament entry fees are not exempt from VAT.

The English Bridge Union (EBU) were appealing HMRC’s decision not to repay VAT on £631,000 on tournament fees raised between 30 June 2008 and 31 December 2011.

Background

Under current UK legislation entry fees may qualify for exemption where:

  • they are for entry to a competition in sport or physical education and the total amount of the entry fees charged is returned to the entrants of that competition as prizes; or
  • they are for entry to a competition promoted by an eligible body, which is established for the purposes of sport or physical recreation.

HMRC’s VAT notice Notice 701/45 provides a list of all the sports and physical activities that it believes qualifies for the exemption.

Taxpayers Arguments

The EBU argued that Bridge was a sport for a number of reasons:

– it is recognised as a sport by the Olympic Committee

– The natural meaning of “sport” is not limited to activities which principally involve skill or exertion

– Bridge is on a par with darts, croquet, billiards, flying and gliding (accepted as sports by HMRC) in that physical activity plays second fiddle to mental skill

They also argued that bridge unions in France, Holland and Belgian (amongst others) were not required to pay VAT on their entry fees.

HMRC’s Arguments

– Sport is something that involves physical activity or fitness and the European article defining the VAT exemption was intended to promote physical and mental health

– Bridge does not involve a significant element of physical activity or fitness

Tribunal’s Ruling

The tribunal concluded that the normal English meaning of “sport” involves a significant element of physical activity and stated that “sport normally connotes a game with an athletic element rather than simply a game”.

Bridge does not contain an athletic element and therefore does not meet the conditions necessary for the VAT exemption.

Implications

Some commentators have likened the case to the great biscuit/cake debate around Jaffa Cakes; however this ruling seems much clearer cut and is unlikely to garner much media attention.

The ruling should not have any wider implications other than to reinforce the definition of what constitutes a sport for VAT purposes as initially established in the Royal Pigeon Racing Association Case (VDT 14006).

The recent tribunal case of Mr Vaines v HMRC (TC02965) dealt with whether a deduction from trading profits was allowed under the ‘wholly and exclusively’ principles, for an out of court settlement of a bank claim relating to a previous trade.

If the claim was not settled the taxpayer could be made bankrupt thus preventing him from continuing in his current trade.

Background

The taxpayer, Mr Vaines, was a member of Harrmann Hemmelrath LLP, a German law firm with offices in London, until 31 December 2005.

The taxpayer subsequently became a partner in Squire Sanders & Dempsey.

On 27 October 2009 the taxpayer made an amendment to his tax return for 2007/08, claiming a deduction of £215,455 against his professional income from Squire Sanders & Dempsey.

The deduction claimed was for a payment made to a German bank, under an agreement made by a number of individuals who were connected with his previous law firm, Haarmann Hemmelrath.  The firm had ceased to trade and owed approx. €17m to a number of German Banks.

The taxpayer believed that the risk of challenging the banks through the German courts was unacceptably high; as if he lost he would be made bankrupt.

If made bankrupt he would lose his current position as partner at Squire Sanders & Dempsey.

Following negotiations with the bank, he agreed to pay them €300,000 (£215,455) in full and final settlement of all claims.  This was paid in January 2008 (tax year 2007/08).

An amendment was made to his 2007/08 tax return and a deduction from his professional income from Squire Sanders & Dempsey claimed.

HMRC denied a deduction primarily on the basis that the payment was not wholly and exclusively for the purposes of his trade.

HMRC’s Arguments

HMRC argued that the deduction should not be allowed for three reasons:

  1. Mr Vaines did not carry on a profession or a trade as an individual,
  2. If he did carry on a trade individually the payment was not wholly and exclusively for the purposes of the trade as it also enabled him to avoid bankruptcy and preserve his reputation, and
  3. If it was wholly and exclusively, it was capital and not revenue expenditure and therefore no deduction was allowed

Tribunals Conclusions

1. Trading as an Individual

 HMRC had tried to rely on a case that predated self-assessment. However this case was found to be superseded by ITTOIA s.862, which states that members of an LLP are treated as carrying out the trade and not the partnership itself.

The tribunal therefore dismissed HMRC’s argument that Mr Vaines did not carry on a trade in his own right.

2. Wholly & Exclusively

The tribunal held that as a matter of fact the purpose of Mr Vaines making the payment was to preserve and protect his professional career or trade.

With this in mind the case of Morgan (Inspector of Taxes) v Tate & Lyle Ltd (1955) states that ‘money spent for the purposes of preserving the trade from destruction can properly be treated as wholly and exclusively expended for the purposes of the trade’.

As a result they found that the payment to the Bank was wholly and exclusively for the purposes of his trade.

3. Revenue or Capital?

The final consideration was whether the payment was revenue or capital.  HMRC contended it was capital and therefore no deduction was allowed.

Mr Vaines argued that no asset or enduring advantage was brought into existence by the payment made to the Bank and as a result it was a revenue expense.

He relied on Lawrence J in Southern (HM Inspector of Taxes) v Borax Consolidated Ltd (1940) where he stated;

‘..if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue’ and ‘it appears to me that the legal expenses which were incurred…did not create any new asset at all but were expenses which were incurred in the ordinary course of maintaining the assets of the Company, and the fact that it was maintaining the title…does not, in my opinion make it any different’

The tribunal found that as the payment was to preserve and protect his professional career or trade it must follow that it is a revenue and not capital payment in line with the case above.

Decision

As a result the appeal was allowed and the payment found to be wholly and exclusively for the purposes of his trade.

In the recent co-decision tribunal case of Morgan v HMRC and Donaldson v HMRC (TC 9096 & 8431) the procedure behind issuing £10 daily late filing penalties was challenged.

Background & Legislation

Schedule 55 of FA 2009 allows HMRC to levy penalties of £10 per day if a self-assessment tax return has not been filed within 3 months of the filing date.  Such can penalties can be issued for up to 90 days, meaning that the maximum daily penalties issued totals £900.

In order for the daily penalties to be valid the legislation requires that HMRC “decides” whether to impose the penalties and notifies the taxpayer of the decision.

The taxpayers in question argued that the SA returns and subsequent reminders issued did not satisfy the above conditions and therefore the penalties were not valid.

 The questions for the tribunal to address were:

– Did the fact that daily penalties were automatically issued by an HMRC computer constitute a decision?

– Did the SA return and/or reminders constitute a notice of the liability to the daily penalties?

Decision

The tribunal found that it had been decided at a senior level, and as a general policy, to impose daily penalties where there’s a default, and accordingly the HMRC computers were programmed to deal with this. To do otherwise would have meant up to a million individual decisions – a completely impractical exercise. The tribunal, by the chairman’s casting vote, therefore found that there had been a HMRC decision which met the requirements of schedule 55.

With regards to the notice of a penalty HMRC relied on the SA returns and reminders which stated:

 “If we still haven’t received your online tax return by 30 April (31 January if you’re filing a paper one) a £10 daily penalty will be charged every day it remains outstanding. Daily penalties can be charged for a maximum of 90 days, starting from 1 February for paper tax returns or 1 May for online tax returns.”

The tribunal found that the statutory requirement was not met as the documents were ambiguous.  This was because of the use of ‘will’ in the first sentenced followed by ‘can’ in the second.

The tribunal found that the text merely indicated that HMRC could impose daily penalties.  They felt that even applying a purposive construction the terms of either document were not clear enough to impose a penalty from a particular date.

The fact that two dates were mentioned was not the point; the vagueness of the documents was their downfall. Accordingly the appeal on the daily penalties was allowed.

Impact of The Case

Presumably HMRC will update the text of their SA returns and reminder notices accordingly to make sure a ‘notice’ is given.

However, given the decision it will be interesting to see whether other taxpayers challenge daily penalties previously issued and if HMRC will appeal the case.

There has been much publicity in the media in recent months over tax avoidance, and whether certain parties are paying the “right” amount of tax.  Whilst such discussions have often focused on big businesses trying to pay less tax, fairness in the tax system can swing both ways with unexpected bills being incurred.  The theme of fairness ran through three recent tax cases heard by the courts.
In the First-tier Tribunal case of Joost Lobler v HMRC (TC2539) the taxpayer was hit with a huge tax bill on partial surrenders of life insurance policies, despite having made a loss.  If he had made full surrenders, then he would have had no tax to pay.  The tribunal suggested that the taxpayer’s situation was “outrageously unfair” as he had made no profit or gain, but had become liable to tax, under the letter of the law, which could potentially bankrupt him.
In the recent case of T James V HMRC, the taxpayer persuaded the Tribunal that he had a ‘reasonable excuse’ for late payment because he chose (out of limited resources) to provide his corporate business with funds to pay their PAYE, VAT and corporation tax, rather than keep up with his previously agreed ‘time to pay’ arrangements on his personal account with HMRC.  This enabled the business to continue and increase the total tax take to HMRC.  Despite this, HMRC still took the case to tribunal rather than consider the fairness of the case internally.
Finally, in the case of J Jackson v HMRC (TC2448), the taxpayer had received termination payments from his employer when he retired, on which tax had been deducted at basic rate.  The payment was included on Mr Jackson’s tax return, which was filed on time. He believed that his employer would have deducted any tax due, having always been taxed through PAYE and therefore made no payment of tax at the higher rate.
He received a tax demand from HMRC.  On receiving written confirmation of what the additional tax related to, he paid the tax but was then issued with a late payment penalty.  The Tribunal found that the taxpayer had acted reasonably and had a genuine belief that his taxes were up-to-date.  The tribunal overturned the penalty and noted that the taxpayer clearly felt aggrieved and unfairly treated.
As can be seen from these cases, HMRC’s view on fairness appears to be at odds with that of the general population and the concept of “paying the right amount tax” is not as clear cut as the media portrayal.  Tax is complicated, and taking professional advice is therefore essential.

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.

 

The recent tribunal case of Seacourt Developments Limited v HMRC involved appeals against a number of determinations by HMRC in respect of PAYE, national insurance contributions (NICs) and Construction Industry Scheme (CIS) deductions.

Seacourt had previously stated that it only had seven employees via its P35 and no subcontractors were detailed in its CIS returns for 2005/06. In August 2008 the company’s new auditors submitted a revised schedule showing “workers” for 2005/06 as being 176, however no additional detail could be provided on their status as Seacourt did not provide it.

HMRC subsequently issued determinations for the 169 additional “workers” from 2005/06 -2007/08 on the advice of the company’s accountants (Seacourt failed to arrange a meeting with their accountants to discuss the issues). HMRC made an estimate as to which “workers” should have been dealt with under PAYE and CIS, with the total amount of PAYE and NIC due being £758,124.

In addition to the tax due HMRC also issued penalty notices. The maximum amount that could be charged was 100% of the tax due; however HMRC mitigated the penalty by reducing it by 10% for disclosure (max 20%), 20% for co-operation (max 40%) and 20% for seriousness (max 40%). The result being that the penalty was reduced to 50% of the tax due.

Seacourt appealed against the penalty but the judge ruled in HMRC’s favour. However, perhaps most surprisingly the tribunal ordered that the penalty be increased to 95% of the tax found to be due, bringing the total penalty to £720,217.80 (previously £379,060).

The penalty was increased on the basis that Seacourt had failed to co-operate and the offence was serious in nature, and therefore the discounts previously afforded by HMRC were removed. The tribunal also felt the disclosure was not of sufficient quality to warrant a 10% reduction and reduced it to 5%. As a result the maximum penalty was only reduced by 5%.

The overall outcome of the case is not surprising given the facts, however the fact that the tribunal ordered the penalty to be increased is. This could have an impact on HMRC’s penalty mitigation criteria in the future and also make taxpayers think twice before appealing an already reduced penalty.

The First Tier Tax Tribunal decided in the case of Prince & Others v HMRC that it had no jurisdiction over the application of ESC A19.

It was heard that the application of an extra statutory concession is governed by public or administrative law, and therefore this case needed to be settled through a judicial review.

The taxpayers’ appeals were struck out and we must now see whether a judicial review goes ahead.

partnership agreement
(Photo credit: o5com)

The case of Mrs Pauline Valantine v HMRC (TC 01644) demonstrates that in certain cases it may be useful to engage in discussions/meetings with HM Revenue and Customs as this could prevent cases being taken to Tribunal unnecessarily.
The key issue in the case concerned whether Mrs Valantine was in partnership with her husband.  If Mr & Mrs Valantine were in partnership then Mrs Valantine would become liable for unpaid income tax/NICs on her share of the partnership profits and unpaid VAT for which she would be joint and severally liable.
The question of liability was particularly relevant because Mr Valantine was expected to declare bankruptcy, therefore if a partnership did not exist then Mrs Valantine would not be liable for the unpaid tax and HM Revenue and Customs could not expect to receive payment.
Based on the evidence before them the Tribunal found in favour of the taxpayer on the basis that the relationship between the taxpayers made it unthinkable that they would have entered a business partnership.
Interestingly however, the Tribunal concluded that HM Revenue and Customs should not be criticised for their handling of the case or for bringing the case to Tribunal.  They went on to say that had the taxpayers been willing to meet HM Revenue and Customs to discuss the case then the case may never had been brought to appeal.
Taxpayers involved with investigations/enquiries from HM Revenue and Customs may find professional advice useful to ensure that matters are concluded both quickly and robustly.
For information regarding our tax investigation/enquiry services please contact Paul Davison on 0113 244 3502 or visit our website www.eavesandco.co.uk

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.

The tribunal case of Sarah Cornes and HMRC considered whether there was reasonable excuse for late payment of income tax.

The appellant’s business was struggling and her husband had suffered through 3 employment terminations and ensuing personal problems.

The tax payer made a request for “time to pay” on 23 February 2011.  Because of difficulties in managing paperwork etc a time to pay arrangement was finally agreed on 2 June 2011.

The tribunal found that the taxpayer had been diligent and prudent, in attempting to agree a time to pay arrangement prior to the surcharge trigger date (28 February 2011). Therefore she had reasonable excuse and the surcharge was not to be applied.