Elbrook (Cash and Carry) Ltd – Payment of VAT Assessment Would Cause Hardship

Arguments are inevitable between taxpayers and HMRC over interpretations of key phrases in the legislation. These often revolve around penalties, appeals and what constitutes ‘reasonable’. In a recent case, the Revenue lost on the grounds that the taxpayer would have suffered ‘hardship’ if required to pay a VAT assessment before appealing it (as according to VATA 1994, s.84 one of the conditions for appealing is that the tax must be paid).

The taxpayer had won the case at the First-Tier Tribunal, and the Upper Tribunal noted that it could only overturn the finding in that case if they had made an error in law.

The Upper Tribunal noted that the test had to consider not just the ability to pay, but “the capacity to pay without financial hardship”. It was felt the possibility of obtaining new finance should be ignored in the circumstances (which seems to go against standard HMRC practice in cases regarding difficulty paying). It was only if other sources were likely to become available they should be considered. The judge agreed with the First-Tier Tribunal that approaching their bankers would not have been suitable as it could have caused further financial difficulties through the bank becoming concerned.

Overall, the judge agreed with the conclusions of the First-Tier Tribunal, even though the decision could perhaps have been worded better. The case highlights that it can be worth challenging HMRC interpretation. They are Civil Servants, not the judiciary, so there are independent arbiters of the rules!

Please contact us if you have any concerns about HMRC practices. We have extensive experience in such matters. Often HMRC are right, but not always. They will only be kept to high standards by rigorous, independent review. This is in the best interests of everyone, including HMRC.

Careful with those Capital Gains Tax deductions

Accountants and clients used to the broad brush “commercial” approach to computing trading profits can get caught out by the different and stricter rules for calculating capital gains.

Payments which may make sense, or even be thought essential from a commercial perspective are not necessarily then allowable for capital gains tax purposes.

This is demonstrated by the recent case of J. Blackwell.  In exchange for £1m, Mr Blackwell agreed to act exclusively in voting his shareholding in BP Holdings in favour of the Taylor and Francis Group who wished to purchase BP Holdings.  Later another prospective purchaser came along for BP Holdings.  In order to extricate himself from the first agreement Mr Blackwell paid Taylor and Francis Group £17.5m which he then claimed under S38 TCGA 1992 as a deduction against his subsequent sale of the BP Holdings shares to the second purchaser.

The Upper Tier Tribunal found against him on the grounds that the expenditure was not reflected in the value of the asset disposed of to the purchaser.  Admittedly, it put him in a position to make the disposal, by releasing him from the previous restrictions, but it did not enhance the value of the shares themselves.  Similarly, the Courts held the payment did not create or establish any new rights over the underlying shares themselves.

This principle can be a factor in helping clients decide whether to accept an offer, by understanding what it would be worth after tax.  It can often be in point where a client is considering an offer from a developer for (say) housing.  On this principle, if the developer is buying a cleared site, where a bulldozer has taken down perhaps years of “enhancement expenditure” on the former trade site, then it is likely HMRC will seek to deny the cost of the previous building works, perhaps increasing the gain by a material amount.

Care in understanding the facts is crucial.

Courts Find Against Another Avoidance Scheme – Do HMRC Really Need More Powers?

The courts continue to find in favour of HMRC in cases involving avoidance schemes, with the most recent example being Vaccine Research Limited Partnership and another v CRC at the Upper Tribunal.

With so many cases going against such scheme providers, questions are raised as to whether the various new powers that HMRC is seeking on avoidance and other matters are really necessary?  Perhaps using the existing HMRC powers to more effectively challenge such schemes is all that is really needed.

Vaccine Research Limited Partnership and another v CRC

The case in question concerned an R&D avoidance scheme, with a partnership being established in Jersey. The taxpayer partnership entered into an agreement whereby it paid another entity, Numology Ltd, £193m to purportedly carry out research and development (R&D).

Numology paid a very small proportion of this (£14m) to a subcontractor, PepTCell, who actually undertook the work and then contributed £86m to the taxpayer business itself.  The partners claimed for a loss of £193m in respect of R&D capital allowances.

The Upper Tribunal unheld the First-Tier Tribunal’s decision, finding that the funds were put into an artificial loop and effectively only the £14m paid to the subcontractor was genuinely incurred for R&D.  The Tribunal noted that the FTT was right to conclude “that Numology Ltd’s contribution represented funds put into a loop as part of a tax avoidance scheme, and [was] not in reality spent on research and development”.

The evidence of recent case law suggests that the existing provisions available to HMRC are sufficient to close down avoidance schemes and yet they continue to seek new powers in the name of cracking down on tax avoidance.  It is concerning that HMRC continue to amass new powers, such as attempting to take funds directly from bank accounts and issuing non-appealable tax demands, on the premise that they are needed when it appears that they are not.  Please feel free to share your own thoughts below.

McLaren’s FIA Fine Not Wholly and Exclusively for Trade

We wrote previously regarding the First-Tier Tribunal case of McLaren Racing Ltd v HM Revenue & Customs, where the Tribunal found that the fine relating to spying on Ferrari (which amounted to around £34m) was deductible because the act in question was wholly and exclusively for the purposes of trade and no laws were broken.

HMRC appealed the case to the Upper Tribunal who found that the fine had been incurred because McLaren engaged in conduct not in the course of its trade.  The penalty was found therefore to be a disbursement or expense, but not paid wholly and exclusively for the purposes of the company’s trade. It was therefore not an allowable deduction against their profits for corporation tax.

The outcome of the original Tribunal case was somewhat surprising, and this decision therefore appears to be more in line with previous case law.  This is a shame as the First-Tier Tribunal case had suggested that the scope of the “wholly and exclusively” rules might have been wider than previously thought.  Bearing in mind the amount of tax at stake, it is possible however, that McLaren could seek to appeal the decision.

Discovery and Negligence Considered Again – Sanderson v CRC

The question of what constitutes a ‘discovery’ continues to cause disagreements between HMRC and taxpayers.  A further case on the matter was recently heard by the Upper Tier Tribunal.  Interestingly, the question of negligence on the taxpayer’s part was also considered.

Facts

The taxpayer appealed against the First-tier Tribunal’s decision to uphold a ‘discovery’ assessment.   HMRC were also cross-appealing one part of that decision.

Mr Sanderson filed his 1998/99 tax return in February 2003. He claimed losses of around £2m to set against a chargeable gain of £1.8m.

These losses arose as a result of an avoidance scheme in which he had participated, claiming the benefit of Trust Fund losses in the Castle Trust scheme under TCGA 1992, s. 71(2). Some limited additional information in relation to this claim was given in the ‘additional information’ box on the return.

HMRC had been investigating the Castle Trust scheme since 1999 through the Special Compliance Office and Special Investigations Section. In July 1999, HMRC had a list of the users of the scheme, but Mr Sanderson’s return was not submitted until 2003.  By that point the scheme was found to be ineffective, and its capital losses were reduced to nil. Mr Sanderson was informed of this by the scheme promoter in January 2004.  On contacting his accountants he was advised to do nothing.

In late 2004 the Inspector became aware that Mr Sanderson’s return had been filed and raised a discovery assessment in January 2005. The normal enquiry window for the return had closed on 30 April 2004 which all parties agreed.

The First-tier Tribunal (FTT) had found that there had been a ‘discovery’ by HMRC and that an officer could not reasonably have been expected, on the information made available to him, to have been aware of the insufficiency.  However they determined that the insufficiency of tax was not attributable to negligent conduct on the part of the taxpayer or anyone acting for him.

Both the Taxpayer and HMRC were appealing against the decisions against them in the FTT.

Decision

The taxpayer claimed HMRC knew about his participation in the scheme before he submitted his return and as they had decided the Castle Trust scheme was not effective before he filed, they should have been aware of tax insufficiency before the enquiry window closed.

The Upper Tribunal found that the return did not contain enough information to make an HMRC officer aware that there was a tax insufficiency by itself, despite the fact that it would have alerted a hypothetical official to the fact the taxpayer was taking part in the scheme.

The discovery assessment was therefore valid, and Mr Sanderson’s appeal was dismissed.

However, on the question of negligence, the Upper Tribunal found in favour of the taxpayer.  They did not accept HMRC’s contention that the taxpayer’s adviser was negligent in advising to do nothing further on discovering that the Castle Trust scheme was ineffective.  Interestingly, the judge noted there was “no statutory provision imposing an obligation on a taxpayer to tell HMRC about something in a filed return that he subsequently finds to be erroneous.”

Wholly and exclusively test and duality of purpose – Healy v CRC

The rules on whether expenditure may be allowed as a deduction under the ‘wholly and exclusively’ principles can often be contentious.  This is demonstrated by the number of cases taken to the courts to determine such disagreements.

The recent Upper Tier Tribunal case of Healy v CRC has added further material to the case law on the subject, and due to the outcome promises more to come as it has been referred back to the First Tier Tribunal.

The case concerned professional actor, Tim Healy, and whether or not the cost of his accommodation in London was an allowable expense.  The First-tier Tribunal had allowed his original appeal on the basis that he had not been looking for a permanent home in London.

HMRC appealed, arguing that the tribunal had erred in law by ignoring whether or not Mr Healy had a duality of purpose when incurring the costs as it met the need for warmth and shelter than he ordinarily had.

The Upper Tier Tribunal agreed that by failing to address this point the Tribunal had erred in law.  Based on the facts available to them, they did not have the necessary detail to determine the case.  It was therefore remitted to the First-tier Tribunal for a new hearing.

The outcome of the re-heard case could have wider implications for the self-employed and so it will be interesting to see how the case develops.  In the meantime, it is important to take care in this area and take each case on its own merits.

The importance of the motive behind the transaction

In the recent case of Land Securities PLC v HMRC, the appellant Land Securities PLC appealed against the decision of the First Tier Tribunal, who had agreed with HMRC’s arguments to disallow claims made to deduct a capital loss from profits subject to corporation tax on the basis that the creation of the loss, and therefore the avoidance of tax, was the underlying motive behind the transaction.

The series of transactions involved Land Securities PLC selling shares in a subsidiary called LM Property Investments Limited (LMPI) to a subsidiary of Morgan Stanley in the Caymen Islands (C) with a put option being set up whereby C could sell the shares back to Land Securities PLC at any time after 29 February 2004. On 1 August 2003 C injected funds of around £200m into LMPI. On the same day C also agreed to sell back the shares in LMPI to Land Securities PLC for over £200m more than they had originally been purchased for.

The Upper Tier Tribunal denied relief, finding against the appellant on the basis that the transaction did not exist to create a commercial profit but that the materiality of the transaction was to create a loss for Land Securities PLC to offset against its profits and as such pay a lower amount of tax.

A further recent case (PA Holdings),involved a company constructing a complex arrangement in order to divert employee bonuses to be taxed as dividends rather than employment income, therefore saving tax and NICs. The Court of Appeal found that the payments were remuneration for employment and subject to Income tax and NICs accordingly.

PA Holdings’ appeal to the Supreme Court following this ruling has now been withdrawn and the decision at the Court of Appeal is therefore final. Further details of the case can be found at:

 http://eavesandco.co.uk/blog/2012/01/18/a-payment-cannot-be-both-dividend-and-employment-income/.

Reynolds painting from 1776 is found to be a “Wasting Asset” – Executors of Lord Howard of Henderskelfe (dec’d) v R&C Commissioners

A recent Upper Tier Tribunal case – Executors of Lord Howard of Henderskelfe (dec’d) [2011] TC 01340 – considered the Capital Gains Tax implications of the sale of a painting by Sir Joshua Reynolds.

The painting, owned by Lord Howard, was informally lent it to a company that put it on display at Castle Howard, Lord Howard’s stately home, as part of the company’s ‘house-opening trade’.

Lord Howard died in 1984 and the painting was sold by the executors of his estate in 2001.  Throughout this period, the painting continued to be displayed by the company. The executors claimed that the painting was tangible moveable property which was ‘plant’ and therefore a ‘wasting asset’.  The result being that the gain on the sale of the painting would be exempt from capital gains tax.

The first-tier tribunal originally found in favour of HMRC, who argued that the painting was not plant because the executors did not have a business.  However, Mr Justice Morgan at the Upper Tier Tribunal found in favour of the executors, agreeing that the painting represented plant, stating, “the painting satisfied the tests as to function and as to permanence in the established test as to the meaning of plant”.

Hok Ltd v HMRC – HMRC Wins Appeal

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.