1. HMRC prompt on flat rate employment expenses

Further to the article in the December 2020 issue of TAXline concerning HMRC’s work on digital prompts, we now have further detail about the prompt on claiming flat rate employment expenses on self assessment returns.

HMRC has introduced a restriction on the amount that can be claimed in Box 18 Fixed deductions for expenses on the employment section of the self assessment return. For 2019/20 returns the restriction is in place only for those using HMRC’s online self assessment return.

The restriction will be included in the requirements for third party self assessment software for 2021/22. In the meantime HMRC has asked software developers to remind their users of the amount of flat rate expenses that can be claimed and, where possible, to update 2019/20 and 2020/21 software to restrict the amount claimable in Box 18.

The amount that can be claimed is restricted to a maximum of £1,132 which puzzled us initially as the top rate of flat rate expenses, which applies to airline pilots, is £1,022 (see HMRC’s Employment Income Manual at EIM50052). The £1,132 includes a further £110 flat rate travel expense that is available to airline staff to cover travel to certain types of events (see EIM50060).

Most taxpayers will be entitled to claim less than the maximum, if anything. Given the attention HMRC is paying to these claims, it would seem sensible to double check that the correct amount is claimed in Box 18, even if the restriction has not yet been introduced into your software. If actual rather than flat rate expenses are being claimed, boxes 17, 19 and 20 should be used as appropriate.

Contributed by Caroline Miskin

2. Late application allowed due to adviser failure

The First-tier Tribunal (FTT) has found that a taxpayer had a reasonable excuse for the lateness of his claim for pension protection. He had engaged a competent adviser, who had not informed him of the need to make an election, and when he realised he had missed the deadline there was no unreasonable delay in making the election.

The taxpayer had several pension plans, including a defined benefit pension. His adviser, who had full details of the plans, did not inform him that he was close to meeting the lifetime allowance, and incurring the lifetime allowance charge, as he had overlooked one element, though the taxpayer was in regular contact with him. The taxpayer had always used financial advisers to manage his affairs, and engaged a qualified adviser from a reputable firm, on a friend’s recommendation. The taxpayer realised the error when he received a letter from a pension provider. He complained to the adviser, and after going through their complaints process engaged another adviser, and made his late claim through them about a year after becoming aware that one was needed.

The FTT found that the taxpayer should be allowed to make a late election, as he had a reasonable excuse. He was entitled to rely on the adviser he had carefully selected, and had remedied the failure without unreasonable delay once he was aware of it.

Gibson v HMRC [2020] UKFTT 439 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

3. Updated guidance for non-resident companies disposing of UK property

HMRC has published details of the information to be included in a tax return when a non-resident company disposes of UK property.

A non-resident company that disposes of UK property will, unless an exemption applies, be required to submit a CT return together with iXBRL tagged computations. HMRC now requires such companies to include information on how any losses, exemptions and reliefs have been utilised. The calculation of the gain or loss must be explained, the address of the property disclosed, and the property must be classified according to its type. HMRC will accept these details in a separate covering letter submitted with the CT return.

From the weekly Tax Update published by Smith & Williamson LLP

4. UT finds a property development was not a trade

The Upper Tribunal (UT) has upheld a FTT decision that the development of a property did not amount to a trade. A company is not automatically carrying on a trade merely because it is not an investment company. 

An offshore company acquired a UK property, but could not find a buyer when it wished to sell it several years later. The company redeveloped the property to make it more attractive to buyers and to achieve a higher return. It claimed property development ATED relief from the time it commenced the development activities. HMRC denied the relief on basis that the development did not amount to carrying on a trade.

The FTT ruled that there was insufficient evidence that the company had resolved to hold the property for a trading purpose. Its activities were merely to obtain a higher selling price, which did not necessarily mean that the property had ceased to be an investment asset.

The UT upheld this decision. It held that the FTT was correct to ask whether or not the company was focused on profit. The hope of the sale price exceeding the costs incurred does not necessarily mean that a transaction is a venture in the nature of a trade.

Hopscotch Limited v HMRC [2020] UKUT 294 (TCC)

From the weekly Tax Update published by Smith & Williamson LLP

5. Taxation of Coronavirus Support Payments

Four pages have been added to HMRC’s Business Income Manual (BIM) concerning the taxation of coronavirus support payments. The relevant legislation is s106, Finance Act 2020 (FA 2020) and Sch 16, FA 2020. The pages are:

• BIM40456 - Specific receipts: Coronavirus Support Payments - General rules
• BIM40457 - Specific receipts: Coronavirus Support Payments - Specific rules & exceptions
• BIM40458 - Specific receipts: Coronavirus Support Payments - Self Employment Income Support Scheme
• BIM40459 - Specific receipts: Coronavirus Support Payments - Employment-Related Schemes

From the weekly Business Tax Briefing published by Deloitte

6. Accommodation claim disallowed for sole trader

The FTT has denied a claim for accommodation and travel for a sole trader who took a number of contracts in one place outside commuting distance from his home, as he chose to work at that distance. A claim for expenses of one contract would have been allowable.

The taxpayer, a self-employed engineer, took a number of contracts in the vicinity of Swindon, as the rates of pay were better than near his family home. This was too far to commute from his home in Scotland, so he stayed at a hotel in Swindon for 165 nights in the tax year in question. He claimed the costs of accommodation and travel as expenses. HMRC denied the claim.

In his appeal, the taxpayer argued that travel to obtain the better pay in Swindon was a business decision. He had paid for basic accommodation solely to allow him to work there. The FTT dismissed his appeal, finding for HMRC that as he was able to work near his home, though at a lesser rate, the costs were not incurred ‘wholly and exclusively’ for the purposes of his trade. Had he incurred the costs for one specific subcontract the claim would be allowed, but they were more akin to general commuting costs for his work in Swindon on various subcontracts.

Taylor v HMRC [2020] UKFTT 416 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

7. Natural capital accounting and tax

Further to practical point 253 in the November 2020 issue of TAXline, it is key to look at natural capital and the tax and accounting position. “Natural capital accounting” is the process of calculating the stocks and flows of natural resources in a given eco-system or region. How natural capital is accounted for in the context of a farming business is something that must be considered as the Agriculture Act 2020 was passed into law on 11 November 2020. As a result direct area subsidy payments are being replaced by the Environment Land Management Scheme (ELMS) from DEFRA.

A big question for farming will be in what accounting and tax period do the income and expenses fall? Another consideration is whether the expenditure to increase the natural capital and possibly generate income is capital or revenue in nature. The recent case of Steadfast Manufacturing & Storage Limited v HMRC [2020] UKFTT 0286 (TC) shows how marginal the decision between capital and revenue expenditure can be.

With an ageing population of farmers and landowners, questions have to be raised over the impact on capital gains tax (CGT) and inheritance tax (IHT) reliefs. Will the land still qualify for agricultural property relief (APR) (is it still agriculture) and business property relief (BPR) for IHT? For example, does the improvement of natural capital count as trading or business? Rewilding and natural capital present significant questions for agricultural tax advisers, indeed all farmers and landowners, looking for capital taxes protection. 

Contributed by Julie Butler FCA, Joint Managing Partner, Butler & Co

8. Supplementary charge: apportionment of profits

The Court of Appeal (CA) has allowed the taxpayer's appeal in Total E&P North Sea UK Limited and Another v HMRC. The case concerns an increase to corporation tax on oil-related activities announced with immediate effect in March 2011, and s7(5), Finance Act 2011, which allowed an affected company to elect for a just and reasonable alternative basis of assessment to time apportionment in assessing the amount of tax payable on its ring fence profits for an accounting period straddling the rate change.

The CA agreed with the FTT that any company which earned profits at a significantly faster rate in the earlier part of the period than the later part, and stood to be materially prejudiced by time apportionment, could avail itself of s7(5). It disagreed with the UT’s view that, for s7(5) to be engaged, profits in the later period had to have arisen from something which was exceptional.

Lord Justice Newey said: ‘The FTT thought that s7(5) applies to all companies "whose profits are not smoothly spread throughout the year, but whose profits differ greatly from one part of the year to the other, and who could be disadvantaged by … a change of tax rate part way through an accounting period". I agree.’

From the weekly Business Tax Briefing published by Deloitte

9. Unallowable purpose and transfer pricing

The FTT has published its decision in BlackRock Holdco 5 LLC v HMRC. BlackRock Holdco 5 LLC, a UK tax resident US LLC, entered into loans of US$4bn with its parent company to fund an acquisition of a US business of a third party seller. The use of a UK borrower in a US chain of businesses was challenged by HMRC under the legislation on loan relationships for unallowable purposes and under transfer pricing legislation. HMRC argued that the effect of both sets of provisions was to reduce the UK finance cost deductions to nil. The Tribunal found in the taxpayer’s favour in respect of both challenges.

From the weekly Business Tax Briefing published by Deloitte

10. Settlement agreement amount found to be employment income

The FTT has found that the whole of a payment under a settlement agreement was taxable employment income. The payment had arisen from the taxpayer’s claim for unpaid overtime and allowances, so although the settlement agreement provided for some to be paid to lawyers and insurers, it did not change the character of the payment.

The taxpayer, along with a number of colleagues, took legal action against his employer over unpaid overtime and hardship allowances. The employer settled, so the taxpayer received a payment consisting of costs and a settlement. The costs were agreed to be tax free, but he filed a return on the basis that the settlement was also not income. HMRC raised discovery assessments covering the eight tax years to which the legal action had related.

The taxpayer appealed, stating that two of the three elements of the settlement were not earnings, as they had been used to pay the lawyers and insurers. HMRC argued that the entire payment had arisen from the employment, and the FTT agreed, dismissing the appeal. It found that the terms of the settlement agreement made it plain that the payment related to the claim for underpayment, so as the overtime and allowances would have been taxable earnings so was the settlement payment. Although some was diverted to pay lawyers and insurers, the settlement agreement just set out an order of priority of to whom to pay the amount, without changing its character as employment earnings.

Murphy v HMRC [2020] UKFTT 461 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

11. Revival of EIS deferred gains

Much has been written about the reduction in the lifetime limit for business asset disposal relief from 11 March 2020. However, one point that has been largely overlooked is that the reduced limit will apply where gains deferred using enterprise investment scheme (EIS) deferral relief are revived after that date.

Individuals who have made qualifying gains of over £1m but less than £10m prior to 11 March 2020, would obtain entrepreneurs’ relief on the whole of their gains. However, if they use an EIS investment to defer part of their gains, they will find that they have exceeded the new limit when the deferred gains are revived.

This point is mentioned in HMRC’s Capital Gains Manual at CG63956.

The deferral may still result in a tax saving. If the taxpayer dies while still holding the EIS shares, the deferred gains will fall out of charge. In addition, if the EIS company fails, the capital loss on the EIS shares will be available to set against the revived gains, although the loss may be better used against income. 

Taxpayers making gains qualifying for entrepreneurs’ relief in 2019/20 will need to decide whether the deferral is worthwhile given the increased tax charge that may apply eventually. Those who have made such gains in 2018/19 may wish to consider amending their 2019 tax returns to withdraw the deferral claim.

Contributed by Peter Finch, Associate Director, leaman mattei

12. Garden and grounds found to be within permitted area for private residence relief

The FTT found that private residence relief (PRR) applied to the whole gain arising on the disposal of a property, which included land of 0.94 hectares. The land was found to be required for the reasonable enjoyment of the property.

The taxpayers, a husband and wife, sold their property, which included gardens extending to 0.94 hectares, to a developer in 2014. They did not report the gain on their tax returns as they considered it qualified for PRR. HMRC found out about the disposal from stamp duty records, and recalculated the gain on the basis that only the standard 0.5 hectares formed part of the permitted area that was subject to PRR.

The FTT was satisfied that the whole of the grounds was required for the reasonable enjoyment of the house and so qualified for PRR, taking into account the size and character of the house. It noted that the properties identified by the taxpayers’ expert witness provided a better comparison to the property in question than those put forward by HMRC’s expert witness. The FTT also stated that the photos of the property showed a natural tree border around the perimeter of the property which is a factor that can justify a larger permitted area.

The FTT therefore reduced the discovery assessments made by HMRC, totalling just over £325,000, to nil.

Phillips v HMRC [2020] UKFTT 381 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

13. FTT finds short term residence qualifies for CGT exemption

The FTT has found that the disposal of a property in which the taxpayers lived for less than two months qualified for PRR on disposal, as they had moved in with the intention of living there long term having completed building work. The fact that they received a good offer, unsolicited, around the time they moved in did not mean that they would not have lived there long term otherwise.

The two taxpayers purchased a home, and after a year of building works, moved in. Six to eight weeks later, they accepted an unsolicited, repeated, offer to purchase it at a good price, and after the sale moved back to the rented accommodation they had occupied during the building works. They did not declare the disposal to HMRC.

HMRC argued that the sale did not qualify for PRR, as their occupation was not ‘of the quality and necessary degree of permanence or continuity’ to qualify the property as their main residence. The offer had first been made before they moved into the property, so they did not move in with the intention of long-term residence.

The FTT allowed the appeal and cancelled penalties for inaccuracy, finding that as the taxpayers had moved into the property with their family on completion of the building work, although their lease had not run out, it was likely that they intended to live there indefinitely. If it were not for the unexpected offer, increased after they moved in, the occupation would have continued.

Core & Anor v HMRC [2020] UKFTT 440 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

14. Legacy found to be chargeable to IHT as non-business property

In the latest case concerning the availability of , the FTT found that it was not available on three flats. The services provided to guests were incidental to the letting activity, and there was a lack of contemporary evidence to offset this. The business was therefore chiefly one of holding investments.

The deceased taxpayer had owned four of the five flats in a converted manor house. He lived in one, and let the others out when he acquired them, as furnished holiday accommodation. His executors claimed that BPR applied to the flats, reducing the IHT due. HMRC opposed this, holding that the business was ‘of making and holding investments’.

The FTT considered the nature of the business in detail, examining the advertising, booking and reviewing processes, what services were offered to guests, and what facilities were available, as well as the hours spent on business work by the deceased and his family. The executors argued that the services provided, including dog sitting, babysitting, book lending, therapies, arranging activities and so on, made the business amount to a trade rather than merely a letting business.

The FTT dismissed the appeal, finding that this was simply a letting business with some incidental services that did not change the character of the business. The non-investment activities, such as babysitting, did not happen on a regular basis. In addition, there was a lack of contemporary evidence, the executors’ case relying heavily on testimony from past guests. The deceased had been in poor health in the latter years of running the business, and it was unlikely that he had undertaken substantial concierge services.

Cox, Executors of the late v HMRC [2020] UKFTT 442 (TC)

Read analysis from Step

From the weekly Tax Update published by Smith & Williamson LLP

15. Taxpayer refused SDLT relief on combining apartments

Taxpayers purchasing an additional residential property are subject to a 3% stamp duty land tax (SDLT) surcharge, refundable if it was purchased with the intention of it being their main residence, and they sell their original main residence within three years of the purchase (replacement relief). The FTT has found that if two replacement residences are purchased with the intention of combining them into one, then replacement relief is not due, as neither was intended to be a replacement only or main residence individually.

The taxpayer purchased two adjacent apartments from different vendors a fortnight apart, paying the SDLT rates for additional properties on both. He subsequently sold his previous residence, and applied to HMRC to reclaim the extra SDLT, on the grounds that both flats were a replacement residence, as he had purchased them to combine into one dwelling. HMRC granted a refund for one flat only, and the taxpayer appealed. Before the FTT, HMRC’s position was that he was entitled to the refund for neither flat, though they did not seek to negate the refund given due to time limits. This appeal was limited to the second purchase.

The taxpayer argued that both properties were purchased as a replacement for his main residence, and that there is no express requirement in the legislation limiting the replacement to one purchase. As both purchases were completed before the sale of his previous residence, the double counting rule refusing relief where a second replacement is purchased after sale did not apply.

The judge found that the key part of the legislation was the requirement that at the effective date of the transaction the purchaser intended the purchased dwelling to be his only or main residence. HMRC argued that as the intention was to combine them into a new dwelling, neither purchase was intended to become an only or main residence. The FTT agreed with this conclusion, and denied higher rate relief on the second purchase, as the first was not in question.

Moaref & Anor v HMRC [2020] UKFTT 396 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

16. HMRC change in guidance; 3% SDLT surcharge, mixed use transactions

HMRC has updated its guidance on multiple dwellings relief, which allows SDLT rates to be fixed by the average value of dwellings rather than total deal price, by amending its manual page SDLTM09740.

The guidance suggests that HMRC now accepts that the 3% surcharge on residential property does not apply to mixed use transactions. This means that beneficial rates previously applying only to student accommodation should now apply across the board as long as there is a commercial element (which is not ‘negligible’ or ‘artificially contrived’). The value of the reclaims can therefore be up to 3% of the purchase price.

Much of this benefit will be lost when the SDLT holiday ends, which is due to happen on 31 March 2021. That date is also important for non-resident buyers, as it will see the introduction of a new 2% surcharge for such persons.

From the weekly Business Tax Briefing published by Deloitte

17. FTT ruling on SDLT for a holiday letting business

A company was denied relief from the SDLT higher rate charge because the Shareholders’ Agreement allowed the shareholders to use the property. The FTT also considered the control tests for partnerships and SDLT. It found that a trust’s shareholding could be attributed to the other shareholder, but not also to her husband.

The taxpayer was a company that had purchased a property from a connected limited liability partnership (LLP). The LLP had two members, a husband and wife, and the wife also held 50% of the shares in the company. The other 50% were owned by a trust.

The first issue was whether or not the company was eligible for relief from the 15% higher rate charge of SDLT. The company argued that it qualified for relief because the property was acquired for use in a property rental business. The FTT rejected this argument because the Shareholders’ Agreement allowed the shareholders to use the property for up to five days each year. This showed that the property was not acquired exclusively for use in a rental business, regardless of the shareholder’s intentions to make use of that allowance.

The second issue was the application of the SDLT partnership rules. The wife held a 50% interest in both the LLP and the company. HMRC therefore agreed that the chargeable consideration should be reduced by 50%. The wife was also associated with the trust, as a fellow shareholder, and its shareholding could be attributed to her for the purposes of the control conditions. The trust’s shareholding could not, however, be attributed to the husband. The chargeable consideration was therefore not reducible to nil, and 15% SDLT was payable on half of the total consideration paid.

Waterside Escapes Ltd v HMRC [2020] UKFTT 0404 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

18. Guidance on court-ordered restructuring plans and stamp duty

HMRC has expanded its guidance for applying for confirmation of the stamp duty treatment of court-ordered restructuring plans.

Restructuring plans are specific schemes that were introduced into insolvency law earlier in 2020. HMRC’s expanded guidance explains how businesses can obtain confirmation from HMRC on whether or not stamp duty will be charged on a court order sanctioning a restructuring plan.

From the weekly Tax Update published by Smith & Williamson LLP

19. VAT on use or enjoyment of phones in Austria

SK Telecom (SKT), a mobile phone provider based in South Korea, incurred Austrian VAT on fees charged by an Austrian network operator, and passed them on to its customers (South Koreans visiting Austria) as roaming charges.

The Austrian tax authorities rejected SKT’s Directive claim on the basis that effective use and enjoyment of its services took place in Austria, and SKT should have accounted for Austrian VAT on the roaming charges. Advocate General (AG) Henrik Saugmandsgaard Oe agreed. In his view, the roaming service was clearly ‘used’ in Austria, and it was unnecessary to consider whether it was also ‘enjoyed’ there (although some language versions of the Principal VAT Directive refer to ‘use and enjoyment’, the correct phrase is ‘use or enjoyment’).

The AG also considered that the fact that the roaming service might be subject to VAT in South Korea was irrelevant. The application of use and enjoyment provisions for the prevention of double taxation (or non-taxation or distortion of competition) is only by reference to VAT in the EU. SK Telecom’s roaming charges should have been subject to Austrian VAT.

From the weekly Business Tax Briefing published by Deloitte

20. VAT on nutrition advice provided by gym

Frenetikexito runs fitness studios in Portugal, and offers fitness and nutrition plans for a monthly fee. Where customers signed up to both plans, Frenetikexito allocated 60% of the payment to the fitness plans and 40% to the nutrition advice service (which it treated as exempt).

In AG Julianne Kokott’s opinion, the two plans should be treated as separate supplies. She concluded that there was no single complex supply; the fitness and nutrition plans were provided by different staff at different locations and different times, were invoiced separately, and could be signed up for separately. In her view, the nutrition plans were not dependent ancillary supplies either, as the charges were more than a marginal part of the overall fee, and nutrition advice and fitness plans are different ways of achieving a healthy lifestyle. However, she doubted whether the nutrition services were VAT exempt, so allocating consideration to nutrition plans may not affect the VAT which Frenetikexito should have charged to its customers.

From the weekly Business Tax Briefing published by Deloitte

21. Kaplan: overseas student recruitment costs subject to VAT

Kaplan International Colleges UK (KIC UK) incurred costs in 70 countries (principally China, Hong Kong, India, and Nigeria) recruiting overseas students for its UK colleges.

Until 2014, it incurred these costs directly. It therefore had to account for UK VAT under the reverse charge, which it could not recover as it had formed a VAT group with the colleges whose activity was exempt. Kaplan then established a company in Hong Kong (KPS HK) which consolidated the recruitment costs before apportioning them between the colleges.

The Court of Justice of the European Union has ruled that this did not convert the recruitment costs into an exempt supply under the cost-sharing exemption (CSE). KPS HK was providing its services to the UK VAT group, one of whose members (KIC UK itself) was not a member of the cost-sharing group as it did not provide exempt education. If the CSE applied to charges from KPS HK to the UK VAT group (meaning that no reverse charge arose) then there was a risk that KIC UK would benefit from the exemption. This risk could not be tolerated, and therefore the CSE could not apply to any of KPS HK’s charges.

From the weekly Business Tax Briefing published by Deloitte

22. FTT finds discovery not stale

The FTT has upheld a discovery assessment issued over four years after submissions of two SDLT returns, 18 months after correspondence with HMRC about them had ceased. The judge found that the initial information supplied had not been enough for HMRC to make the discovery, as the taxpayers had not explained that two returns for different companies were linked, nor that a tax avoidance scheme had been used, nor that one company involved was unlimited. The discovery assessment made on review of the file after HMRC investigated these schemes was valid.

The taxpayer company (MD) purchased land from a third party, and later that same day made a distribution consisting of that land to the parent company (CEL), which wholly owned MD. The share capital of MD was reduced by this distribution. They claimed that no SDLT was due, as this was an intra-group transfer of non-cash assets, so consideration was effectively nil on each transfer. Eventually, it was agreed between the taxpayers and HMRC that SDLT was due, but the taxpayers argued that the assessment was invalid, as the discovery was ‘stale’.

After the initial SDLT returns were filed, HMRC had requested additional information as to why no SDLT was due, as there was a discrepancy on the form, and later issued corrections to charge SDLT. The taxpayer had included handwritten notes on the form, but these were not picked up by HMRC scanning systems. After two years of correspondence an HMRC official accepted the original returns, undoing the corrections. 18 months later, following an HMRC review of SDLT avoidance schemes, discovery assessments were issued.

The taxpayer argued that these assessments were invalid, as they had been issued too long after HMRC was aware of the issue. Full details had been given in the forms, or in the correspondence with HMRC. HMRC argued that the taxpayers had not alerted them to the fact that there was a connection between the two SDLT returns, though this had been noticed, nor that a scheme had been used. The earlier correspondence simply related to the issue in processing the returns, and the actual discovery had been made when the file was reviewed after a Counsel’s opinion on these schemes had been obtained, after the enquiry window had closed.

On review of the train of events and file notes, the FTT found for HMRC that the discovery assessment was valid. Although HMRC had some information earlier, the actual discovery had been made when all the facts came to light on review of the file.

Merit Developments NI & Anor v HMRC [2020] UKFTT 414 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

23. Senior Accounting Officer: changed approach to penalties

Following recent discussions with HMRC on the Senior Accounting Officer (SAO) rules, we understand that, in 2018/19, 152 SAO penalties were raised; this number fell slightly to 148 in 2019/20. Five of the penalties across the two periods related to main duty failures or inaccurate certificates.

We also understand that HMRC intends to modify its approach following critical comments on its exercise of discretion in relation to SAO penalties made by the FTT in Castlelaw v Douglas; updated guidance is expected by the end of 2020. It is expected that greater emphasis will be placed on the taxpayer’s compliance record and the overall status of the relationship with HMRC.

HMRC therefore expects to spend more time focusing on the substance of SAO, including engaging directly with SAOs as part of the Business Risk Review (BRR+) process. HMRC is continuing to accept SAO certificates signed electronically, and to accept unsigned certificates where the certificate is issued from the SAO’s email address. 

From the weekly Business Tax Briefing published by Deloitte

24. FTT dismisses ‘logistically impossible’ ATED penalties

The FTT found that where the first ATED return from a taxpayer is late, HMRC cannot issue a valid penalty notice for daily late filing penalties. The law requires the penalty notice to be issued prospectively; since the penalty period had passed, HMRC could not issue a valid penalty notice.

The taxpayer, a company operating caravan parks, acquired a cottage to be used as a furnished holiday let in July 2017 and filed its first two ATED returns late, in January 2019. HMRC issued late filing penalty notices, including a notice for daily penalties for the period 1 August 2018 to 30 October 2018 in relation to the second ATED return. The penalties relating to the first return were later withdrawn, and the taxpayer appealed the remaining penalties. The FTT upheld all of them except the daily penalties, which it found were not validly issued.

The FTT held that, on a purposive interpretation of the statute, a penalty notice for daily late filing penalties cannot be issued retrospectively. It ruled that the statute does not confer on HMRC a discretionary power to backdate these penalty notices. The judgement acknowledged that this interpretation means that HMRC cannot validly issue a daily penalty notice if the first filing of ATED returns is late. By the time HMRC becomes aware that an ATED return is due, the period during which the daily penalties apply will have passed. It is therefore logistically impossible for daily penalties to apply in these circumstances.

Heacham Holidays Limited v HMRC [2020] UKFTT 0406 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

25. FTT overturns child benefit charge penalties

The FTT has cancelled penalties relating to four years’ worth of the high income child benefit charge (HICBC). It accepted that the taxpayer had been unaware of the HICBC, as he became subject to it the year after it was introduced, and the media campaign was carried out. He had not been aware of his wife’s finances, and had dealt very promptly the matter when HMRC notified him of the liability.

The taxpayer’s wife claimed child benefit for four tax years, in which the taxpayer’s income was above the threshold to have a reduced entitlement. HMRC wrote to him on 30 September 2019 to explain the recent changes to child benefit for those on high incomes, and how they might apply to him. He responded on 4 October and provided income details for the relevant years rapidly. Assessments were issued for the overpaid child benefit, and penalties.

The taxpayer appealed the penalties, arguing that he and his wife were unaware of each other’s salaries and other income. He had been unaware of the HICBC until receiving the 2019 letter, and had dealt with the matter promptly and paid all tax due. HMRC asserted that he had been sent an awareness letter in 2013 about the HICBC. His efficiency in dealing with the 2019 letter was reflected in the penalties of £286.10, as he had been given the maximum reductions.

Taking into account the circumstances, the FTT allowed the appeal and cancelled all penalties, agreeing that the taxpayer had a reasonable excuse. He had not been subject to the HICBC at the time of the media campaign, and given the speed of his response to the 2019 letter it found that he had not received the 2013 letter.

Cockburn v HMRC [2020] UKFTT 388 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

26. Discovery assessment on child benefit valid

The FTT has dismissed an appeal against discovery assessments for the HICBC, finding that under the legislation this type of assessment can be issued for the HICBC.

The taxpayer, who was not in self assessment, failed to declare liability for the HICBC in 2013/14 although he received an awareness letter, as he did not realise that his employment benefits counted towards the threshold for repayment. When he became aware of his liability in 2018, he notified HMRC voluntarily. After discussions, HMRC issued discovery assessments covering four tax years. The taxpayer appealed.

The FTT dismissed his appeal. It considered whether or not the legislation empowered HMRC to raise discovery assessment for HICBC, and found that it did. The taxpayer had not received a notice to file, but he was liable for the charge, so was obliged to notify chargeability. His failure to do so led to a loss of tax, so HMRC was entitled to assess it.

Wiseman v HMRC [2020] UKFTT 383 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

27. Diverted salary subject to IT without PAYE credit

In a lead case, the FTT found that for avoidance arrangements designed to take income out of the scope of IT and NICs no PAYE credit was due to reduce the bill. The FTT considered the PAYE regulations in detail, and excluded part of the earnings as subject to agency contracts, and part as the transfer of assets abroad (TOAA) rules applied and took precedence.

The taxpayers had participated in a DOTAS notifiable scheme, involving offshore arrangements designed to keep the majority of their income out of the scope of UK IT and NICs. Each set up an Isle of Man (IoM) trust, the trustee of which was an IoM company. The companies for each participant formed an IoM partnership. The taxpayers agreed to provide services to the partnership in exchange for a fee. The partnership contracted with a UK company, who contracted with a recruitment agent, to allow the taxpayers to work for end clients. The taxpayers received a fee for the contract, and a partnership profit share, totalling the amount paid by the end client less fees charged for the arrangements. They declared only the contract fee as liable to tax, not the profit share, relying on a provision of the double tax treaty.

HMRC amended the returns to charge IT and NIC on the profit share. Following a UT decision on another user of the arrangements, the taxpayers accepted that they were liable to tax, but argued that a PAYE credit should be due for tax that should have been withheld from their pay.

The grounds of appeal were that the income was earnings, so under the PAYE regulations tax should have been withheld by their employers. As this was the responsibility of the employer, the taxpayers were still entitled to claim a PAYE credit as though the tax had been deducted. HMRC was now out of time to open a claim against the employers for failure to withhold tax.

The FTT looked at whether the payments were earnings or taxable under the agency rules but in either event no PAYE credit was available under the TOAA rules. The taxpayers had transferred assets to the IoM trusts when entering into contract with the partnership, creating rights. The TOAA rules took precedence over PAYE.

Lancashire & Ors v HMRC [2020] UKFTT 407 (TC)

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