049. Extension of MTD VAT

Making Tax Digital for VAT (MTD VAT) extends to all VAT-registered traders, and many will need to sign up for the first time for their first accounting period that starts on or after 1 April 2022.

It is important to sign up to MTD VAT at the right time.

If the business pays its VAT by direct debit, it should sign up:

• at least seven days before the first MTD return is due; but
• at least five days after the last non-MTD return is due.

Signing up too close to the date the return is due can result in duplicate payments being collected.

If the business does not pay by direct debit, it should sign up at least three days before the first MTD VAT return is due.

Contributed by Caroline Miskin

050. Changes to business rate eligibility criteria for holiday homes

The Department for Levelling Up, Housing and Communities has announced that, from 1 April 2023, a property will only be assessed for business rates rather than council tax if the owner can provide evidence that:

• it will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the coming year;
• during the previous year, it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days; and
• during the previous year, it was actually let commercially, as self-catering accommodation, for short periods totalling at least 70 days.

051. Partners’ legal fees on criminal charge found to be partnership expense

The First-tier Tribunal (FTT) has allowed a partnership to claim deductions for the expenses of defending partners in criminal cases. It was shown that the business would have suffered significant ill effects from a conviction, so the expenses were wholly and exclusively for the trade.

Two partners in a partnership trading in scrap metal faced criminal charges over dealing in stolen property. They were ultimately found not guilty, but incurred substantial legal fees defending their case. HMRC disallowed these costs in the partnership tax returns on the grounds that they were not wholly and exclusively for the benefit of the trade, but also for the purpose of defending the partners’ reputations and avoiding prison sentences for them. The taxpayer contended that the scrap metal industry is highly regulated and the partnership would have been unlikely to obtain a licence if the partners were convicted. The landlord of the premises had also informed them that the lease would be terminated if they were convicted, and their bank and insurer could have also raised issues.

The FTT found for the taxpayer. It disagreed with HMRC’s stance that the business would not have been significantly impacted by conviction. In addition, the partners were at risk of fines, rather than prison, and the damage to their personal reputations was done when their arrests were reported in the local news, rather than during the court process. The legal expenses were incurred wholly and exclusively for the trade, so allowable.

TR, SP and SR Rogers v HMRC [2021] UKFTT 458 (TC)

From the weekly Tax Update published by Smith & Williamson LLP 

052. Taxpayer loses appeal on farming sideways loss relief

The Court of Appeal (CA) has agreed with the Upper Tribunal (UT) that an organic farming business was not carried on on a commercial basis. The judgement, which overturns a First-tier Tribunal (FTT) decision, sets out the correct approach to the test for sideways loss relief for farming businesses.

The taxpayer purchased a working farm with surrounding land, but for about 17 years did not turn a profit, despite purchases of more land and changes to the way the farm was run. HMRC treated the trade as non-commercial and denied sideways loss relief, on the grounds that there was no reasonable expectation of profit.

The CA agreed with the UT that the correct approach is first to determine what activities were carried on in each year of losses.

If those activities were carried on at the beginning of the year of loss, the test was whether a competent farmer would have then thought that, in those circumstances, a profit would be made but not until after the end of that year.

If so, the test is met and sideways loss relief is available. It is important that the actual activities are considered in this test; general categorisation such as ‘organic farming’ is not permissible. Under this approach, and based on the expert evidence, there was a reasonable expectation that the business would make a profit long before it actually did. The business was therefore not run on a commercial basis and sideways loss relief was not available.

The CA analysed the UT decision, and the FTT decision, which had been for the taxpayer, in detail, and decided that the FTT had misconstrued the test, by looking at the competence of the individual farmer instead.

Naghshineh v HMRC [2022] EWCA Civ 19

From the weekly Tax Update published by Smith & Williamson LLP 

053. Pension contribution not wholly and exclusively for the trade

The First-tier Tribunal (FTT) concluded that substantial pension payments made on behalf of key employees as part of a tax scheme were not incurred wholly and exclusively for the purposes of the trade. No corporate tax deduction was available as a result.

Two separate taxpayer companies set up unfunded unapproved retirement benefit schemes to provide directors and key employees with a future pension. The contributions were calculated with reference to the estimated pre-tax profits of the businesses and, in both cases, the aggregate amount of pension was set at 80% or 100% of estimated profits. The taxpayers claimed tax deductions for the liability to make future payments into the scheme.

HMRC raised enquiries and disallowed the pension contributions on the grounds that either they were not incurred wholly or exclusively for the trade or, as no employee benefits were provided, the amounts were not allowable employee benefit contributions. The taxpayers appealed.

The FTT dismissed it, finding that the primary purpose of the payments was to reduce the taxpayers’ tax liability without incurring any expenditure. The scheme was brought to the taxpayers as a tax planning scheme, the engagement letters with the accountant implementing the scheme referred to it as aggressive tax planning and at no stage was pension advice sought. The contributions were calculated by reference to profits, regardless of the level of those profits, rather than future benefit needs. The FTT concluded the provision of pensions to directors was only an incidental aim of the taxpayers when establishing the pension arrangements. The liability to pay future pensions was not therefore incurred wholly and exclusively for the purposes of the trades.

The FTT went on to consider whether or not the arrangement amounted to an employee benefit contribution. It found that as the arrangement was unfunded, the employee benefit contribution rules did not apply.

A D Bly Groundworks and Civil Engineering Limited & CHR Travel Limited v HMRC [2021] UKFTT 445 (TC)
 
From the weekly Tax Update published by Smith & Williamson LLP 

054. Revised guidance on subsidised costs for R&D claims

HMRC’s Corporate Intangibles Research and Development Manual has been expanded to provide additional guidance on the meaning of subsidised expenditure for small and medium-sized enterprise (SME) R&D claims. It has also updated its guidance on activities contracted to an SME.

R&D tax reliefs under the SME scheme are not available for expenditure that is subsidised. Expenditure that is otherwise met directly or indirectly by a person other than the company is included in the definition of subsidised. The new guidance confirms that there needs to be a clear and direct link between the payment received and the qualifying expenditure to fall within this definition. What is considered to be a ‘clear and direct link’ will depend on the facts in each case and some examples have been provided.

HMRC has also updated its guidance on subcontracted activities. Expenditure incurred in carrying out activities contracted to an SME by another person is not qualifying expenditure. This is intended to prevent both parties to a contract from claiming relief for the same activities. The guidance confirms, however, that where R&D continues after the contract has been fulfilled, the post-contract activities will not be precluded from relief.

From the weekly Tax Update published by Smith & Williamson LLP 

055. Closing PAYE schemes

When should you close a PAYE scheme if you have P11Ds and/or PAYE settlement agreements (PSAs) to submit?

The answer is that you should file the P11Ds and PSA at the point of closure so that HMRC attaches them to the open PAYE scheme before closing it.

If there are no longer any employees, the employer should either submit a nil return employer payment summary (EPS) for each period that no one is paid or a single EPS covering the future months where there will be no employees while the PSA/P11Ds are in the process of being prepared before the scheme is closed.

Contributed by Kate Upcraft, Kate Upcraft Consultancy Ltd

056. Flu vaccine provision

Flu vaccinations provided directly by employers to employees, whether through the provision of a vaccination at, or local to, the workplace or via a voucher scheme, are taxable benefits. However, the provision of the vaccination generally meets the conditions of the trivial benefits exemption and so is exempted from income tax and national insurance contributions (NIC).

Reimbursements made to an employee by an employer in respect of the cost of a flu vaccination borne by the employee do not meet the conditions for the trivial benefits exemption, as it is the provision of cash. This will create an income tax liability for the employee and an NIC charge on the employer. The employer may choose to settle the tax and NIC on behalf of the employee by grossing up and including on a PAYE settlement agreement.

Contributed by Peter Bickley

057. HMRC’s Online End of Year Expenses and Benefits service to be decommissioned

From 6 April 2022, HMRC’s Online End of Year Expenses and Benefits service (the interactive PDF used to submit P11D and P11D(b)), will no longer be available. Instead, employers should use HMRC’s PAYE Online service. HMRC’s PAYE Online service allows:

• submissions for up to 500 employees; and
• online submissions of P46(car) – without the need to download the latest version of Acrobat Reader or to use a certain web browser to access.

End-of-year expenses and benefits can also be reported using commercial payroll software.

Employers can access HMRC’s PAYE Online Service using the government gateway details used for the previous service. In the event of any issues, support can be found through the help function on the PAYE Online Service or by contacting the Online Services Helpdesk.

058. Changes to claiming subcontractor construction industry scheme (CIS) deductions

From April 2022, HMRC is introducing an additional field for claiming CIS deductions on the employer payment summary (EPS). Limited companies must enter their corporation tax unique taxpayer reference (CT UTR) or COTAX reference number in that field to claim credit for CIS deductions.

HMRC will reject any EPS submissions that do not include the CT UTR along with a claim for CIS deductions. If the company cannot satisfy the new CT UTR validation but needs to report anything else, they should remove the claim for CIS deductions and resubmit their EPS.

If the company has lost or cannot find their CT UTR, a request for the CT UTR can be made online. HMRC will send the CT UTR to the business address registered with Companies House.

CT UTRs should not be included on the EPS for any employer who is not using the EPS to claim a CIS deduction (for example, to recover statutory payments).

Construction businesses that are not operated through a limited company should not claim a CIS deduction on the EPS. In that case, deductions should be reported and claimed on the taxpayer’s self assessment tax return.

059. Payments during training found to be earnings

The First-tier Tribunal (FTT) has found that payments made to a midwifery trainee were earnings rather than scholarship income. Her employment during training by the hospital was continuous with her employment beforehand as a nurse.

The taxpayer applied to HMRC for a refund of PAYE and national insurance contributions (NIC) on payments made to her by an NHS trust during her midwifery training, and appealed to the FTT on refusal. She argued that this should be classed as exempt scholarship income. At the time, she had been on a university course, which included training on the wards. The hospital in which she completed trainee shifts made payments to her. She had been employed by the hospital as a nurse prior to enrolling on the course for further training and was employed after the course as a midwife.

HMRC argued that her employment at the hospital was continuous. The FTT agreed, rejecting her case that she was not an employee when a student. Evidence included the fact that she had remained in the pension scheme throughout. The fact that she had relied on unclear HMRC guidance, which was subsequently updated, and that colleagues had successfully claimed refunds in the same situation, did not alter the law. All her income was therefore earnings subject to PAYE and NIC.

Johnson v HMRC [2021] UKFTT 462 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

060. Taxpayer partially loses appeal on car allowances

The First-tier Tribunal (FTT) has found that car allowances were earnings, as they were linked to employee grade rather than business use. A part of the allowances can, however, be disregarded, to the extent that the payments were relevant motoring expenditure.

The taxpayer company paid car allowances to employees for some years. It later applied to HMRC to reclaim the class 1 national insurance contributions (NIC) paid on these amounts. HMRC refused on the grounds that the allowance was not tied to mileage, but covered acquisition of the car and all running costs except fuel, so was for the purchase of a vehicle rather than use of a vehicle.

The FTT found for HMRC that the car allowance payments were earnings. The amounts were linked to staff grades, rather than aligned to business use, and were not reimbursements for expenses. An amount of the payments was, however, agreed to be relevant motoring expenditure, so not subject to NIC.

Wilmott Dixon Holdings Limited v HMRC [2022] UKFTT 6 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

061. Remuneration trust scheme held to have failed

The First-tier Tribunal (FTT) has found that payments made by the company to a remuneration trust, which were loaned on to the director, were subject to PAYE.

The taxpayer company made contributions to a remuneration trust, which granted funds to an associated company. The majority of these funds were then lent to the taxpayer company’s sole shareholder and director. HMRC raised assessments on the basis that this was a marketed tax avoidance scheme. The company contended that the contributions to the trust were wholly and exclusively for the purposes of its trade, so should be allowed as deductions, and argued that PAYE was not due. The FTT considered the details of the scheme, along with the evidence of witnesses involved in its introduction and relevant case law. Some documents presented by the taxpayer were found to be sham documents so were not allowed to support the case.

The FTT dismissed the taxpayer’s appeal. This was a marketed scheme with the purpose of obtaining a tax deduction for the company without creating a tax liability for the director. The loans to the director were a pre-ordained series of steps, inextricably linked to the making of the contributions, to benefit the director’s family. It concluded that the contributions were not wholly and exclusively for the purposes of the taxpayer’s trade and not deductible for corporation tax. The FTT also found that although the amounts lent were not earnings from an employment under general principles, the loan arrangements were employment income subject to PAYE and national insurance contributions.

Strategic Branding Ltd v HMRC [2021] UKFTT 474 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

062. Former hospital found not to be taxpayer’s main residence

The First-tier Tribunal (FTT) has found that, although the taxpayer claimed to have lived for a year in a large derelict building that he owned, if this had been the case the quality of his occupation was not sufficient to classify it as his main residence. His wife had lived elsewhere, he had not changed his address with any official body, and he had not carried out any renovation work to make the building habitable.

The taxpayer owned a former hospital, for 19 years. On sale, he claimed private residence relief for four years of his ownership period, one year of actual residence and three years as the pre-sale period allowed at that time for former main residences. He lived in another property he owned both before and after the claimed year of residence, which remained available to him. No main residence election had been made and for a year the property had been rented out to a school. His wife lived elsewhere and never visited the property.

He argued that he had purchased the property planning to convert it into a large home and had only ultimately sold it to the local council as he believed that they would otherwise issue a compulsory purchase order, given their keenness to develop the site for residential use. HMRC took the view that the property was purchased as an investment, like other investment properties he owned. Although he had discussed planning permission and talked to developers, which he argued was to create a home, this was consistent with increasing the value of his investment. No renovation work had been done during 19 years of ownership, the property was not suitable for occupation as a home without it, and was in very poor condition, so HMRC believed it was highly unlikely that he had chosen to live there for a year rather than at his other properties. The taxpayer had not changed his address with any bank or other institution, as all post was sent to his workplace, a pharmacy, which was his registered address with HMRC.

The FTT found for HMRC. It held that he had never shown any intention that his claimed occupation would result in the site becoming his long-term residence. No work had been done to renovate the clearly derelict property, and the nature of his claimed occupation was not sufficient to create a claim that it was his main residence. In addition, as his wife had never set foot in the property and was unaware of her husband’s plans for it to be the family home, it could not be regarded as her residence, and a married couple can only have one main residence. No findings were therefore necessary on his intentions at the time of purchase, and the capital gains tax assessment and penalties for carelessness were upheld.

Hussain v HMRC [2022] UKFTT 13 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

063. Taxpayer wins in business asset disposal relief case

The First-tier Tribunal (FTT) has found that a partner could claim business asset disposal relief (BADR) on the partnership’s sale of an office building, as it was part of the process by which he had disposed of his interest in the business, although the process took 22 years.

In 2017, a partnership in which the taxpayer was a partner sold an office building to his pension scheme. He claimed entrepreneurs’ relief, now known as BADR, on the sale, on the grounds that from 1996 he had been reducing his interest in the partnership each year. HMRC contended that the office sale did not meet the requirement of being linked to the disposal as part of the business, as there was no proof of a link. Given that the withdrawal from the partnership took 22 years, the sale was not part of the same transaction

The FTT allowed the taxpayer’s appeal, finding that the sale was part and parcel of the wider withdrawal. He had explained the business circumstances that led to extending the withdrawal, but had been trying to dispose of the business throughout, so on the facts of the case BADR was granted.

Thomson v HMRC [2021] UKFTT 453 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

064. Non-taxable trust registration: TRS extension confirmed

New rules that came into force in October 2020 require all UK express trusts and some non-UK trusts to register with HMRC. This includes non-taxable trusts, unless the trust is specifically excluded. The trust registration service (TRS) opened to registrations by non-taxable trusts in September 2021.

A draft statutory instrument to amend the TRS regulations was laid before parliament on 6 January 2022.

This statutory instrument amending the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 needs to be approved by both Houses of Parliament before it comes into law. Provided that this approval is granted, the changes are expected to come into force on 9 March 2022.

Once approved, the statutory instrument:

• extends the registration deadline from 10 March 2022 to 1 September 2022;
• extends the post-2022 registration deadlines from within 30 days of the trust becoming registerable to within 90 days of the trust becoming registerable;
• extends the time limits for keeping information held on TRS up to date from within 30 days of the trustees becoming aware of the change to within 90 days of the trustees becoming aware of the change;
• adds to the existing exclusion for insurance policies at para 4, Sch 3A to ensure that trusts holding policies that contain temporary disablement cover and trusts holding healthcare policies are excluded from registration; and
• adds a new exclusion at para 6A, Sch 3A to ensure that trusts created in the course of setting up a bank account for minors or vulnerable persons are excluded from registration.

HMRC’s Trust Registration Service Manual will be updated for these changes in due course.

Contributed by Caroline Miskin

065. SDLT assessment found to be valid

The First-tier Tribunal (FTT) has rejected a taxpayer’s argument that the stamp duty land tax (SDLT) return it has submitted was voluntary, so incapable of being enquired into. Although this type of scheme had failed by means of retrospective legislation, the FTT found that this scheme was invalid at the date of the transaction, so the discovery assessment and closure notice were found to be valid.

The taxpayer implemented a subsale relief scheme with the aim of reducing SDLT on the purchase of a property by granting a third party the option to buy the property at the same time as the purchase, and holding that the first contract had therefore not been fully performed. This type of scheme has previously been defeated, using retrospective legislation, so the issue in this case was validity of the closure notice and discovery assessment.

The appellant argued that the return enquired into was a voluntary return, into which HMRC had no power to enquire. It stated that the onward option contract meant that no SDLT return was required in relation to the transfer of the property to the appellant, so it had been submitted as a voluntary nil return. For SDLT purposes no transaction had occurred.

The FTT considered the legislation, and reached the conclusion that the scheme was ineffective at the date of the transaction, before the retrospective legislation, as the contract was substantially performed. The acquisition was therefore a notifiable transaction requiring a return.

Redmount Trust Company Limited v HMRC [2021] UKFTT 443 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

066. Claims for input tax on Mailmedia services were invalid

For Zipvit Ltd to recover VAT on Mailmedia services provided by Royal Mail in 2006-2010, VAT must have been ‘due or paid’ and should have been evidenced by a VAT invoice. At the time, however, the services were (incorrectly) considered to be exempt from VAT. Although HMRC did not pursue Royal Mail for output tax, Zipvit still sought to recover input tax.

Last July, Advocate General Kokott rejected Zipvit’s case, on the basis that it was impossible to establish a right to recover input tax in the absence of a VAT invoice showing the amount of VAT on a supply. The Court of Justice of the European Union has now also ruled against Zipvit, albeit for a different reason. In principle, the fact that Royal Mail had not charged VAT to Zipvit meant that Zipvit had not passed on any VAT to its customers (even though the contract provided that Zipvit should bear the cost of any VAT). VAT was not ‘due’ in relation to Royal Mail’s supplies, as HMRC accepted that it had no enforceable claim against Royal Mail (which had a legitimate expectation that Mailmedia services should have been treated as exempt until 2010). In those circumstances, it was unnecessary to consider whether the absence of a VAT invoice was significant, as Zipvit’s claim could not in any event succeed. 

From the weekly Business Tax Briefing published by Deloitte

067. Parking control fees subject to VAT

Apcoa Parking Danmark A/S operated car parks on private land under agreements with site owners. It set the conditions for using the car parks, and imposed a €69 ‘control fee’ if drivers did not comply with them (eg, by exceeding the permitted parking time, or parking across multiple bays).

In the Court of Justice of the European Union’s judgement, such fees were subject to VAT. The obligation to pay the control fees was a feature of the legal relationship created when a driver decided to park in one of Apcoa’s car parks (ie, part of the general terms and conditions for using the car park). In effect, the fees represented additional consideration for ‘excessive use’ of the car park. Unlike the example where a hotel retains a deposit because a customer does not show up (when no service is provided) there was a link between the control fees and the provision of parking. Apcoa’s claim for VAT of €3.37m on the control fees should therefore be rejected.

In the UK, updated guidance on how to distinguish between compensation and consideration is still awaited, as set out in a revised introduction to Revenue & Customs Brief 12 (2020) in January 2021. 

From the weekly Business Tax Briefing published by Deloitte

Editor’s note: HMRC issued updated guidance in Revenue & Customs Brief 2 (2022) on 7 February 2022.

068. Supply of accommodation in hostels

City YMCA London (CYL) owns and operates a hostel for young homeless people at Monarch Court in Hackney. As well as accommodation in their own room, residents are provided with breakfast, wifi and access to communal kitchen and laundry facilities and a games room. Most residents stay for more than six months (but less than two years), although their agreement with CYL can be terminated at short notice. The agreement stated that residents did not have a right of exclusive occupation, and denied the creation of any tenancy that might interfere with CYL’s ability to evict the resident.

The First-tier Tribunal (FTT) has ruled that CYL was nevertheless making a supply of property. Although the agreement denied exclusive occupation in theory, it was necessary to establish whether exclusive occupation was provided as a matter of economic reality. In this instance, CYL might retain a right to inspect and maintain the bedrooms, but did not retain a right to use the rooms as bedrooms for other people. The FTT concluded that CYL was making a supply of property. It also held that Monarch Court was similar to a hotel, not because of the additional facilities that were provided alongside the room, but because CYL’s accommodation was, like most hotel stays, intended to be short-term. CYL’s supply of property was therefore subject to VAT, but qualified for the reduced valuation for long-term hotel accommodation. CYL could recover input tax incurred in operating the property (and in redeveloping another hostel in Islington), and should account for VAT at an effective rate of 4% on most of its charges to residents. 

From the weekly Business Tax Briefing published by Deloitte

069. Distance sales of goods from Northern Ireland to the EU

Businesses selling goods from Northern Ireland to consumers in the EU have to pay local VAT on the sales if the total exceeds the distance selling threshold of €10,000. This threshold is much lower than the UK VAT registration threshold of £85,000 per annum.

To avoid having to register for VAT in up to 27 EU member states, businesses can instead choose to use the One Stop Shop (OSS) Union scheme to manage the VAT on their distance sales of goods from Northern Ireland to EU consumers.

HMRC has published a notice, which has force of law, that is of particular relevance to small Northern Ireland businesses trading below the UK VAT registration threshold that wish to make use of the OSS. It sets out certain legal requirements to be met by such businesses.

The details are as follows:

1. A person making a request to register for the OSS scheme must have a valid VAT registration number and be identified as a ‘relevant Northern Ireland trader’ under Part 6 of the Value Added Tax (Northern Ireland) (EU Exit) Regulations 2020.
2. If a person does not have a valid VAT registration number, is not liable to be registered for VAT, and does not wish to register voluntarily, the person must make a request to be allocated a valid VAT registration number for the purposes of using the OSS scheme. This request must be made before, and in addition to, a request to register for the OSS scheme.
3. A person who does not wish to be registered for VAT must enter the ‘VAT registration portal’ and select ‘63990 Distance sales of goods (below UK VAT threshold) for OSS purposes’ when asked to search for a business activity when applying for a valid VAT registration number.
4. Where a person has made a request to be allocated a valid VAT registration number, HMRC must allocate a valid VAT registration number for the purposes of using the OSS scheme with effect from the day on which the request is made.
5. Where a person’s registration under the OSS scheme is cancelled, HMRC must also cancel that person’s VAT registration number, where that number is used solely for the purposes of the OSS scheme. 

Contributed by Neil Gaskell

070. VAT recovery on share sales

The taxpayer won its appeal regarding the recovery of VAT in relation to the sale of shares in a subsidiary.

The taxpayer had sold the shares in a subsidiary in order to finance the  construction of a new hotel. It had incurred VAT on professional costs associated with share sale and recovered the VAT on its VAT returns. HMRC contended that as the sale of shares was exempt from VAT, the taxpayer was not entitled to reclaim this VAT and raised an assessment accordingly.

The First-tier Tribunal held that as the purpose of the share sale was to raise funds for the downstream activities of the business, that is the development and operation of a new hotel, the VAT incurred on professional costs associated with the share sale was recoverable.

Hotel La Tour Ltd v Revenue and Customs Commissioners [2021] UKFTT 451 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

071. Issue of partial closure notice: Court of Appeal dismisses taxpayer’s appeal

The Court of Appeal has unanimously upheld the decision of the Upper Tribunal (UT) in HMRC v Embiricos. The case concerns self assessment provisions, introduced in 2017, that allow for a partial closure notice (PCN) to be issued by HMRC. A PCN allows for discrete matters to be settled, or to be determined by the Tribunal, while allowing others to remain under enquiry. 

HMRC opened enquiries into claims by the taxpayer in his self assessment tax returns for the years ended 5 April 2015 and 5 April 2016 that he was domiciled outside the UK and entitled to the remittance basis of taxation. HMRC concluded as a result of its enquiries that he was domiciled in the UK. The taxpayer sought a closure notice from HMRC for those years so that he would be able to appeal against HMRC’s decision. 

HMRC considered that it could not issue a closure notice until it had also quantified the amount of tax that would be due if the remittance basis was denied. HMRC therefore issued the taxpayer with an information notice request. 

The First-tier Tribunal agreed with the taxpayer that a PCN could and should be issued in these circumstances. The UT reversed that decision, holding that it was necessary for the amount of tax to be ascertained. The Court of Appeal has now agreed with the UT. Lady Justice Nicola Davies said “… I have concluded, in agreement with the [Upper Tribunal] that HMRC do not have the power to issue a PCN in respect of Mr Embiricos’ domicile and remittance basis claim without specifying (assessing) the increased tax due in consequence of that conclusion. I would dismiss the appeal accordingly.”

From the weekly Business Tax Briefing published by Deloitte