Pensions

254. Elaborate pension liberation scheme fails

A taxpayer suffered an unauthorised payment charge from his self-invested personal pension (SIPP) where he sold unquoted shares to his SIPP trustees at a price that was over the arm’s length value. The First-tier Tribunal (FTT) held that he and the trustees were not at arm’s length despite having no other connection.

The taxpayer applied for shares in a company that was marketed as developing a Mediterranean hotel. At the same time, he became a member of an associated LLP. The taxpayer later sold his shares to his SIPP at the price paid, without due diligence. The structure was such that no hypothetical purchaser would have placed any value on the shares as there was no basis on which a return on them could be made and the structure was uncommercial.

The taxpayer argued that he was at arm’s length from the SIPP trustees. The FTT did not accept that argument since it was only his SIPP funds that were involved.

The FTT found that the sale of the shares otherwise than at arm’s length price constituted an unauthorised payment. It also upheld the surcharge HMRC had imposed on the taxpayer.

Boardman v HMRC [2022] UKFTT 238(TC)

From the weekly Tax Update published by Evelyn Partners LLP

Business taxes

255. Carry-forward of trading losses

When a trade (or any other kind of business) is transferred to a company wholly or mainly for shares, any tax losses of the business that remain unused at that time are retained by the transferor and can be deducted from any income the transferor receives from the company. It doesn’t matter whether the income is in the form of remuneration or dividend (or even loan interest): nor does it matter that the income may have no connection whatsoever with the business transferred. All that really matters is that the company continues to carry on the transferred business (however minimal the extent) and that the transferor continues to hold the shares.

It’s a remarkably generous relief and one that can, in the right circumstances, rescue something from the wreckage of a failed business venture where all else fails. But there are limits, as the appellant found in Graham Davis v HMRC [2022] UKFTT 274 (TC).

Mr Davis’s business, which he conducted as a sole trade between 2002 and 2007, was financing the car trading activities of one Mr Dickinson. Mr Davis supplied the money for Mr Dickinson to buy cars: on their sale he was paid back the amount advanced plus a share of profit.

Some years after the sole trade had ceased, Mr Davis incurred some losses (Mr Dickinson failed to pay up what he owed) and he claimed relief for them against income he received from his company in 2016/17 and 2017/18.

The first problem with the claim was that the company had started operation in 2005. It never had any dealings with Mr Dickinson – who was Mr Davis’s only customer and with whom Mr Davis continued to trade personally until 2007. Difficult, then, to see that the trade had been transferred to the company.

The second problem was that even if the trade had been transferred, the losses didn’t exist at the date of transfer: they were ‘post-cessation losses’ to which the rules don’t apply.

Third, even if the trade had been transferred, it hadn’t been transferred in return for shares in the company: they had been subscribed for in cash. That alone scuppered the claim.

Altogether, the case was hopeless. Nonetheless, it is a useful reminder of the generosity (in some circumstances) of the rules on carry-forward of trading losses – but generosity has its limits.

Contributed by David Whiscombe writing for BrassTax, published by BKL

256. Discussing succession planning with farmers

Farmers dislike discussing succession and their own mortality and will avoid meeting face to face when these subjects are on the agenda. However, a number of recent tax changes impact quite seriously on farmers and could provide the basis for a wider conversation.

First, the registration of trusts and the impact on partnership property which, by definition, is held in trust. Second, how soon basis period reform will impact on farmers, especially those with April or June year ends. Third, the tax consequences of the move to farming for the environment as a result of the Agriculture Act including the sale of carbon credits. All these point towards the needs to understand farm ownership, the direction the farm is going to take in the months and years ahead and to translate that into business plans, which farmers hate to produce!

The matter could be further complicated by a fourth ingredient: farmers who took advantage of the lump sum exit scheme must dispose of or gift the land or tree planting has to take place by 31 May 2024.

There are numerous other discussion points, such as the interaction of incorporation with ‘super deduction’ and research and development tax relief. This leads to full succession planning in a face-to-face meeting. Farming face-off cannot be avoided.

At a practical level, a farm tax adviser must remember to ask for more details on professional clearance when taking on a new farm client (eg, the overlap relief figure and trust registration details for starters).

Contributed by Julie Butler, Founding Director, Butler & Co

257. Self-employment income support scheme grants can be recovered

The First-tier Tribunal (FTT) has agreed with HMRC that a taxpayer was not self-employed at the relevant time, so not entitled to claim grants under the self-employment income support scheme (SEISS). HMRC’s assessment is therefore valid, and the grants must be repaid.

The taxpayer had been self-employed as a fitness trainer, but incorporated in 2018 and traded through the company thereafter. His tax returns reflected the change in his employment circumstances. In May 2020, he applied for and received an SEISS grant, and a second in August. HMRC started a compliance check in October. He argued that the need to be a sole trader was not clear from the claims process. He should be allowed to keep the grants, as HMRC had paid them to him in the full knowledge, from his returns, that he was not self-employed at the relevant time.

The FTT found for HMRC. It was shown screenshots of the claims process, in which the eligibility criteria were clearly set out, but noted this was not that important. The taxpayer was never entitled to the grant, and HMRC had raised an assessment in good time. Although HMRC knew he was not trading, the FTT could not consider a ground of legitimate expectation. The assessment was upheld.

Taylor v HMRC [2022] UKFTT 304 (TC)

From the weekly Tax Update published by Evelyn Partners LLP

Company tax

258. Corporate interest restriction – additional information requirements, electronic filing

HMRC has published a new notice setting out additional statutory information requirements for returns made under the corporate interest restriction (CIR) rules (at tinyurl.com/TX-CIRRules).

The notice, which has the force of law under Sch 7A, Taxation (International and Other Provisions) Act 2010, requires five pieces of additional information to be included in all new and revised CIR returns filed by businesses on or after 1 October 2022. These include information on: the group’s ultimate parent; any entities making qualifying infrastructure and/or consolidated partnership elections; and the adjusted net group-interest expense of the worldwide group.

HMRC has updated its guidance page Restriction on Corporation Tax relief for interest deductions for the above, and also for the effects of the previously reported changes, which now mean that, since 1 September 2022, businesses are only able to submit their CIR returns and their notices of appointment or revocation of CIR reporting companies through one of two electronic filing methods approved by HMRC.

From the weekly Business Tax Briefing published by Deloitte

259. Christmas spectacular found eligible for theatre tax relief

The First-tier Tribunal (FTT) has found for the taxpayer that a production consisting of various elements was one dramatic production overall, so theatre tax relief was available.

This is only the second reported case on theatre tax relief, introduced in 2014. It is available on theatre, ballet shows and other dramatic productions.

The taxpayer put on a show each year, which consisted of a number of elements such as dance, song, and shows. HMRC argued that this was essentially a variety show that had no consistent story. The tribunal watched a recording and heard extensive evidence as to how the show was put together and the roles of the performers.

The FTT agreed with the taxpayer that this fell within the category of other dramatic production, and that the performance was mainly given through the playing of roles. The dancers and singers were performing not as themselves, but were playing the role of a dancer or singer as required by the story, such as a chorister in some scenes. It commented that karaoke, pop concerts and the Royal Variety Show would not be entitled to theatre tax relief, but that this show would.

The legislation on ‘other’ dramatic productions was amended with effect from April 2022.

Thursford Enterprises Limited v HMRC [2022] UKFTT 240 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

260. Media company did not qualify for the seed enterprise investment scheme

Investments in a company did not qualify for the seed enterprise investment scheme (SEIS) as there were disqualifying arrangements.

The company was incorporated to exploit the intellectual property rights to an animation programme and related spin-offs. The originator of the concept was a director within a group of companies (the Group) that operated a fund for investors to subscribe for shares in creative companies. An anti-avoidance provision denies SEIS relief where there are disqualifying arrangements. This includes where shares are issued subject to arrangements whose main purpose is to generate access to tax relief and the benefit of the investment is passed to another party to the arrangements.

The First-tier Tribunal (FTT) found for HMRC due to the existence of disqualifying arrangements preventing relief for investors under the SEIS. More than half of the capital raised was paid by the media company under a production services agreement to a member of the Group. The media company argued that the company to which the payment was made was not party to the arrangements, but the FTT disagreed, noting the extensive involvement of members of the Group in virtually every aspect of the arrangements. On other points, the FTT found in favour of the taxpayer, making comments on various aspects of this notoriously complex area.

Coconut Animated Island Limited v HMRC [2022] UKFTT 303 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

261. Bloodstock business did not qualify for the enterprise investment scheme

The First-tier Tribunal (FTT) agreed with HMRC that the taxpayer was an investment company, so ineligible for the relief. The profits came from appreciation in stock, and capital was not sufficiently at risk to meet the criteria for the scheme.

HMRC refused to certify share issues by the company as enterprise investment scheme (EIS) shares. The company bought and sold potential racehorses, and outsourced raising them to a third party. The FTT considered the operations of the company. In order to qualify for EIS, the capital needed to be at risk and there had to be a plan for longer term development of the company.

This company indicated in its publicity for investors that it only intended to last for three years. It had no employees and subcontracted all activities. The company had not sought advance clearance and had also not prepared any business plans or cash flow forecasts to support its case. The FTT therefore found for HMRC that it was correct to deny EIS status.

Valyrian Bloodstock Limited v HMRC [2022] UKFTT 306 (TC)

From the weekly Tax Update published by Evelyn Partners LLP

262. HMRC wins cross appeal on market value

HMRC has won an appeal on the market value of a distribution, where the split between income and capital was unclear for tax. The Upper Tribunal (UT) found that the distribution should be calculated by reference to the sales consideration in the agreement rather than the amount actually received.

The taxpayers owned a potato grading and processing business, which they operated as a partnership. They incorporated the partnership, which involved transferring goodwill to a new company. The goodwill was valued at approximately £1.2m in the accounts. The company paid approximately £750,000 cash to acquire it and left the balance on a loan account. The company later became insolvent and so the balance was never repaid.

HMRC disputed the value of the goodwill, and the First-tier Tribunal (FTT) found that it should have been valued at approximately £270,000. The parties agreed that the excess paid for the goodwill over the true value was a distribution taxable on the taxpayers. They disagreed, however, on whether the excess should be measured using the figure of £1.2m or £750,000. The presiding member of the FTT found that the distribution was equal to the excess of £750,000 over the true value of the goodwill, although the other member dissented. He held that the amount actually transferred was what mattered; crediting a directors’ loan account did not amount to a distribution. The increase to the loan account created a liability for the company; it was not a transfer of assets.

Both parties appealed to the UT. The taxpayers argued that the FTT should have assessed market value as the price a reasonably prudent purchaser would have paid for the debt, so no more than company net assets. The UT dismissed this, as the value was from the perspective of a member of the company.

HMRC appealed on the grounds that the transfer of goodwill was the new consideration, that the benefit to the taxpayers was not only when payments were made to them for the debt, and that the value of the benefit was just the value of the debt. The UT accepted HMRC’s appeal, finding that the FTT had erred in law, and the market value could only be determined by what was known at the time, not information found years later.

HMRC v Pickles & Anor (Cross Appeals) [2022] UKUT 253 (TCC) 

From the weekly Tax Update published by Evelyn Partners LLP

Payroll and employers

263. 'Cost-of-living’ payments by way of vouchers

In recent months, a large number of employers have sought to provide one-off/exceptional payments/support to their employees to help mitigate the impact of the ‘cost-of-living crisis’. Unfortunately, where this support is provided in the form of a cash payment/bonus, lower-paid employees (ie, potentially those who need the support the most) are often being left with little additional cash because of the interaction with universal credit (UC) payments.

However, by providing the support in the form of a non-cash voucher, employers are able to provide this support to their employees without impacting the employee’s UC payments. It is important that the provision of the non-cash vouchers is reported correctly.

Payrolled benefits and non-payrolled benefits are not considered to be ‘employed earnings’ for the purposes of UC. This is because reg 55, The Universal Credit Regulations 2013, SI 2013/376, specifically excludes amounts that are treated as earnings under Chs 2-11, Pt 3, Income Tax (Earnings and Pensions) Act 2003, (the benefits code).

HMRC will declare any item of income that is not flagged as a payrolled benefit to the Department for Work and Pensions (DWP) for the purposes of calculating entitlement to UC. Therefore, employers need to ensure that payrolled benefits are correctly flagged in the system set up to ensure that they are not included incorrectly in an employee’s employed earnings.

Non-cash vouchers present a further complication. Unless the employer has elected to payroll these (ie, where they would have been declared at section C, the taxable value is put through the payroll), these must be declared on an employee’s P11D. However, class 1 national insurance contributions (NIC) must be deducted via payroll. To ensure the correct treatment, the payroll code used for the non-cash voucher must be flagged as notional, non-taxable (if not payrolling), class 1 NIC-able but it also needs to be flagged as a payrolled benefit. That means the value will be declared to HMRC as part of gross earnings (but not taxable earnings) and it will not be reported to the DWP.

Contributed by Graham Gustard, Head of Employment Tax, University of Cambridge, and Ian Holloway, Payroll Consultant

CGT

264. Taxpayer wins appeal on remittance point

The First-tier Tribunal (FTT) found that payments under an indemnity had not generated a capital gain. There was no remittance to the UK, as this was just settling a debt.

The two taxpayers, who were non-UK domiciled, sold a company. As part of the agreement, they gave an indemnity against a debt being irrecoverable, which turned out to be the case. The complex mechanism chosen to settle the liability was essentially to create and then write off a debt.

HMRC argued that the transactions had generated a capital gain, which was a taxable remittance to the UK. On close analysis of the transactions and legislation, the FTT found that there was no remittance. There was no value added, so no chargeable gain.

Sehgal & Anor v HMRC [2022] UKFTT 312 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

Trusts

265. Entrepreneurs’ relief for trusts

The Court of Appeal (CA) has found that the First-tier Tribunal (FTT), and not the Upper Tribunal (UT), was right in a case on entrepreneurs’ relief (ER, now known as business asset disposal relief). Relief was available for the taxpayers, as the qualifying time period to hold the shares before disposal did not apply to trusts.

The three taxpayers were each granted an interest in possession in three separate settlements in July 2015. A relation gave an equal number of trading company shares to each settlement in August 2015 and the trusts disposed of them less than four months later. The three taxpayers were qualifying beneficiaries for ER, as they were officers of the trading company and their shareholdings were otherwise sufficient to meet the personal company rules and had been held for over the qualifying holding period in a personal capacity. Together with the trustees, they therefore claimed ER on the disposals, which HMRC rejected on the grounds that the trust shares were held for under one year.

The FTT found for the taxpayers, on the grounds that the statutory provisions on the time period applied only to shares held directly. The UT found for HMRC that the requirement to hold and interest for a year before disposal does apply to trusts. It considered the historical basis for ER, looking at its predecessors and the rationale behind the relief. It found that the availability of ER to a trust beneficiary was closely linked to that beneficiary, rather than looking solely at the trust.

The CA overturned the UT judgement and restored the FTT’s. It looked at the logic behind the legislation and found on close reading that as each individual was a qualifying beneficiary, then the trust did not also need to meet the time limit.

The Quentin Skinner 2015 Settlement L & Ors v HMRC [2022] EWCA Civ 1222 

From the weekly Tax Update published by Evelyn Partners LLP

Stamp taxes

266. Is it a dwelling?

The status of a property as a ‘dwelling’ can be important in establishing liability for stamp duty land tax (SDLT). Sometimes a property’s being a dwelling can be a Good Thing; sometimes a Bad Thing.

For example, under multiple dwellings relief, SDLT is often reduced if it can be shown that a purchase includes two (or more) dwellings. Hence a succession of cases in which taxpayers have endeavoured to show that ‘granny flats’, annexes or outbuildings included in the purchase of a main home are separate dwellings and HMRC has argued (almost always successfully) that they aren’t.

In such cases, it’s been established (inter alia) that:

• The test is ‘multifactorial’, taking into account all relevant facts and circumstances.
• When assessing whether property is ‘suitable for use as a dwelling’ it’s the physical state of the property at the time of acquisition that is relevant. Any potential it may afford to become suitable with a little work must be disregarded.
• A dwelling must provide its occupants with all the facilities for basic domestic needs.
• The test is objective and must be assessed by reference to its suitability for occupants generally rather than a particular class of occupier.

For example, in Dower, absence of proper kitchen facilities was a factor in determining that an annexe was not a separate dwelling.

On the other hand, it can sometimes be disadvantageous for a property to be a ‘dwelling’. Specifically, a 3% SDLT surcharge often applies on the purchase of ‘additional dwellings’ where the purchaser already owns a dwelling, as it did in Carl James v The Welsh Revenue Authority [2022] UKFTT 271. Since the land was in Wales, the case was about land transaction tax (LTT) rather than SDLT: but the same principles apply.

Mr James, who lived in an end-of-terrace property, bought the house next door with the intention of knocking the two into one. This was fairly straightforward since the properties had originally been built as one dwelling, but had been partitioned many years earlier.

A month or two before the sale, the vendor had removed the kitchen. This was not, apparently, part of a clever scheme to assist Mr James in saving LTT: it was just that Mr James didn’t need the kitchen and the vendor’s cousin did. Mr James’s argument that a property without a kitchen is not, on the authority of earlier cases, a dwelling was met with short shrift: “With or without a kitchen, Danderi House was used or suitable for use as a dwelling and therefore fell within the definition of a dwelling set out in s37 LTTA 2017.” Double standards? Surely not.

In fact, the ‘not a dwelling’ point wasn’t Mr James’s main argument: rather, he sought to rely on one of two exclusions from the surcharge. Sadly, neither exclusion applied.

First, he pointed out that the surcharge doesn’t apply to an acquisition of a further interest in your main residence: this is what stops the surcharge running when you, as leaseholder, buy the freehold interest. Unfortunately, what Mr James had bought wasn’t a further interest in his main residence: it was the house next door.

Second, he thought he might rely on the fact that the surcharge doesn’t apply when the property you buy is a replacement for your main residence. But that didn’t apply either because his main residence wasn’t being replaced by the property purchased but combined with it.

You might think Mr James had something of the moral high ground in the case. But whether he did or not, it didn’t help him.

Contributed by David Whiscombe writing for BrassTax, published by BKL

VAT

267. VAT refund scheme for museums and galleries

Ordinarily, it is not possible to recover the VAT incurred on goods and services purchased to support non-business activities, such as museums and galleries offering free access. However, the government will reimburse this otherwise irrecoverable VAT if the museum or gallery is named in an order made by HM Treasury.

Applications to join the scheme (by being named in the treasury order) reopen in the autumn. To be eligible to apply for admission to the scheme, museums or galleries must:

• be open to the general public for at least 30 hours per week, without exception;
• offer free entry, without prior appointment;
• hold collections in a purpose-built building;
• display details of free entry and opening hours on the museum website.

For more information on the conditions that must be met or how to apply

Contributed by Ed Saltmarsh

268. Transfers of going concern for excise warehouse keepers

There has long been a question over whether an existing excise warehouse can be sold as a transfer of going concern (TOGC) for VAT purposes, meaning no VAT is due on the sale. The reason for this is that there is no guarantee that HMRC will approve the buyer’s excise authorisation applications and, even if it does, HMRC’s own published policy states that it is impossible for the buyer to have all of the authorisations in place at the point of completion. Therefore, there is a question as to whether it is possible for the buyer to carry on the same kind of business as the seller with no break in trade.

However, HMRC has now issued a statement explaining that a disposal of an excise warehouse business and revocation of its approvals can be synchronised with the new owner’s authorisations being immediately approved:

“Where there is a transfer of an existing business, particularly where the new business does not already hold the required excise approval, we appreciate that this can result in a potential delay between the new approval starting and the business being able to access the Excise Movement and Control System (EMCS) to allow goods to continue to move in excise duty suspension. To address this delay, where there is a TOGC, our Excise Processing Team are authorised to inform the business of their new excise ID before their approval start date. As long as applications are submitted in a timely manner and the TOGC is made clear as part of the application, we should be able to share the new excise ID early enough to allow sufficient time for the new business to register and enrol for EMCS (and other systems like ATWD) and be ready to operate fully from the date their approval officially starts.”

HMRC’s published guidance is yet to be updated in line with this statement.

Contributed by Ed Saltmarsh

269. Online platform deemed to be acting as principal

Fenix International operates the OnlyFans social media website where creators upload and post photos and videos, which fans can pay to access. Fenix retains 20% of the payments and has always accounted for VAT on this commission. However, HMRC assessed it for £11.2m on the basis that it should have treated itself as both recipient and supplier of the creators’ content.

Article 28 of the Principal VAT Directive (PVD) sets out that an undisclosed agent “acting in his own name but on behalf of another person” is deemed to receive and make a supply. However, for online services delivered by platforms such as OnlyFans, the rules go further. Article 9a of Council Implementing Regulation (EU) No 282/2011 introduces a presumption that a platform is acting as undisclosed agent and should account for VAT on all amounts received, unless it can explicitly indicate who the supplier really is on its invoices; but platforms cannot make a valid indication if they either (a) authorise payment, or (b) set the general terms and conditions for the supplies.

Fenix stated that Art 9a had radically changed the rules on agency, had been introduced by the European Council through the wrong legislative process, and was therefore invalid. However, Advocate General (AG) Athanasios Rantos disagreed. He was satisfied that Art 9a respected the essential general aims pursued by the PVD. It clarified the position of agents by identifying the party responsible for paying VAT, which limited the risk of double taxation or non-taxation. The PVD already requires certain agents to account for VAT, and Art 9a should not therefore be regarded as amending or supplementing it. The fact that Art 9a created a presumption that might be almost impossible for an online platform to rebut reflected the economic and commercial realities of how platforms operate. Consequently, AG Rantos concluded that Art 9a had been properly introduced, meaning that Fenix should have accounted for VAT on all amounts received from fans. A Court of Justice of the European Union press release summarising the opinion is available.

From the weekly Business Tax Briefing published by Deloitte

270. VAT required on payment to break lease

In February 2021, Kuehne + Nagel Ltd (KNL) paid £112,500 to Ventgrove Ltd in order to exercise a break clause and terminate a 10-year lease on commercial premises in Aberdeen. Ventgrove refused to accept that the break had been validly exercised, on the grounds that KNL should also have paid “any VAT properly due thereon” (ie, it should have paid £135,000). In December 2021, the Outer House of the Court of Session concluded that HMRC (on the basis of its policy as it stood at the time) would have treated the break clause payment as outside the scope of VAT, meaning that KNL had validly terminated the lease.

On appeal, the Inner House of the Court of Session disagreed. In the first place, based on the Court of Justice of the European Union judgements in MEO and Vodafone, VAT was due in these circumstances. Second, HMRC would have expected VAT to be charged (ie, there was no legitimate expectation that the payment would be outside the scope of VAT). The Outer House had incorrectly assumed that HMRC’s policy was as described in Lloyds Bank plc (a VAT tribunal decision from 1996) rather than more recent extracts from HMRC’s manuals. The Inner House accepted HMRC’s explanation that its relevant policy was set out in its manual relating to land and property (VATLP02400), which states that a payment by a tenant in a reverse surrender is to be treated as a supply of property by the landlord. KNL had not paid enough to break the lease and Ventgrove’s appeal was allowed.

From the weekly Business Tax Briefing published by Deloitte

271. VAT on contribution in kind to property development partnerships

W GmbH had approximately a 90% interest in two limited partnerships that developed residential properties in Germany. The sales of the properties by the partnerships were exempt from VAT, which would have led to an irrecoverable VAT cost if the partnerships had contracted for the construction services themselves. W therefore procured €40m of construction services and contributed them to the partnerships. It treated these contributions as outside the scope of VAT but reasoned that it could recover associated input tax as it was a fully taxable business by virtue of some relatively modest management fees.

The Court of Justice of the European Union (CJEU) has accepted that W was a taxable person (ie, it was not a pure holding company). However, in the absence of any direct link between the construction costs and its management services, W needed to show that the costs formed part of its general expenses. On this point, the CJEU endorsed Advocate General Pitruzella’s opinion that the construction services were not expenditure incurred in order to acquire or manage the partnerships but were instead the very object of the partnership contributions. Contributing to partnerships is not, in itself, an economic activity for VAT purposes and could not on its own justify input tax recovery. Interestingly, the CJEU also considered that the direct link between the construction costs and the activities of the partnerships meant that there was no direct link between the construction costs and W’s own business. W was not entitled to recover input tax on the construction services, which meant that it was not necessary to consider whether it would have been an abuse of law to allow it to do so.

From the weekly Business Tax Briefing published by Deloitte

Customs and other duties

272. Interest on customs debts

Between July 2018 and April 2022, some businesses were incorrectly charged a £25 minimum interest amount for the late payment of customs duty. They may be able to claim a refund of the difference between the £25 minimum charge and the actual amount of interest that should have been applied.

In addition, between July 2018 and April 2022, HMRC used an incorrect interest rate to calculate late payment interest on customs debts. During this period, HMRC’s system calculated late payment interest at 0.5% more than the correct rate.

Businesses affected by either of these issues can find details about how to make a claim.

Contributed by Ed Saltmarsh

Compliance and HMRC powers

273. Be aware of e-commerce data

Clients who trade online through eBay, Amazon or other online marketplaces need to be aware that their accounts with those e-commerce sites can be provided directly to HMRC.

This data will include full details of the goods listed and the sales completed. HMRC also has access to data on goods imported into the UK.

The combination of information from these sources was the undoing of Adspec Ltd and its sole director/shareholder, Adil Hussain.

Adspec Ltd imported electronic tablets and accessories from China, branded them with a company logo, then sold the goods to UK customers on eBay, Amazon and through the company’s own website.

HMRC examined Adspec’s import figures and compared them with the turnover reported on its VAT and corporation tax (CT) returns. Data obtained from the third-party e-commerce sites confirmed HMRC’s suspicions that a large number of sales were not declared. This precise information on products advertised and the price points allowed HMRC to raise VAT assessments and calculate the likely profit margins of the company.

After conducting parallel VAT and CT investigations, HMRC issued Adspec Ltd with assessments for VAT, CT, and penalties for deliberate inaccuracies and failing to register for VAT at the correct time.

As HMRC believed that the company could soon become insolvent and that the deliberate inaccuracies could be attributed to the sole director Adil Hussain, it was able to issue Hussain with personal liability notices (PLN) for the VAT and CT penalties his company refused to pay.

This case illustrates what can happen if a taxpayer tries to hide online sales from HMRC.

Adspec Ltd and Adil Hussain v HMRC [2022] UKFTT 00285 (TC) 

From the weekly Tax Tips published by the Tax Advice Network

274. The threshold for ‘deliberate failure’ to file

There are penalties for failure to file a self assessment tax return on time (unless there is a ‘reasonable excuse’ for the failure):

• the initial penalty is £100;
• if the return remains outstanding after three months, penalties of £10 a day (up to a maximum of £900) start to kick in; and
• if it’s still not filed six months after it should have been, a penalty of 5% of the tax due (or a minimum of £300) is payable, with another 5% (or £300) if the delay reaches a year.

That much is reasonably well understood. What may be less well-known is that the 12-month penalty of 5% can be greatly uplifted (to a maximum of 200% in some circumstances) if “by failing to make the return, [the taxpayer] deliberately withholds information which would enable or assist HMRC to assess [the taxpayer’s] liability to tax”.

Thus (unlike the other penalties) the ‘super-penalty’ appears to require not just a failure to file the return, but a positive decision not to do so: but the approach taken by HMRC and the Upper Tribunal recently in the case of Matthew Harrison [2022] UKUT 216 (TCC) gives some cause for concern.

Mr Harrison’s 2014/15 tax return, which should have been filed by 31 January 2016, was not filed until September 2018.

Over the relevant period, Mr Harrison had suffered a number of distressing events including a violent carjacking, a car crash, the death of his mother, the sectioning of his daughter with post-natal mental health problems resulting in his becoming (with his wife) their grandchild’s carer and “considerable financial and operational difficulties” in his business involving formal complaints to a supervisory authority and the suspension of Mr Harrison’s personal authorisation.

When Mr Harrison changed accountants in March 2016, he discovered that his previous advisers had not filed his 2014/15 tax return. He didn’t take steps to get them to do so – it was, in his words “one fight too many”. Instead, he (eventually) instructed his new advisers to recreate the return, which they sent to him for approval in September 2017. For reasons that he “could only put down to mental anguish at the time” he did not approve and file it until he “had started to come out of [his depression]” in September 2018 – so more than two and a half years late.

HMRC asserted (and the Tribunal agreed) that, although Mr Harrison’s circumstances might afford him a ‘reasonable excuse’ for failing to meet the 31 January 2016 deadline, those circumstances and that excuse had ceased to apply at some (unspecified) time before September 2018 and the filing had been unreasonably delayed thereafter. So there were penalties for the late filing.

Although that part of the decision may be harsh, one can see how it could have been reached. What is much less easy to accept is HMRC’s imposition of the ‘super-penalty’ for deliberately withholding the return, and the Tribunal’s rejection of Mr Harrison’s appeal. Mr Harrison admitted: “Sorting out my tax return was just at the bottom of my priorities list.” But there seems to have been no evidence adduced that he had made a positive decision not to file it: at best (or worst) he had failed to direct the attention it warranted to the filing of the return. Indeed, the Tribunal expressly “does not suggest that this was a calculated act undertaken for gain”; but it was sufficient, in the Tribunal’s view, that “Mr Harrison was aware of what he was required to do, and he would have been aware that he had prioritised other demands on his time ahead of submitting the Return. He was therefore conscious of the decision that he had made and must be regarded as having taken this decision deliberately.”

On the basis of this case, the hurdle that HMRC must surmount in order to impose an enhanced ‘deliberate withholding’ penalty is a low one – much lower than many might have thought when the law was introduced. It appears that it may now be HMRC’s default position that any prolonged delay in filing a return may be assumed to be a ‘deliberate withholding’ of information with the concomitant enhanced penalties. Whether that position is or is not a correct one, it is as well to be aware of it.

Contributed by David Whiscombe writing for BrassTax, published by BKL

275. Discovery assessments upheld for an 11-year period

The First-tier Tribunal (FTT) agreed with HMRC that a loss of tax had been caused by deliberate behaviour of the taxpayer’s agent, so assessments could be issued for years otherwise out of time.

For 11 tax years, a partnership submitted tax returns showing a profit of zero. This profit figure was after deductions for direct costs paid to other family partnerships. HMRC argued that these were in fact drawings, and that the family partnerships had claimed private domestic expenditure as expenses. In order to issue assessments for all the years investigated, HMRC needed to use the extended time limits for deliberate behaviour.

The FTT agreed with HMRC that there was a loss of tax due to deliberate behaviour and upheld the assessments. There was no evidence to support why the costs had to be incurred. The agent, who had later been convicted of cheating the public revenue in relation to another matter, had deliberately designed the partnership accounts to evade tax.

The Magnet Partnership v HMRC [2022] UKFTT 288 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

Appeals and taxpayer rights

276. High income child benefit charge: permission granted for late appeal

Permission to make an appeal almost a year late was granted due to the strength of the case.

The taxpayer claimed child benefit for two years while unaware that she was liable for the high income child benefit charge (HICBC). She repaid the money using a payment plan when HMRC informed her about the charge, but appealed more than 10 months late. She applied for permission to make a late appeal on grounds including that she had never been made aware of the HICBC, was unaware of her appeal rights and was having mental health difficulties during the pandemic.

The FTT did not find her reasons for delay particularly compelling, but allowed the application, stating that a plain injustice would arise if she was prevented from making the appeal, as following the outcome of the Wilkes case it would be bound to succeed. It commented that a much greater delay might have swayed the outcome the other way.

Marfo v HMRC [2022] UKFTT 289 (TC)

HMRC v Wilkes [2021] UKUT 150 (TCC) 

From the weekly Tax Update published by Evelyn Partners LLP

277. Taxpayer awarded £1 in costs against HMRC

A judge agreed that HMRC had acted unreasonably, so taxpayers were entitled to claim costs of defending their previous appeal. Given that HMRC’s procedural failure had previously resulted in the taxpayers being able to keep a £1.3m tax refund to which they were not entitled, the judge capped the costs award at £1.

The taxpayers had entered a stamp duty land tax avoidance scheme, which all parties agreed was ineffective. They were however able to keep the tax refund of more than £1.3m, as the assessments were not raised in the right timeframe.

They won their appeal last year against HMRC’s argument that they had been negligent for not amending their returns in line with a legislative change. The deadline for an assessment in a case of negligence would have been later. The legislation now refers to deliberate behaviour.

Subsequently, they applied for HMRC to pay the costs they had incurred in defending their appeal. The tribunal agreed that HMRC had taken forward a case in which it had no reasonable prospect of success, due to a lack of evidence, so had caused the taxpayers to incur the costs of an unnecessary hearing.

The judge found that it was just and fair to make an award of costs against HMRC. The costs were more than £80,000. The judge awarded £1.

GC Field & Son Ltd & Ors v HMRC [2022] UKFTT 314 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

International

278. Treaty main purpose test

The First-tier Tribunal (Judge Tony Beare) has released a decision – Burlington Loan Management DAC v HMRC – which considers whether a payment of UK-sourced interest arising on a debt assigned to an Irish resident taxpayer was prevented from qualifying for treaty relief from withholding tax by the main purpose test in the interest article of the 1976 UK-Ireland Double Tax Convention.

The debt, relating to the administration of Lehman Brothers, was previously held by a creditor resident in a jurisdiction that did not have a tax treaty with the UK. Prior to the payment of the interest, the debt was transferred to an unrelated company, Burlington, with the price paid reflecting an assumption that treaty relief would be available. However, HMRC considered that the main purpose test within the UK-Irish treaty’s interest article (as it applied at the time) had been met (ie, that a main purpose of a person concerned with the assignment of the debt-claim was “to take advantage of” the interest article) and so refused Burlington’s claim for a refund of the approximately £18.1m of tax withheld.

Judge Beare noted that there was no previous direct case law authority on the correct construction and application of this clause (or an equivalent in any other treaty). He considered the parties’ submissions, including on the meaning “to take advantage of” in the context of the treaty and article, and found in favour of Burlington. Inter alia, noting that the creditor did not retain any ongoing economic interest in the flow of income from the debt-claim after the outright sale, Judge Beare considered that “in order for a person to be said to have a main purpose of ‘taking advantage’ of a treaty relief […] something more is required than simply selling the debt claim outright, for a market price which happens to reflect the fact that certain potential purchasers of the debt claim have tax attributes which the seller does not have, to a purchaser which happens to be able to pay that market price because it has those tax attributes by virtue of being entitled to relief under a treaty”.

From the weekly Business Tax Briefing published by Deloitte

279. EU intra-group asset transfers

One of the last direct tax cases referred to the Court of Justice of the European Union (CJEU) by the UK courts is the corporation tax case Gallaher Limited v HMRC. It concerns the compatibility of UK domestic legislation providing for intragroup transfers between two UK resident companies to take place at nil-gain/nil-loss with EU freedoms. In particular, whether it was justifiable at the time under EU law for transfers of assets by UK resident companies to group companies resident in other EU (or EEA) states to be taxed differently (ie, as an immediately taxable disposal based on the market value of the asset). In 2019, the First-tier Tribunal held that, in the absence of rules to spread any tax arising over a reasonable period of time, an immediate tax charge suffered by Gallaher was contrary to EU law. The payment deferral rules within Sch 7, Finance Act 2020 were subsequently enacted in response to this decision.

On appeal in 2020, the Upper Tribunal referred the EU law issues to the CJEU. Advocate General (AG) Athanasios Rantos has now published his initial opinion on the matter. AG Rantos distinguishes the situation from earlier jurisprudence of the court in relation to migrating companies and exit charges, and considers that the restriction on the freedom of establishment here may, in principle, have been justified in circumstances such as Gallaher’s where the taxpayer has realised proceeds from the intragroup disposal. The CJEU will now consider the AG’s opinion and will issue its judgement in due course.

From the weekly Business Tax Briefing published by Deloitte