Highlights this month include:

• Are fixed dividend shares part of ordinary share capital? • Definition of “development trade” for ATED relief • New dynamic code trigger for PAYE • FN and APN quashed for “Round the World” scheme • Online filing exclusions for 2017/18 SA returns. • HMRC criticised for poor procedures

Paula Tallon

Monthly Tax Review

Gabelle, a division of Markel Tax

A Periodic Update

for Professional Advisers

June 2019

1 June 2019

CONTENTS 1. CAPITAL TAXES ..................................... 2 1.1 ER: Fixed dividend shares ...................... 2 1.2 ATED: Development not a trade ........... 2 1.3 PPR: House occupied for 10 weeks ...... 3 1.4 Payment not made under guarantee ... 3 2. INCOME TAX & NI ................................. 4 2.1 Reporting interest and pensions ........... 4 2.2 PAYE: New dynamic coding trigger ...... 4 2.3 Welsh get incorrect PAYE codes ............ 5 2.4 Scottish get incorrect PAYE codes ........ 5 2.5 Termination awards and testimonials .. 5 2.6 New fuel type for company cars ........... 5 3. BUSINESS DIRECT TAXES ................. 6 3.1 LLP losses denied carry forward ............ 6 3.2 PPN stands for Ingenious film scheme 6 3.3 CIS: 2018/19 refunds commence ....... 7 3.4 CIS: Reasonable care taken .................. 7 3.5 CIS: Penalty notices not delivered ....... 7 4. COMPLIANCE & ADMIN ...................... 8 4.1 Online filing exclusions 2018/19 ........... 8 4.2 No evidence given by HMRC .................. 8 4.3 No valid discovery in Tooth .................... 9 4.4 Notice to file not issued correctly ....... 10 4.5 No record of penalty notice .................. 10 4.6 HMRC procedures fall short .................. 11 4.7 Tax Adviser definition to expand ........ 11 4.8 Follower notice and APN quashed ....... 12 4.9 GAAR panel opinions ............................. 12 5. EUROPEAN & INTERNATIONAL ..... 13 5.1 Crown Dependencies: tax residency .. 13 5.2 Non-doms: IHT on overseas property13 5.3 Can pension scheme register in UK? . 13 6. RESIDUE ................................................. 14 6.1 Guidance on MPAA and pensions ........ 14 6.2 OTS small business tax ......................... 14 7. KEY DATES ............................................. 14 7.1 Deadlines in June and July ................... 14

2 June 2019

1. CAPITAL TAXES 1.1 ER: Fixed dividend shares Walshaw claimed Entrepreneurs’ Relief (ER) on the disposal of all his shares in Cambridge Education Holdings 1 (Jersey) Ltd (CEH) on 4 December 2013. He was the chairman of a UK-based company known as Cambridge Education Group Limited (CEG) which is the holding company of the Cambridge Education Group (the Group). In March 2012 the Group was restructured and as a result he held in CEH:

• 44,183 ordinary shares • 396,000 10% preference shares • 24,660 B ordinary shares.

If the preference shares were ordinary share capital as defined in ITA 2007, s 989, Warshaw held 5.777% of the ordinary share capital of CEH, and thus qualified for ER. If the preference shares were not ordinary share capital, he held only 3.5% of the ordinary share capital of CEH and did not qualify for ER on his gain. The preference shares carried a right to a dividend at a rate of 10%, which was cumulative such that, if any dividends remained unpaid due to lack to reserves, he would accumulate a dividend of 10% on them. The dividend was calculated on the share capital plus a variable so it was not a fixed rate. If the rate of the dividend was fixed, these shares would not be defined as ordinary share capital for ER. HMRC guidance is that fixed preference shares are not ordinary share capital, but the FTT held that the cumulative element of the dividend meant that the rate was not fixed, and therefore the taxpayer was eligible to claim ER. S Warshaw v HMRC [2019] UKFTT 268 (TC) summarised from case report found on BAILII: https://tinyurl.com/TC07107 1.2 ATED: Development not a trade

In 2011 Hopscotch decided to sell a residential property it owned in Kensington, London and placed it on the market for an asking price of £13.5m. For

two years there were no offers at that price and the agents advised the company to take the property off the market and redevelop it in order to maximise value.

Following grant of planning permission in December 2015, construction work began in April 2016 and ran to September 2017. The total redevelopment cost was approximately £1m. The property was listed for sale in October 2017, at an asking price of £15.9m, though had not been sold at the date of hearing this appeal.

The company submitted ATED returns for the three years from 1 April 2013 to 31 March 2016 on the basis that it was liable to pay ATED calculated on a value of the property (£13.5m) without relief. Relief was claimed though in the ATED returns for the two years to 31 March 2017 and 31 March 2018 under FA 2013 s. 138 (property developers).

HMRC open enquiries withdrew the relief claimed on both ATED returns, on the basis that the development of the property did not make the company a person carrying on a property development trade. Hopscotch appealed.

The FTT said it was common ground that the scale of the works carried out amounted to ‘development’ of the property. What was firstly in dispute was whether:

• Hopscotch was carrying on a ‘property development trade’, as defined in FA 2013, s. 138(4); and

• If so, whether Hopscotch held its interest in the property exclusively for the purpose of developing and reselling the property in the course of that trade.

On the development trade issue, the judge said the it was perfectly possible for the redevelopment of a single property to amount to a venture in the nature of trade and for a person holding a property as an investment on capital account to resolve, at a particular point in time, that it would henceforth hold the property for a trading purpose and thereby appropriate the property from capital account into trading account.

But the judge did not think the facts in this case supported that conclusion in relation to the property, and the following points supported this conclusion:

3 June 2019

• No evidence was produced of any trading accounts or business plan showing the level of profit to which the redevelopment activity was expected to give rise.

• The board minutes made no mention of the expected cost of the redevelopment or the amount of profit to which the redevelopment was expected to give rise.

• There was an absence of the level of financial planning in relation to the redevelopment which would have been regarded as distinguishing a trade from the taking of steps to maximise the value of an investment held on capital account.

• Hopscotch Ltd had never registered for UK corporation tax and had never filed CT returns.

Hopscotchʼs appeal was dismissed on the basis that it was not carrying on a ‘trade’ at any point in the 2017 period or the 2018 period, and therefore did not satisfy the conditions set out in FA 2013, s. 138(1)(a) and (b) for entitlement to relief from the ATED in respect of the property in either of those ATED chargeable periods. Hopscotch Ltd v HMRC [2019] UKFTT 0288 (TC) adapted from report in croner-i 22/5/19 and found on BAILII: https://tinyurl.com/TC07127 1.3 PPR: House occupied for 10 weeks Davidson purchased a flat in Philbeach Gardens, London on 10 June 2008 and sold in on 18 February 2013 making a gain over approximately £200,000. He had the flat renovated and let it until 7 March 2011. He then occupied the flat with his partner until 24 May 2011 when it was let again until 12 December 2012. The property was empty until it was sold. During this time Davidson also owned a flat in Whitehall, a studio flat in Clapham, and a country residence near Derby. He did not make a PPR election in respect of any of these properties. The FTT heard evidence that Davidson intended the Philbeach Gardens flat to be his permanent home with his partner, but that relationship broken down shortly after they moved in and they both vacated the property. The FTT accepted this evidence and agreed the Philbeach Gardens flat was his main residence from 7 March to 24 May 2011.

This was in spite of the fact that when Davidson was interviewed by HMRC he said he had bought the flat as an investment, but his intentions had changed. Judge Geraint Jones commented “this case turns largely upon our assessment of credibility.” I R Davidson v HMRC [2019] UKFTT 0300(TC) summarised from case report found https://tinyurl.com/TC07128 1.4 Payment not made under guarantee

In 1998 Ron Dennis had entered into a joint venture with TAG Group Holdings SA (TAG Holdings) to develop and manufacture electronic audio and audio-visual equipment. Both parties made investments by way of loans and shares into the joint venture vehicle: TAG McLaren Audio Ltd. This company was wound up in July 2005.

Following this winding-up TAG holdings made a claim of £3.8m (including £800,000 interest) against Dennis. He accepted that he was obliged to make a rebalancing payment of £3m to TAG Holdings under clause 10.3 of the 2001 shareholders' agreement, but the interest was not due.

In his 2007/08 tax return Dennis claimed a loss of £3m which he considered arose under TCGA 1992, s 253(4) as a result of the payment he had made to TAG Holdings. In his 2008/09 return he claimed to offset that capital loss against other gains that he made in that year. HMRC refused the claims and Dennis appealed.

The issue for the FTT was whether the rebalancing payment amounted to a guarantee of a loan or whether it was an indemnity. The judge said clause 10.3 could apply only after the company had started winding-up and all distributions had been made. A guarantee had a specific legal meaning which included the principle of co-extensiveness — that TAG Holdings could claim against the taxpayer or the joint venture company at the same time. Given that a liability under clause 10.3 could crystallise only when there was no prospect of the shareholders having further recourse against the company, it followed that it was not a guarantee because the principle of co-extensiveness was not engaged, rather it was an indemnity. Dennis’ appeal was dismissed.

R Dennis v HMRC [2018] UKFTT 0735 (TC) adapted from report in Taxation Magazine 9/5/19 and found: https://tinyurl.com/TC06868

4 June 2019

2. INCOME TAX & NI 2.1 Reporting interest and pensions

Sean Kirby appealed against HMRC decisions relating to his tax returns for 2011/12 and 2013/14. The disputes concerned how he should report interest and pension income which he claimed partly belonged to another person.

Interest Kirby held money in his accounts on behalf of his father, who was in a care home. HMRC argued that Kirby was liable to tax on interest received from those accounts. The FTT said the automatic position in such cases was that the named account holder was the legal and beneficial owner of the capital and interest, unless there was 'substantive proof to the contrary'. The FTT decided that, 'on the balance of probabilities', one account held cash belonging to the father but Kirby had not met the burden of proof in relation to other accounts. The judge reduced the tax due to allow for the interest on one account. Pensions Kirby and his wife divorced in 2012 when it was agreed she would receive half of his private pension income. However, no formal sharing order was made. Kirby filed tax returns declaring half of his pension income from the date of divorce. HMRC amended the returns to include all of the pension on the basis that there was no pension sharing order and the payments were not qualifying maintenance ones.

The FTT noted that under ITEPA 2003, s 579C the liability for tax charged on pension income is 'the person receiving or entitled to the pension under the registered pension scheme'. Kirby was the only person entitled to the pension income; his ex-wife had no entitlement as far as the pension providers were concerned. Until his pensions were split into separate pots he could not escape the full amounts being included as his income for the purposes of assessing his tax liability. His appeal on this aspect was dismissed.

S Kirby v HMRC [2019] UKFTT 0206 (TC) adapted from report in Taxation Magazine 9/5/19 and found: https://tinyurl.com/TC07054

2.2 PAYE: New dynamic coding trigger The aim of dynamic coding is to reduce the number of P800 computations which are needed to collect tax underpayments or repay overpayments of tax. Dynamic coding aims to use information provided by taxpayers or their employers (through RTI) within the tax year, to recalculate the employee’s “estimated pay”. Then if necessary, amend the current PAYE code in use to achieve a more accurate deduction of tax. New trigger In April 2019 HMRC began to compare the tax code reported for an employee on the FPS with the code HMRC believe it has issued for the taxpayer, as shown on the National Insurance and PAYE Service (NPS). Where the PAYE codes don’t match, and the employer hasn’t implemented the code issued more than 60 days ago, the HMRC computer will reissue the PAYE code to the employer. When comparing tax codes, the HMRC computer doesn’t take into account the suffix (L, T, M etc.) or whether the code is cumulative or non-cumulative, ie WK1/MTH1. If the code hasn’t been used by the employer, the computer will recalculate to see if the HMRC held code is still appropriate. If the HMRC held code is still appropriate, it will be reissued, and if not, HMRC will issue a new PAYE code to both the employee and employer. HMRC has already issued new codes to the first 30,000 mismatches identified. It is also working with selected employers to sense-check for any unexpected scenarios. HMRC expect the volumes of reissued codes will ramp up in June, with the full “go live” of this project to be confirmed at a later date. HMRC estimates that there are currently 500,000 incorrect PAYE codes being operated by employers. To ensure the most up to date PAYE is used download employees’ tax codes before each payroll run. Adapted from article by Kate Upcraft on AccountingWEB.co.uk 21/5/19 and found: https://tinyurl.com/trgPYE

5 June 2019

2.3 Welsh get incorrect PAYE codes

The Welsh rate of income tax was introduced in April 2019. Welsh taxpayers are assigned a 'C' prefix in their tax code denoting where they live.

HMRC has alerted the Welsh Government to an error that has occurred in the application of the new PAYE codes for a number of employers, including some UK government departments and agencies. This has meant that some taxpayers living in Wales have received a Scottish ‘S’ code and, as a result, have paid Scottish rates of income tax in April.

In a letter to the Welsh Government Finance committee, Jim Harra HMRC deputy chief executive was adamant that the error was not the fault of HMRC. He said it was “disappointing that despite the engagement we had with employers, some have not applied codes correctly”. However, any discrepancies in the codes applied by employers will be corrected through the PAYE system and this would ensure that the Welsh government receives the correct revenue.

Adapted from report in Taxation 23/5/19 concerning Welsh Government statement found: https://tinyurl.com/WRITcds 2.4 Scottish get incorrect PAYE codes In March 2019, HMRC admitted to failing to identify 45 of the 129 MSPs as Scottish taxpayers, despite the Scotland Act 2012 stating that all MSPs, Scottish MPs and Scottish MEPs should be treated as Scottish taxpayers by default. As a result, those 45 MSPs received PAYE codes for 2019/20 as non-Scottish taxpayers. In a letter to the Scottish Parliament's public audit and post-legislative scrutiny committee, Jim Harra said: “This default position means that the process to allocate tax codes to parliamentarians does not follow HMRC's normal automated business rules (which are based on the taxpayer's residential address) and instead requires manual intervention. Unfortunately, this was not completed correctly in all cases this year.” Adapted from report in Taxation 23/5/19 concerning HMRC letter to Scottish Parliament found: https://tinyurl.com/ScPrlPcds 2.5 Termination awards and testimonials

The National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill 2017-19 more closely aligns the NICs treatment of termination awards and income from sporting testimonials, with the Income Tax treatment. For both types of payment a new class 1A employer only NIC charge is imposed at 13.8%, with effect for payments made on and after 6 April 2020. Terminations The NICs Bill more closely aligns the NIC treatment of any termination award that is taxable under section 403 ITEPA 2003 with the income tax treatment of that award (where a £30,000 exemption applies). This Bill does not affect the NICs treatment of other types of termination award such as those which constitute earnings and are subject to PAYE and Class 1 (primary and secondary) NIC in full in any event. The method of collecting the class 1A NIC will be set by regulations and it is anticipated that it will be paid when the charges arises, rather than after the end of the tax year, as with other class 1A charges. Testimonials The class 1A NIC will be imposed on the amount of testimonial chargeable to income tax, which is any payment above £100,000. Summarised from the CIOT representations on the NIC Bill 2017-19 and found: https://tinyurl.com/NICTestterm 2.6 New fuel type for company cars New diesel cars are now being sold that meet the Euro standard 6d, which gives them two advantages: • the 4% supplement doesn’t apply so the taxable

benefit is calculated as per petrol cars; and • the £12.50 daily charge in London’s ultra-low

emissions zone does not apply. Where an employee has been provided with a new diesel car, which meets Euro standard 6d, this should be reported as fuel type F on the form P46(car) for 2019/20. Where a Euro standard 6d diesel car was provided in 2018/19, it should be reported on the 2018/19 P11D as “fuel type A”. Check that the expenses and benefits software has calculated the correct taxable benefit for 2018/19 as the 4% supplement should not apply to Euro standard 6d cars, even in 2018/19. Summarised from Employer Bulletin 77 found https://tinyurl.com/EmBulAPr77

6 June 2019

3. BUSINESS DIRECT TAXES 3.1 LLP losses denied carry forward

Douglas Shanks is a professional accountant, who carried on his business through Douglas Shanks LLP from April 2004 to June 2008, of which he was the sole member. The LLP was dissolved in October 2009 and the partnership return for 2008/09 was submitted several years late showing losses.

Since June 2008 Shanks practiced with a succession of other sizable LLP firms. His personal tax returns for 2008/09, 2009/10 and 2010/11 included claims to set the losses sustained in Douglas Shanks LLP against his income from the other firms.

Mr Shanks included a ‘white space’ disclosure in his 2009/10 and 2010/11 returns explaining that he was operating a consultancy business to the same client body under the ‘umbrella’ of different firms, and was not, in fact, a member in the later LLPs. Thus, the income in those later years and should be treated as a continuation of the same profession, allowing the earlier losses from his LLP to be offset.

HMRC disallowed the loss relief claim for 2008/09 for the following reasons:

1) Douglas Shanks LLP was dissolved before filing a partnership return reporting the results of its actual trade, and that disqualified the partners in that firm from reporting the results of their notional trades;

2) the LLP failed to provide any accounts information; and

3) the losses could not be carried forward against the profits of other firms.

HMRC also assessed Shanks to inaccuracy penalties under FA 2007, Sch. 24 on the basis that his actions were deliberate but not concealed.

The FTT rejected HMRC’s reason 1), so Shanks was therefore entitled (and required) to return the results of his notional trade.

To counter HMRC’s reason 2) Shanks did provide some draft accounts for his LLP, but those accounts did not support the substantial loss claim.

The FTT agreed with HMRC’s reason 3) as it found that Shanks was a partner of firms where he worked after leaving Douglas Shanks LLP. The trades of

those LLPs were distinct. It followed that any losses incurred in Douglas Shanks LLP would not have been available to carry forward against profits arising from the other firms. The FTT accordingly dismissed the appeal against the closure notices for his tax returns for 2008/09 to 2010/11.

In relation to the inaccuracy penalty, given the above, the basis on which Shanks reported his income in his returns had proved to be incorrect.

The FTT did not agree with HMRC that Shanksʼs behaviour had amounted to a deliberate inaccuracy. When Shanks submitted his tax returns he took a view on how his income should be reported which was not spurious or fanciful; he followed that view accurately, and he explained to HMRC (via the white space) exactly what he had done and why. When he provided the documents, he subjectively believed they were accurate.

The FTT concluded that the inaccuracy was not careless and therefore the FTT allowed the appeal against the penalty.

The FTT took into account two important issues:

• all the caselaw referred to in this decision concerning the tax treatment of partnerships post-dated Shanksʼs submission of his returns, so none of that judicial comment was available to Shanks when he decided how to report his income on his returns.

• Shanks took considerable care in reporting the information; he made an explicit white space statement of what he had done and why he took his view.

D Shanks v HMRC [2019] UKFTT 279 (TC) adapted from report in croner-i Tax Update 15/5/19 found on BAILII: https://tinyurl.com/TC07118 3.2 PPN stands for Ingenious film scheme

In 2004/05 Beadle took part in a marketed tax avoidance scheme involving a partnership: Ingenious Film Partners LLP (IFP).

IFP claimed trading losses and Beadle claimed to carry back his share of the losses to reduce his income for an earlier year. After an enquiry into the IFP partnership return, HMRC reduce the IFP trading loss to nil. In October 2014, HMRC issued a partner payment notice (PPN) to Beadle requiring him to pay

7 June 2019

£100,000. He challenged the notice, but HMRC rejected his representations. It imposed a penalty notice for non-payment of the PPN against which the taxpayer appealed. The FTT concluded it had no jurisdiction to consider the taxpayer's argument that the PPN was excessive. The UT confirmed the FTT did not have jurisdiction to entertain the taxpayer's challenge. The decision to issue a PPN was by a public body challengeable by judicial review only. When PPNs were legislated for there was not right of appeal against the PPN, as there was already a right of appeal against the underlying tax assessment and any penalty notice. IFP had in already appealed against the reduction of its trading losses to nil. The UT concluded that the absence of a right of appeal against the PPN was “a clear indication” that parliament did not intend taxpayers to be able to challenge PPNs on appeal to the FTT. If they could not do so directly, it would be 'odd' to permit them to do so indirectly by way of appeal against the penalty of not paying the PPN. Permitting such a challenge would be 'contrary to the design and purpose' of the PPN regime. The UT also upheld the FTT conclusion that the taxpayer's belief that the PPN was unlawful did not constitute a reasonable excuse for failure to pay within the payment period. Finally, the judge ruled that the penalty notice was not defective because it stated the wrong payment date for the PPN, and it failed to identify the issuing officer. The taxpayer's appeal was dismissed. D Beadle v HMRC [2019] UKUT 0101 (TCC) adapted from report in Taxation, found: https://tinyurl.com/UTBeadle 3.3 CIS: 2018/19 refunds commence Companies which are registered under the construction industry scheme (CIS) as sub-contractors, and who don’t have gross payment status, will have tax deducted from their invoices by their customers. This tax can be set against the PAYE and NIC payable by that company, but in many cases the CIS deductions will exceed the PAYE and NIC payable. In this case the company can claim a refund of CIS

deductions using the online form. Tax agent can do this on behalf of their clients, but where the agent wasn’t to receive a portion of the refund to cover fees form R38 must be submitted by post. It takes HMRC up to 40 working days to process each CIS refund claim, so don’t start chasing for the refund until at least 19 June. Summarised from Employer Bulletin 77 found https://tinyurl.com/EmBulAPr77 3.4 CIS: Reasonable care taken On 8 June 2016 HMRC wrote to Ground Force Ltd to inform them that the gross payment status of their supplier: Virenda Construction Limited (Virenda), was cancelled on 8 June 2016. Ground Force claimed this letter was not received until 6 July 2016. Between 10/6/2016 and 1/7/2016 Ground Force made payments of £314,806 to Virenda without deduction of tax. From 11 July 2016 all payments to Virenda were made with deduction of 20% tax. After requesting information from Ground Force about its payments to Virenda, HMRC issued a reg 13 determination under the CIS regs for the sum of £51,456, which was later reduced to £50,173. Ground Force requested that HMRC apply reg 9 of the CIS regulations and direct that the sum demanded should be recovered from Virenda. HMRC refused to do this. On 13 July 2017 HMRC issued a penalty assessment equal to 24.75% of the determined tax giving a penalty of £12,417.81. Ground Force appealed against the determination, the refusal to make a direction under reg 9, and the penalty. The FTT agreed that Ground Force had taken reasonable care to action HMRC’s instructions once the letter was received from HMRC on 6 July 2016. The appeal against the determination and the refusal to make a direction under reg 9 succeeded and the penalty fell away. Summarised from case report of: Ground Force Construction Ltd v HMRC [2019] UKFTT 0274 (TC) found https://tinyurl.com/TC07113 3.5 CIS: Penalty notices not delivered

8 June 2019

ESE Rendering Solutions Ltd received 34 penalties totalling £6,900, for failing to submit monthly CIS returns (forms CIS 300) to periods from August 2015 to January 2017. The company claimed it hadn’t received those penalty notices. At the FTT hearing the company produced documentation which HMRC accepted provided a reasonable excuse for not submitting returns for periods before January 2016. Judge McNall noted that as this was a penalty appeal that “HMRC bears the burden of establishing (albeit only to the civil standard, that is to say, on the balance of probabilities) that the penalties remaining in issue are due and payable.” HMRC could not produce copies of any of the penalty notices as evidence. The FTT found that HMRC failed to show that any penalties were issued to the company before 16 December 2016, except for two fixed penalties which were referred to in letters for the periods ended 5 August 2016 (£200) and 5 October 2016 (£100). However, the £200 penalty did not appear in HMRC’s schedule for the period ending 5 August 2016, and so the FTT accepted that the company had not received it. The £100 penalty was held to be due and payable. The FTT thus cancelled all the penalties except for one. Summarised from case report of: ESE Rendering Solutions Ltd v HMRC [2019] UKFTT 0309 (TC) found https://tinyurl.com/TC07137

4. COMPLIANCE & ADMIN 4.1 Online filing exclusions 2018/19

Where HMRC’s tax calculator is unable to compute an individual’s tax liability correctly the HMRC computer will either not permit the tax return to be filed online or will calculate the tax due incorrectly. Where these cases are identified they are included on the exclusions list for online filing, and the return must be filed in paper form.

HMRC has published its first list of self-assessment online filing exclusions for 2018/19, which is likely to be updated as further exclusions are identified during the tax return filing season.

To enable exclusions to be tracked from year to year, each new exclusion is issued a number. Once the exclusion is resolved, it is removed from the list but the number is not reused. As a consequence, while there are only 31 live exclusions, the latest exclusion is number 106.

HMRC has solved 17 of the issues which prevented online filing for 2017/18 returns. Most of these deal with the interaction of the savings and dividend allowances, but two specific problems affecting Scottish residents have also been sorted. However, not all of personal savings/dividend allowance interaction problems have been solved, and nine exclusions have been added for 2018/19 most of which relate to that area.

Other new exclusions with more limited application include:

• Ministers of religion with pension and employment income where, in some circumstances, the tax refunded in the computation is more than they have paid in the year.

• Situations where the individual wants to disclaim their personal allowance to claim income tax relief on EIS subscriptions.

The list has been reformatted since 2017/18 and now splits exclusions into two categories. Five cases fall into system-related exclusions, which have been around for many years and would require significant system amendments to resolve, and 26 are live exclusions where a future fix is being considered.

In addition to exclusions, there is also a further list of special cases for 2018/19. These are situations where the return will be rejected by HMRC’s system unless a workaround is used. Many software developers opt to modify their programmes to incorporate workarounds and facilitate online filing.

Where a paper return for 2018/19 is filed after 31 October 2019 but before 31 January 2020, and is accompanied by a reasonable excuse form explaining which exclusion case applies, HMRC should not charge a penalty.

Adapted from article by Helen Thornley in Accountancy Age 16/5/19, the full exclusions list for 2018/19 is found: https://tinyurl.com/SAexolf1819 4.2 No evidence given by HMRC

9 June 2019

We covered the case of Michael and Flora Hegarty in the Gabelle MTR February 2019 (see item 4.6). HMRC had issued information notices under FA 2008, Sch 36 but withdrew them with no explanation when the taxpayers appealed. HMRC then issued further information notices and the taxpayers again appealed. HMRC produced no evidence at the FTT as to why it thought there was underassessment of tax. The FTT found the information notices were not valid and that HMRC could not raise a discovery assessment. Following conclusion of that case the taxpayers applied for costs. The tribunal refused on the grounds that HMRC had made a 'tactical error' in failing to produce evidence to support the notices. The judge considered the taxpayers' arguments were not so obviously meritorious as to be bound to succeed, nor were HMRC's responses so obviously unmeritorious that they were bound to fail. M&F Hegarty v HMRC [2019] UKFTT 0226(TC), adapted from report in Taxation Magazine: 9/5/19 and found https://tinyurl.com/TC07073 4.3 No valid discovery in Tooth

Mr Tooth has won again at the Court of Appeal, having been successful at FTT and UT, over the issue of discovery and deliberate error.

Tooth participated in a tax avoidance scheme in 2008/09 which was designed to give rise to employment related losses. He sought to carry back those losses to set off against his 2007/08 income.

Tooth included the full disclosure of the scheme on his tax return as prescribed by the scheme promoters and filed the return electronically on 30 January 2009.

The scheme as a whole was defeated by anti-avoidance legislation, but Mr Tooth maintained that his self-assessment for 2007/08 should stand as it had not been validly challenged.

In October 2014, HMRC purportedly issued a discovery assessment under TMA 1970, s. 29. As this was more than six years after the relevant tax year, for the discovery to be valid, as well as HMRC having to prove that they had made a ‘discovery’, they also had to show that the insufficiency of tax had been brought about deliberately by either Mr Tooth or any person acting on his behalf.

FTT decision

The FTT allowed Toothʼs appeal, determining that the assessment was invalid because:

• although HMRC had made a discovery within the meaning of TMA 1970, s. 29(1);

• the situation had not been brought about deliberately by either Tooth or any person acting on his behalf, so that TMA 1970, s. 29(4) was not satisfied (and therefore the 20 year time limit allowed for making a discovery assessment under TMA 1970, s. 36(1A) did not apply).

Upper tribunal decision

The UT considered that there was no inaccuracy pursuant to TMA 1970, s. 118(7) in the document given to HMRC. Tooth had adopted a position in his return which, albeit controversial, could not (at the time of the return) be said to have been wrong and in a white space disclosure he had identified the position he had taken (and the fact that it was controversial). Given this he could not be guilty of an inaccuracy when, subsequently, it was established that the position taken by him was wrong.

The UT also did not consider that the inaccuracies alleged by HMRC could be said to have been deliberate, because Mr Tooth took steps to draw the (alleged) inaccuracies to HMRCʼs attention. So Tooth did not act deliberately within the meaning of s. 29(4).

On the issue of ‘discovery’ the UT held that on the facts found by the FTT, HMRC had not established that they had made a discovery. Had this been the only point in issue, the UT would have allowed the appeal, and remitted the matter for further evidence and argument to the FTT.

Court of Appeal

HMRC argued that the relevant discovery was made in October 2014 (and acted upon promptly), as it was only then that the HMRC officer concluded that Toothʼs self-assessment was incorrect in the light of a letter from Toothʼs accountant in March 2014. The March 2014 letter had explained that Toothʼs case was an example of the situation described in Cotter and that HMRC had incorrectly made an enquiry under TMA 1970, Sch. 1A, when it should have opened a s. 9A enquiry.

10 June 2019

Floyd LJ held (with Lord Justice Males and Lord Justice Patten agreeing) that HMRC had not established, on the basis of the documents or otherwise, that they had made a valid discovery assessment. He dismissed HMRCʼs appeal on this issue and declined to remit the matter to the FTT.

Given the Court of Appealʼs above conclusion, it was not necessary to consider the deliberateness issue, but it did so anyway.

The CA unanimously disagreed with the UT in finding that, if there was an inaccuracy, the inaccuracy was deliberate. Had it been necessary to do so, the Court of Appeal would have agreed with the UT and FTT that the inaccuracy did bring about the assessment to be insufficient.

The Court of Appeal accordingly dismissed HMRCʼs appeal because they had failed to show that they had made a discovery.

At the time HMRC claimed the discovery was made it was clear that the HMRCʼs officer already viewed Tooth’s self-assessment to be insufficient. All that had changed was the way HMRC were aiming to assess the insufficiency, which was as a result of the Supreme Court decision in R & C Commrs v Cotter [2013] BTC 837 which had found that in such a case an enquiry could not be made under TMA 1970, Sch. 1A.

HMRC v Tooth [2019] EWCA Civ 826 adapted from report in croner-i 29/5/19 and found on BAILII: https://tinyurl.com/ToothCa 4.4 Notice to file not issued correctly This case was an attempt by HMRC to force the taxpayer to complete a self-assessment return in order to pay outstanding tax which was not collected through PAYE. It follows the case of Goldsmith [2018] TC 06284, and similar for which the HMRC appeal is due to be heard by the Upper Tribunal in July 2019. HMRC issued Hurst with a notice to file a tax return for 2015/16 because he had not paid enough tax through his tax code as shown on the tax calculation (form P800). The tax underpayment could not be collected through his tax code; and Hurst had not responded to HMRC’s voluntary payment letters.

As Hurst did not submit a tax return for 2015/16 HMRC issued him with late filing penalties under FA 2009, Sch. 55.

Hurst appealed on the grounds that he was within the PAYE system and any underpaid tax could have been dealt with by way of a P800.

He relied on the case of Goldsmith [2018] TC 06284, in which the FTT had found that returns issued to collect tax already calculated and ‘assessed’ by P800s, and not for the purpose of establishing the taxpayerʼs taxable income and tax payable, did not meet the statutory requirements of TMA 1970, s. 8(1), and accordingly the late filing penalties were invalid.

The FTT noted that similar conclusions to those in Goldsmith were reached in Griffiths [2018] TC 06697 and Mansoor [2018] TC 06518. But on the other hand, in Crawford [2018] TC 06594, the FTT disagreed with Goldsmith. In this case the tribunal found it appropriate to follow the line of authority in Goldsmith.

As HMRC had indicated that they were aware of the underpayment of tax when they issued the P800, the FTT found that it was not possible for HMRC to have validly issued a notice to file. The appeal was allowed.

S Hurst v HMRC [2019] UKFTT 286 (TC) adapted from report in croner-i 22/5/19 and found on BAILII: https://tinyurl.com/TC07125 4.5 No record of penalty notice There were two similar cases this month relating to the valid issue of penalty notices. Both were heard by Judge Geraint Jones QC as default paper cases. As these were penalty cases the burden of proof rests upon the respondents (ie HMRC), who must prove each and every factual and matter said to justify the imposition of the penalty. In the first case HMRC claimed to have sent Claire Platt late filing notices in respect of her 2016/17 tax return. The FTT was not provided with a copy of that penalty notice or any evidence about its contents. HMRC produced a “Return Summary” document which Judge Jones said “gives no clue whatsoever as to whether any Penalty Notices were generated, let alone dispatched.”

The Return Summary document, said Judge Jones “falls well short of being sufficient evidence to

11 June 2019

prove, even to the civil standard, that a Notice to File was actually sent to the appellant.” There were three reasons for this:

• The ‘Return Issue Date’ of 6/04/16 was probably incorrect because that would have been the date on almost every personʼs Return Summary for 2016/17 even though the notices to file would have been sent out on a staggered basis.

• There was no evidence to show that any notices to file were actually sent.

• HMRC had not provided any evidence of how they operated their systems for the dispatch of such material.

The second case had very similar facts concerning late filing penalty notices which HMRC claimed had been sent to Alexandru Musca for late submission of his 2014/15 tax return. The only evidence HMRC presented was the “Return Summary”, which did not record the taxpayer’s address in 2015/16. It stated the taxpayer’s address effective from 27/3/2018, but no clue as to what address HMRC allegedly sent the notice to file for the 2014/15 tax return. As HMRC did not provide sufficient evidence that a notice to file the 2014/15 tax return was sent to Musca, the appeal against the penalty for late submission of that return was allowed. Claire Platt v HMRC [2019] UKFTT 0303(TC) found: https://tinyurl.com/TC07131 and Alexandru Musca v HMRC [2019] UKFTT 0304(TC) found: https://tinyurl.com/TC07132 4.6 HMRC procedures fall short Ryan Solomon appealed against penalties totalling £1,300 for failing to deliver his 2016/17 on time. Solomon was unaware that he had been registered for self-assessment by the agency he worked through for one month in October 2016, which apparently also set up a personal service company for him and appointed him as director of that company. He did not set up a forwarding address for mail while he worked abroad in 2017/18 as he was not expecting to receive any notices from HMRC. For these reasons the FTT accepted that Solomon had a reasonable excuse for his failure to file the 2016/17 return on time and cancelled the initial penalty of £100.

The FTT cancelled the daily penalties because HMRC had not produced either an SA reminder or SA 326D and so had not shown that the condition in FA 2009, Sch. 55, para. 4(1)(c) (that the taxpayer had been notified of the date from which daily penalties would become payable) had been complied with. The FTT also cancelled the 6 month penalty as it was issued automatically before the return was received without an officer of HMRC considering to the best of their knowledge and belief what the penalty should be, as is required by FA 2009, Sch. 55, para. 24(2). Judge Thomas was critical of HMRC’s procedures which did not record exactly who registered Solomon for self-assessment, and who set up and operated the company in his name. Ryan Solomon v HMRC [2019] UKFTT 0305(TC) adapted from report in croner-i Tax Update 29/5/19 and found: https://tinyurl.com/TC07133 4.7 Tax Adviser definition to expand

The government is consulting on how to transpose the EU fifth anti-money laundering directive into UK law by January 2020. This directive requires an extended definition of “tax adviser” and will broaden the requirement to register trusts with HMRC.

The government proposes to use the money laundering regulations to extend the definition of “tax adviser” to include firms and sole practitioners who provide, “directly or by way of arrangement with other persons, material aid, assistance or advice about the tax affairs of other persons”.

This EU directive extends the scope of the trust registration service to:

• all UK-resident express trusts; • non-EU resident express trusts that acquire UK

land or property on or after 10 March 2020; and • non-EU resident express trusts entering into a

new business relationship with a regulated business on or after 10 March 2020.

The government does not expect to specify a full list of types of express trust, but those likely to fall within the definition are discretionary, interest in possession, charitable, employee ownership and many types of bare trusts.

12 June 2019

The government has confirmed that all trusts with UK tax consequences must register on the trust registration service (TRS), even if they are not express trusts or are non-EU resident express trusts without UK trustees. However, non-express trusts with UK tax consequences will not be liable to the wider data-sharing provisions detailed in the directive.

There is currently a 31 January registration deadline for TRS, but this will change as not all trusts will have tax return obligations. Unregistered trusts in existence on 10 March 2020 will have to register by 31 March 2021 and trusts created on or after 1 April 2020 must do so within 30 days of their creation.

Also, the current penalties for failing to register using the TRS will have to change, as the current one is based on the assumption that all trusts have to pay some tax.

Adapted from report in Taxation 2/5/19 on consultation document found: tinyurl.com/5mldcondoc 4.8 Follower notice and APN quashed This was a judicial review which overturned a High Court decision on the validity of a follower notice (FN) and accelerated payment notice (APN). The Court of Appeal quashed the FN, and therefore the APN which was issued on the basis of the FN, also had to fail. The taxpayer had taken part in the “Round the World” scheme which purported to avoid tax through the careful planning of trustees’ and companies’ residence. It involved a trust set up for the benefit of Haworth and his family. The trust held shares in a company, which was subject to a merger and subsequent flotation on the London Stock Exchange. Haworth attempted to avoid capital CGT by the existing Jersey trustees of the trust resigning in favour of trustees resident in Mauritius, and then following the restructuring and share sale the Mauritian trustees retired and UK trustees were appointed. This scheme was similar to the scheme used in Smallwood v HMRC [2010] EWCA Civ 778. HMRC had maintained that Smallwood met the requirements as a final ruling for the purposes of a follower notice. The CA found HMRC had misdirected themselves by:

• overstating the conclusion in Smallwood; and • had reached their decision to give the FN on the

basis that it was more likely than not that the principles or reasoning in Smallwood would have denied the relevant advantage rather than that the principles or reasoning in the ruling would have denied the relevant advantage.

The conclusion in Smallwood was that the FTT had been entitled to find in that case that the scheme failed because the trustees in question were in fact UK resident. That did not mean that another finding might not be possible. Although the appeal was allowed for the above reasons, Newey LJ said he agreed that the follower notice was defective as it did not explain why HMRC considered that the Smallwood decision meant that the place of effective management or the ‘real top-level management’ of the Mauritian trustees was believed to be in the UK. However, he did not think that this would have been a reason to quash the follower and accelerated payment notices. R v HMRC ex parte Haworth [2019] EWCA Civ 747 adapted from croner-i Tax Update 8/5/19 found https://tinyurl.com/HaworthCA 4.9 GAAR panel opinions The GAAR advisory panel published opinions in April 2019 on two similar tax avoidance arrangements: 1) Disguised remuneration involving offshore

insurance bonds and loan arrangements. 2) Close company loans to participators involving

second-hand bonds and gilts options

In both cases the panel’s conclusion was that the entering into and carrying out of the arrangements was not a reasonable course of action in relation to the relevant tax provisions. Case 1) involved only one person who was the sole director and shareholder of the company. Another company, which acted as the scheme promotor, paid initial premium of £5,000 to set up an off-shore life assurance bond for its directors and an LLP set up a loan facility for the promotor company. After additional contributions were made to the bond it was passed into the joint ownership of the director and his company. The scheme also involved ‘cooling

off rights’ and the use of gilt options. The effect was the director received £1.5m in a form the taxpayers claimed was not earnings, even though the

13 June 2019

company claimed a deduction for an amount described as “director’s remuneration”. Case 2 involved two individuals who were the directors and shareholders of their own close company. The directors and the company jointly acquired an offshore bond and the individuals provided guarantees for the company’s liability of £250,000. The scheme also involved ‘cooling off

rights’ and the use of gilt options. The purpose of the arrangements was the extraction of value by the shareholders from the company, which would otherwise be treated as a dividend. Adapted from reports in LexisNexis news 27/5/19 and found https://tinyurl.com/GAAR-opins 5. EUROPEAN & INTERNATIONAL 5.1 Crown Dependencies: tax residency Jersey, Guernsey and the Isle of Man have jointly released updated guidance on the new economic substance requirements for tax residency, which comes into effect for accounting periods commencing on or after 1 January 2019. This guidance is intended to be a first draft, and will be expanded following feedback and further discussion with the OECD forum on harmful tax practices and the EU code of conduct group on business taxation. Under these new requirements, some companies must meet set criteria to demonstrate sufficient economic substance in the jurisdiction before they will be resident for tax purposes. The guidance explains how the scope and operation of the requirements will affect specific sectors such as; banking, insurance, fund management, financing and leasing, and shipping. The economic substance requirements will only apply these industries. The guidance also covers the information the companies will be required to provide, and warns that sanctions will apply if a company cannot demonstrate that it has adequate substance on the island. Summarised from guidance released by the Crown Dependencies, found: https://tinyurl.com/CrwnDepgd

5.2 Non-doms: IHT on overseas property Significant changes to the taxation of non-doms came into effect on 6 April 2017, and there are still a number of points that are unclear in the legislation and guidance. The professional accountancy bodies have submitted sets of questions with suggested answers to HMRC, covering four areas: • trust protections; • mixed fund cleansing (version 3); • rebasing and adjustments to CGT foreign capital

losses election (version 2); and • extension of IHT to overseas properties (version

2)

Each time HMRC respond to the suggested Q&A the CIOT have published a new version of the set of Q&A including the HMRC comments. The latest HMRC comments relate to the Q&A on the extension of IHT to overseas property representing UK residential property. HMRC has agreed with the majority of the suggested answers, but differs from the professional bodies’ interpretation regarding the scope of their definition of collateral for relevant loans, and over some examples. Further discussion has been requested to clarify the differences Adapted from CIOT comments on HMRC’s answers provided to version 2 of questions posed by professional bodies, found: https://tinyurl.com/Nondomsqsv2 5.3 Can pension scheme register in UK?

A German incorporated pension scheme, BÄV, applied to HMRC to become a qualifying recognised overseas pension scheme (QROPS). It was entitled to income from UK properties through its investment in a German real estate fund.

This income would have been exempt under FA 2004, s 186 had the pension scheme been registered in the UK. The scheme claimed the exemption on the basis that the requirement to register was more onerous for a non-resident scheme and this breached the right to free movement of capital under EU law, but HMRC refused the claim.

To become a UK registered pension fund, a scheme must first qualify as a public service pension scheme. The FTT found that BÄV was not a public service pension fund because it had not been

14 June 2019

established by a UK legislative body, so it couldn’t register in the UK.

HMRC accepted the legislation was overtly discriminatory and in breach of the EU principle of the freedom of movement of capital. However, the judge decided the scheme could be registered because it was a pre-2006 scheme which met the legislative requirements, which at that time did not impose a territorial restriction.

BAV-TMW-Globaler-Immobilien Spezialfonds v HMRC [2019] UKFTT 0129(TC) adapted from report in Taxtion, found: https://tinyurl.com/TC06995 6. RESIDUE 6.1 Guidance on MPAA and pensions This guidance was first published in January 2019, which is rather late considering the Money Purchase Annual Allowance (MPAA) was introduced in April 2015 at the level of £10,000, and reduced to £4,000 from April 2017. Unlike the regular pensions Annual Allowance (AA) the MPAA cannot be carried forward, so it is a fixed limit of £4,000 for every year once it has been trigged by flexibly accessing taxable pension benefits form a defined contribution scheme. In May 2019 HMRC updated its MPAA guidance with regard to the “check if you need to pay tax” section, but it is still quite confusing for the lay-person as it mixes up guidance for the AA and for the MPAA. Summarised from HMRC guidance on MPAA found: https://tinyurl.com/MPAAgd 6.2 OTS small business tax The Office of Tax Simplification (OTS) has published a report on simplifying everyday tax for small businesses, with key recommendations for HMRC. The “small business” for this report meant focusing on those with turnover of no more than £2m, or with fewer than 10 employees. This definition would cover 99% of UK businesses. The report compliments the OTS Business Lifecycle Report which was published in April 2018. This report examines key events and growth stages for a small business, such as registering for tax and taking on the first employee. Where appropriate the report notes the other rules and regulations which contribute to the pressures on small businesses, but

the OTS recommendations focus matters where tax is the main issue. The recommendations for government include: • Develop a package of start-up guidance for

businesses which takes them through things which need to be done at key stages. This needs to be designed for someone with no tax or regulatory experience.

• Improve the PAYE and RTI systems so that information flows more quickly and is more accurate.

• Appoint a senior official to oversee and priorities the implementation of Agent Strategy

• Build agent awareness and needs into system design and related guidance

• Work with Companies House to develop digital options to help small companies prepare accounts and tax returns, perhaps using accounts templates including standard iXBRL tags.

• Simplify the corporation tax online return process.

• Review the tax payment processes across core taxes and regimes with a view to aligning and streamlining them.

Summarised from OTS report published 16/5/19 found: https://tinyurl.com/OTSsmbus 7. KEY DATES 7.1 Deadlines in June and July

15 June 2019 • US citizens and Green Card holders to file 2018

US federal tax returns if they haven’t obtained a filing extension. 5 July 2019

• PAYE Settlement Agreements (PSAs) for 2018/19 must be agreed with HMRC (SI 2003/2682, reg 112).

• Letting agents acting for non-resident landlords must make return of the rents paid to landlords and tax deducted in 2018/19 (form NRLY). If no agent is acting the tenant must make the return.

6 July 2019 • Employers to submit forms P11D and returns of

Class 1A NICs (forms P11D(b)) to HMRC for 2018/19 (SI 2003/2682, reg 85; SI 2001/1004, reg 80).

15 June 2019

• Employers must supply relevant employees with P11D(b) and P11D information for 2018/19 (SI 2003/2682, reg 94).

• Annual returns for reporting events relating to all employee share schemes in 2018/19 must be submitted through ERS (ITEPA 2003, s 421J).

• Employee share schemes put in place in 2018/19 must be registered by this date.

• File report of termination payments and benefits where non-cash benefits included in the package, where total value of settlement is £30,000 or more.

• Directors and employees to make good cost of the following provided in 2018/19: cars, vans, road-fuel, non-cash vouchers, accommodation, credit token and benefits treated as earnings, to avoid being taxed on those items.

• Where a close company has provided beneficial loans to a director, must elect by this date for all loans to be treated as a single loan to calculate benefits in kind (ITEPA 2003, s 187).

7 July 2019 • Return must be made of non-cash benefits

provided in 2018/19 to retired employees under employer-financed retirement benefits scheme (FA 2004, s 251(2), SI 2005/3453).

Adapted from “key dates” extracted from Bloomsbury’s Tax Rates and Tables 2019/20 This publication contains public sector information licensed under the Open Government Licence v3.0. The extracts reported from HMRC documents have not been approved by HMRC. For the precise words of the original article, reference should be made to the original publication. The extract should be read subject to the qualifications mentioned therein, to which reference should be made before reliance is placed upon an interpretation. YOU SHOULD NOT ACT (OR OMIT TO ACT) ON THE BASIS OF THIS REVIEW WITHOUT SPECIFIC PRIOR ADVICE. GABELLE PROVIDES A TAX CONSULTANCY SERVICE, OR WE CAN DIRECT YOU TO AN ALTERNATIVE SOURCE OF ADVICE.

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