Contentious Tax Bulletin

HMRC initiatives and new legislation

• HMRC giving electronic till suppression evaders one last chance to come clean

Tax fraud through understating business takings going through the tills is as old as the cash register, but it has become much harder since the advent of electronic tills producing automatically generated sales records. Spotting an opportunity, many unscrupulous software developers have targeted businesses throughout the world with special software designed to artificially suppress sales recorded by electronic tills so the businesses concerned can understate their takings without being caught out by an HMRC audit.

HMRC now has a growing mass of intelligence from a coordinated international law enforcement effort against software providers around the world and has been systematically contacting businesses which appear to have bought illicit software to investigate them or urge them to come clean by making a voluntary disclosure.

The latest letters being issued by HMRC state they are giving the recipients a “final opportunity to make a complete, accurate and honest disclosure before we calculate what we think you owe and charge penalties on top”.

An example letter is available here:

• OTM Final Letter

Although, previous “nudge letters” to businesses suspected by HMRC are sometimes known to have been sent to businesses which have not actually conducted the frauds suspected, it seems that many businesses have operated fraudulently and have resisted attempts to make them come clean – notwithstanding maximum civil penalties of up to 100% of the outstanding tax in situations where they have concealed the fraud with the creation of a fake record trail – or else possible criminal prosecution.

For its part, it seems that HMRC has had to resort to repeated “nudging” for lack of resource to open investigations into all the businesses that it suspects – which seems to be undermining its deterrence effort.  Of course, if HMRC does want to calculate and assess the additional tax it thinks it is owed, it can do so going back up to 20 years for tax fraud but cannot do so without engaging in investigative work and opening current year enquiries or raising discovery assessments for earlier years – then forcing them to engage with HMRC to demonstrate the suspicions are unfounded or mitigate their position.

A business that comes under investigation or wishes to make a voluntary disclosure should seek urgent specialist professional advice.  Acceptance into HMRC’S Code of Practice 9 Contractual Disclosure Facility will guarantee the individuals involved that they will not be personally criminally prosecuted but that is in return for full cooperation and full disclosure throughout the process.  The process should not be entered into lightly or without total commitment.

Case decisions

• HMRC v Bolt Services UK Limited v HMRC [2025] UKUT 00100 (TCC)

This case revolves around the application or otherwise of the Tour Operators’ Margin Scheme (“TOMS”) to VAT on mobile ride-hailing services.  The successful application of TOMS would result in VAT only being chargeable on the commission element charged by the appellant company to the private hire vehicle operators – who are independent contractors – rather than the whole fare charged to the passenger.

The company requested a non-statutory ruling from HMRC regarding the VAT treatment of its on-demand ride-hailing services. HMRC ruled that these services did not fall within TOMS, leading the company to appeal to the First-tier Tribunal (“FTT”) – which ruled in its favour. HMRC then appealed to the Upper Tribunal.

In coming to its conclusions, the Upper Tribunal considered two main issues:

• Whether Bolt’s services were of a kind commonly provided by tour operators or travel agents.
• Whether Bolt supplied the services of the drivers to the passengers without material alteration or further processing.

The Upper Tribunal concurred that the company’s services did fall within TOMS and dismissed HMRC’s appeal against the FTT’s decision.  It concluded that:

• Bolt’s ride-hailing services are comparable to services provided by tour operators or travel agents, as they involve passenger transport, which is a travel service –whether they be point-to-point journeys via apps, airport transfers or station drop-offs.
• The services provided by Bolt were not materially altered or processed and were supplied for the direct benefit of the traveller.

The Judge emphasised that the scope of TOMS should be interpreted broadly to avoid distortion of competition and ensure uniform application of VAT rules.

Other news and announcements

• Chancellor’s Spring Statement – 26 March 2025

Further to the Government’s ongoing policy objective to Close the Tax Gap and the Chancellor announced a raft of further measures and proposals to improve tax compliance and increase punishments for non-compliance :

1. Investing in HMRC’s debt management capacity: The Government will invest in HMRC’s debt management capacity, including recruiting 500 more compliance staff and expanding partnerships with private sector debt collection agencies.
2. Making Tax Digital (“MTD”): The continued rollout of MTD with its quarterly reporting for Income Tax Self Assessment (“ITSA”) will include sole traders and landlords with qualifying income over £20,000 who will be required to join from April 2028. The aim is to make it easier for taxpayers to pay the right tax without less cope for error through a modernised and digital tax system.
3. Increasing late payment penalties: Late payment penalties for VAT taxpayers and ITSA taxpayers will be increased as they join MTD from April 2025 onwards beyond the level of penalties originally envisaged.
4. Consultation proposals: The Government is publishing consultations on how HMRC can make better use of third-party data, proposals to strengthen HMRC’s ability to take action against tax advisers who facilitate non-compliance, measures to close in on promoters of marketed tax avoidance, and options to simplify and strengthen HMRC’s inaccuracy and failure to notify penalties.
5. Prosecuting more people for tax fraud: HMRC is expanding its counter-fraud capability with a view to increasing the number of annual charging decisions by 20%, from 500 to 600 per year by 2029-30.
6. Reforming rewards for informants: A new HMRC reward scheme for informants will be launched later in 2025, targeting serious non-compliance by large corporates, wealthy individuals, offshore and avoidance schemes.
7. Tackling “phoenixism”: HMRC, Companies House, and the Insolvency Service are delivering a joint plan to tackle those using contrived insolvencies to evade tax and write off debts owed to others.
8. Overhauling offshore tax non-compliance: HMRC will recruit experts in private sector wealth management and deploy AI and advanced analytics in an effort to help identify and challenge failed offshore arrangements. Another 400 dedicated staff will be recruited – likely many of them will sit within HMRC FIS Offshore Corporate and Wealthy and will conduct an increased number of COP 8 investigations.

Collectively, the measures aim to raise over £1 billion in additional gross tax revenue per year by 2029-30.  However, they are not all without controversy – particularly, the forthcoming whistleblower programme . . .

• New US-style whistleblower programme

The Spring Statement confirmation that the programme will be launched in later 2025 followed on heels of a speech by Treasury Minister James Murray on 11 March 2025.

The new reward scheme is aimed at incentivising informants to expose failed tax avoidance as well as fraud among wealthy individuals and multinational businesses. Under the scheme, The Times has reported that whistleblowers could receive up to 25% of the additional tax revenue raised as a result of their reporting.

A Price Bailey Freedom of Information request shows that in 2023/24, the Treasury paid out £978,256 under its existing informant scheme, although the number of recipients and the total additional tax revenue raised from those reports was not disclosed.  The new scheme is inspired by the US model, where detailed public reporting shows that the US Internal Revenue Service (“IRS”) paid $89 million (£68 million) to 121 whistleblowers in the 2022/23 fiscal year, resulting in an additional $338 million (£261 million) in tax collected.

Speaking to The Times Political Editor, Andrew Park, Tax Investigations Partner at Price Bailey said:

In comparison terms, the level of rewards offered by HMRC is minuscule compared with the IRS. The thing with very large frauds is that the people in a position to report them tend to be in quite involved positions.

They need a pretty major incentive to blow the whistle, even with HMRC’s guarantees of anonymity. They are taking a risk and they want to feel that they are going to be rewarded and protected. The US scheme proves that significant amounts of money can be raised by paying informants.

Under the current system, HMRC gets swamped with vexatious, low-level reports. It hasn’t provided enough of an incentive for the really major frauds. Some of these cases involve criminal gangs and people could be at physical risk if they blow the whistle.

Ministers are understood to be considering payments of between 10% and 25% of the extra tax collected under the new scheme.

However, as understandable as the new programme is on the part of HMRC, aspects of it are likely to prove highly controversial and/or subject to legal challenge.  Not everything about the American modus operandi will necessarily translate easily from the US to the UK.

Any businesses or wealthy individuals with any concerns at all that they might not be fully tax compliant, and might shortly be seen as a lucrative target by a potential whistleblower, should double-down on their compliance efforts and revisit any old professional advice to ensure it is sound. In the event anything needs drawn to HMRC’s attention, it is never too late to pre-emptively address and mitigate the situation by voluntary disclosure if HMRC has not already formally opened an investigation.

1. HMRC initiatives and new legislation

• Nudge letters to offshore companies holding UK residential property

HMRC have launched a new campaign targeting overseas companies which they know from HM Land Registry to own UK residential property, but which did not pay the UK’S Annual Tax on Enveloped Dwellings (“ATED”) in the three years to 2019/20. This being either without the companies filing ATED returns or because they have filed ATED returns and have claimed exemption from ATED on the basis that they have met the qualifying criteria for letting relief.

HMRC’s main focus is on the concern that many overseas companies not paying ATED may have allowed “non-qualifying” connected individuals to occupy the properties – as suggested, in many cases, by them filing Non-Resident Landlord Income Tax returns reporting their properties were persistently let at a loss.

The letters come in different forms depending on whether or not the companies filed any ATED returns during the period. The letters may nudge the recipients to review their position and make voluntary disclosures if required or the letters may come with a request for detailed information about the letting and occupancy of the properties for HMRC to verify the position for itself.

• OTM Final Letter (Non relief filer – no agent) – OTM000384
• OTM Final Letter (Relief filer – no agent) – OTM000384
• Encompassing Schedule (Final) – OTM000384

• HMRC targeting individuals involved in online sales during the year to 5 April 2023

Further to the closure of the tax return amendment window for 2022/23 returns on 31 January 2025, HMRC is now targeting individuals suspected of undisclosed trading using online sales platforms to nudge them into making voluntary disclosures through the Digital Disclosure Service.

HMRC now obtains a huge amount of bulk data from popular online platforms and filters through it as a matter of routine to cross-compare it with the tax records of platform customers.

Inevitably, many people receiving letters will not have been conducting a main trade or taxable “side hustle” and in light of previous publicity around this topic and previous inadvertent misinformation in the media, the latest letters emphasise that using online platforms to dispose of personal goods is not trading and will not give rise to tax liabilities unless capital gains are realised in excess of annual allowances.

• Online marketplace sales letter

Case decisions

• A Taxpayer v HMRC [2025] EWCA Civ 106

In this long running case now brought from the Upper Tribunal to the Court of Appeal, HMRC contended that the appellant taxpayer was resident in the UK for the purposes of UK Income Tax in the tax year 2015/16. The appellant received £8m in dividends in that year but claimed she was not taxable in the UK as she had become resident in the Republic of Ireland. The issue revolves around the application of the Statutory Residence Test (“STT”) contained in Schedule 45 to the Finance Act 2013.

The First-tier Tribunal (“FTT”) initially allowed the appellant’s appeal, finding that there were exceptional circumstances on six days in question, which prevented her from leaving the UK and staying within the normal non-residence day count permitted to her under the SST. However, the Upper Tribunal set aside the FTT’s decision, holding that there were no exceptional circumstances – the appellant had an alcoholic sister and there were issues with the care and safeguarding of her children but such circumstances were held to be all too common and not exceptional for SST purposes.  The appellant then appealed to the Court of Appeal, seeking to have the FTT’s decision restored.

There were five contested grounds of appeal (ignoring a sixth contingent one which was disregarded by mutual consent):

• The Upper Tribunal erred in its approach to the test as to whether the appellant was “prevented” from leaving the UK.
• The Upper Tribunal erred in holding that whether circumstances were “exceptional” was a matter of law.
• The Upper Tribunal erred in holding that moral obligations cannot be or cannot be part of the exceptional circumstances.
• The Upper Tribunal erred in holding that the First-tier Tribunal (FTT) made contradictory findings on the “exceptional circumstances” issue.
• The Upper Tribunal erred in holding that the FTT had no evidence to support their finding that the paragraph 22(4) conditions were met on each day.

The Court of Appeal, after considering the arguments from both sides, preferred the submissions of the appellant’s Counsel and allowed the appeal on all grounds, restoring the decision of the FTT.  The Court concluded that the circumstances, including the need to care for the appellant’s twin sister and her minor children did indeed constitute exceptional circumstances that prevented her from leaving the UK.

Other news and announcements

• Updated HMRC data on Corporate Criminal Offence investigations

According to new statistics just published, as at 31 December 2024 HMRC had 11 live Corporate Criminal Offence (“CCO”) investigations but no current investigations for which charging decisions had yet been made. A further 28 potential were also under review for possible investigation across a variety of sectors including – software providers, labour provision, accountancy and legal services and transport.

The CCO legislation for failure to prevent the facilitation of tax evasion was introduced in Part 3 of the Criminal Finances Act 2017 but despite considerable political pressure HMRC has yet to bring a prosecution – successful or otherwise. As at 31 December 2024, HMRC had reviewed 114 situations with a view to bringing a prosecution and decided not proceed with bringing charges in every single one of them.

Arguably, the main driver for the legislation was the wholesale facilitation of tax evasion found to have been carried out by many offshore banks and professional services companies prior to the collapse of offshore secrecy and the now automatic international exchange of financial information under the Common Reporting Standard (“CRS”). That problem was largely eradicated before the CCO legislation was enacted.  Indeed, HMRC themselves emphasise that the success of the CCO legislation should be judged in part by its behavioural impact in helping to prevent future abuse rather than putting the past right.

HMRC Initiatives and New Legislation

• Nudge letters to delivery drivers

During the month, HMRC initiated a “one-to-many” nudge letter campaign targeting self-employed delivery drivers who may not have declared their income or registered for Self Assessment. The letters inform recipients that HMRC has obtained information from courier companies, such as DPD, Yodel, and Evri, indicating that the individuals performed delivery services between April 2023 and April 2024 without being compensated through Pay As You Earn (“PAYE”).

The communication emphasises that individuals earning more than £1,000 from self-employment during the 2023/24 tax year are required to register for Self Assessment and submit a tax return. Although the standard registration deadline of 5 October 2024 has passed, HMRC advises affected individuals to register promptly to obtain a Unique Taxpayer Reference (“UTR”), which is necessary for filing a tax return.  Any tax owed for the year ending 5 April 2024 should have been paid by 31 January 2025 to avoid accruing interest.

For those who have earned income from delivery services in previous years without declaring it, HMRC suggests making a disclosure to regularise their tax affairs – which, as with all voluntary disclosures, will help to mitigate the potential penalties associated with undeclared income.

This initiative further underscores HMRC’s commitment to ensuring tax compliance among self-employed individuals in the gig economy. Delivery drivers are encouraged to review their earnings, register for Self Assessment if necessary and declare all relevant income to remain compliant with tax obligations.

• HMRC OTM campaign delivery drivers letter
• HMRC OTM campaign delivery drivers email

• Charities Input VAT

HMRC have issued “one-to-many” nudge letters to VAT-registered charities, philanthropic and voluntary organisations with turnovers under £2 million. These communications aim to raise awareness about the obligation to apportion Input VAT between business and non-business activities.

The letters emphasise that VAT incurred on purchases can only be reclaimed as input tax if the goods or services are intended for taxable business purposes. Charities engaged in both business and non-business activities must apportion VAT accordingly. HMRC provides guidance on determining business activities, referencing a two-stage test:

1. The activity results in a supply of goods or services for consideration.
2. The supply is made for the purpose of obtaining income therefrom (remuneration), even if the charge is below cost.

The letters also highlight the potential for historical overclaims of input tax due to incorrect apportionment and advise charities to review their VAT recovery methods. HMRC acknowledges the complexity of this area and suggests seeking professional advice as required.

This initiative reflects deficiencies identified by HMRC in the charitable sector in meeting VAT obligations. Charities must assess their activities, accurately apportion Input VAT and get appropriate professional advice to maintain compliance.

• OTM Final Email – Charities VAT

Case decisions

• HMRC v Bluecrest Capital Management (UK) LLP[2025] EWCA Civ 23

In this case, the Court of Appeal considered the interpretation of “Condition B” under the “salaried members” rules applicable to Limited Liability Partnerships (“LLPs”).

The salaried members legislation at S863A to S863G ITTOIA 2005, introduced to counter perceived tax avoidance by LLP members who might otherwise be treated as employees for tax purposes, establishes three conditions (A, B, and C). If all conditions are satisfied, an individual member is taxed as an employee. Condition B specifies that an individual will be treated as a salaried member if “the mutual rights and duties of the members and the LLP do not give the individual significant influence over the affairs of the partnership.”

The Court of Appeal Judges have unanimously agreed to overturn previous decisions by the First-tier Tribunal (“FTT”) and Upper Tribunal (“UT”), which had adopted a broader interpretation of Condition B. The Court emphasised that for an LLP member to have “significant influence” over the partnership’s affairs, such influence must derive from the mutual rights and duties established by the LLP’s statutory and contractual framework, typically outlined in the LLP Agreement. This interpretation excludes de facto influence arising from informal or non-legally binding arrangements.

The Court stated that the requisite influence must be exerted over the LLP’s affairs generally, viewed as a whole, and should focus on decision-making at a strategic level. Influence limited to specific aspects of the LLP’s business does not meet the threshold for “significant influence” under Condition B.

Other news and announcements

• New review into effect on taxpayers of the disguised remuneration loan charge

On 23 January 2025, the UK Government launched a new independent review of the disguised remuneration loan charge, appointing Ray McCann, former President of the Chartered Institute of Taxation, to lead the examination.

The review’s primary focus is to assess the challenges individuals face in resolving their loan charge liabilities with HMRC. It aims to provide a fresh perspective on cases that have reached an impasse, particularly those where taxpayers and HMRC have struggled to agree on liability terms or payment arrangements.

The Government has clarified that the review will not consider repealing the loan charge rules, maintaining that individuals who are liable – many of whom participated in disguised remuneration schemes, which involved receiving income in the form of loans – should settle their affairs with HMRC.

This initiative follows ongoing concerns about the loan charge’s impact on taxpayers, especially those of limited means who have experienced extreme hardship and some of whom have even committed suicide.

• HMRC to allocate 5,000 extra tax inspectors in clampdown on small businesses and their owners

HMRC is hiring 5,000 extra tax inspectors in a clampdown on small businesses and their owners, according to information disclosed to a committee of MPs. The amount of the tax gap attributed to small businesses currently stands at £24.1 billion.

The report, “HMRC Customer Service & Accounts”, published on 22 January 2025, reveals that the 5,000 extra tax compliance staff will be targeting Britain’s small businesses and their owners for £6.5 billion in additional revenue by 2029/30.  That’s equivalent to nearly one extra HMRC officer for every 1,000 of the 5.3m businesses categorised as “small” by HMRC.

That increase in staff assigned to small business compliance will be equivalent to one additional tax inspector for every 1,000 small businesses in the UK.

According to a report on the tax gap published by HMRC in June 2024, “The share of the tax gap attributed to small businesses has increased over the last 5 years, from 44% of the overall tax gap in 2018 to 2019 to 60% in 2022 to 2023.”

HMRC initiatives and new legislation

• HMRC launches new R&D Disclosure Facility

Long anticipated, the new R&D Disclosure Facility was finally launched on 31 December 2024.  Its purpose is to enable companies to more easily voluntarily disclose underpaid Corporation Tax arising from accidentally over-claiming reliefs for R&D expenses – carelessly or innocently, in other words, but not deliberately.  This comes against an ongoing backdrop of very limited HMRC resources to open historic investigations.

Disclosures are submitted to HMRC electronically – as with previous existing Disclosure Service initiatives.  However, there are a few key differences:

• there’s no pre-notification and pre-registration process;
• the R&D portal is set up to enable supporting documents – including detailed computations – to be attached to the digital disclosure form;
• there’s no requirement for immediate payment of the computed tax, interest and penalty liabilities upon submission of the disclosure and HMRC have indicated that they’ll be receptive to time to pay arrangements – albeit, typically over up to 12 months.

At a minimum, disclosures will need to include:

• the name of the company making the disclosure;
• the company’s Unique Taxpayer Reference and registered business address;
• the company’s Standard Industrial Classification (SIC code);
• the name of the company’s HMRC customer compliance manager, if they have one;
• the name of the agent who prepared the original claim (if known);
• the accounting periods the disclosure relates to;
• the reasons for the inaccuracy;
• calculations of how much is owed.

Depending upon the number of years involved and whether or not errors were made after taking reasonable care, companies will need to disclose and settle liabilities for accounting periods ended up to six years pre the disclosure date.

Upon review of the disclosures, HMRC will respond with immediate acceptance or will seek more information to explore the conclusions formed.

HMRC will not allow companies to use the R&D facility to admit any deliberate overclaiming of R&D relief.  That would instead require the company officers responsible to personally register themselves – i.e. rather than the company – to make voluntary disclosures under the Contractual Disclosure Facility / COP 9 (“CDF”) – but would at least come with a guarantee of them not being criminally prosecuted subject to an upfront admission of fraud and full cooperation.  Under the “CDF” the companies themselves would still be on the hook for all related liabilities going back up to 20 years and civil penalties of up to 100%.

HMRC can now be expected to make a concerted effort to nudge companies into making voluntary disclosures with targeted letter campaigns.  Companies which have had recent R&D claims rejected are likely to be pressured to accept responsibility for self-reviewing and rectifying their historic positions.

For expert assistance in making a voluntary disclosure or reviewing the validity of past claims please contact Andrew Park in Price Bailey’s Tax Disputes team or Gemma Thake who heads our R&D compliance team.

• Pre-emptive HMRC interventions on Investors’ Relief claims in 2023/24 tax returns

Further to initial checks on claims made in tax returns already submitted, HMRC has already begun writing to taxpayers to inform them that they have provided too little information to support the validity of their claim for a reduced CGT rate of 10% upon the disposal of trading shares or else HMRC believes the claim is invalid.  The letters ask taxpayers to act within 30 days either to amend their returns and withdraw the claims, provide more information or face HMRC removing the claims or opening a formal enquiry.

• Investors Relief insufficient information letter
• Investors Relief invalid claim letter

Case decisions

• M R Currell Ltd v HMRC [2024] UKUT 00404 (TCC)

In this appeal brought to the Upper Tribunal, the company had made an £800,000 contribution in November 2010 to an Employee Benefit Trust (“EBT”) which it had newly established.  The EBT then agreed to loan £800,000 to a founder shareholder/director of the company in order for him to purchase his shareholder/director wife’s shareholding in the company.  The loan was secured on the shares, interest free and repayable in full on the fifth anniversary date.  The recipient’s wife then loaned her £800,000 proceeds back to the company through her director’s loan account so that it suffered no loss of working capital.

Upon investigation, HMRC assessed the full £800,000 loan principal as taxable employment earnings on the company under PAYE.  The First-Tier Tribunal (“FTT”) then found for HMRC in adopting that position and further concluded that the £800,000 was assessable on the loan recipient at the point the company made the contribution to the EBT.  The FTT reasoned that – notwithstanding the ostensible purpose of the loan to enable the purchase of the shares – objectively the loan constituted a potential benefit in the hands of the recipient under S62 Income Tax (Earnings and Pensions) Act 2003 – which defines earnings as “any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth”.  The FTT concluded that the substantial reason for making the loan was to enable the Trustees to fulfil a commitment they had made to the recipient and would not have exercised that discretion were not for all the work he had done for the company over the years.

The Upper Tribunal disagreed that the payment was made as a reward or remuneration for the recipient’s exertions as an employee.  Looking at the full picture, the Judges concluded that the result was that the recipient had been able to purchase his wife’s shares but was still obligated to pay back £800,000 to the Trustees.  That liability overrode any benefit.  Unlike the Glasgow Rangers EBT case ultimately decided by the Supreme Court, there was no suggestion that the loan would not be repaid at term or that employment income had been sacrificed in the expectation of instead receiving a loan – this was not withstanding that HMRC’s investigation resulted in the loan not being repaid in 2015 after all in case HMRC attack of the arrangements gave rise to double-taxation.

Why this matters

The loan here was made for a specific restricted purpose which was well understood by all parties and clearly documented and, contrary to HMRC’s position, that “pre-wired” purpose pointed against it being earnings rather than towards that conclusion.

This case serves as a reminder that EBT arrangements need to be looked at on their own facts and in full context.  The FTT adopted an oversimplistic approach that loans confer benefits in generality and failed to distinguish between diverted or disguised remuneration – which so many EBT loans are – and a bona fide loan arrangement.

HMRC initiatives and new legislation

• New round of nudge letters to suspected landlords

Not for the first time, HMRC have issued letters to people filing tax returns under Self-Assessment who HMRC suspects of failing to declare their rental income and/or capital gains upon disposal.

The latest letters leave recipients in no doubt that a failure to respond – HMRC’s usual 30-day deadline applies – will result in a compliance check.

• Landlords nudge letter

• HMRC red flags taxpayers claiming excess Business Asset Disposal Relief (“BADR”)

Wealthy taxpayers who have submitted BADR claims in their latest 2023/24 tax returns began receiving letters from HMRC during the month warning them that they have either exceeded their £1m lifetime limit with their latest claim or else have already fully utilised it in an earlier year.

Taxpayers who have made errors now have an opportunity to self-correct their tax returns within the normal 12-month correction window but only have 30 days to respond to the HMRC letter before they risk HMRC using their “Para 16 powers” to correct what HMRC regards as an obvious error or else HMRC opening an enquiry and seeking penalties.

It seems that HMRC believes that some taxpayers haven’t yet woken up to the reduction in the lifetime BADR allowance from £10m to £1m on 11 March 2020 or have developed wilful amnesia about the change.

• BADR LTA this year
• BADR LTA already over

Case decisions

• Generator Power Ltd v HMRC [2024] UKFTT 1019 (TC)

The taxpayer was in a VAT dispute with HMRC over the treatment of the supply of generators with fuel. The taxpayer argued that there were two separate supplies – the generators at standard rate and the fuel at a reduced rate. HMRC sought to apply the standard rate to a single supply. The dispute progressed to the First-Tier Tribunal (“FTT”) where the taxpayer successfully introduced new evidence late into the proceedings supporting its position that customers were well able to buy generators and fuel separately elsewhere if they chose. The FTT granted HMRC 28 days to consider its position – whereupon it conceded the taxpayer’s appeal and withdrew.

The taxpayer then applied to the Tribunal for professional costs on the grounds that HMRC’s conduct was unreasonable – it was always bound to fail. The FTT was not convinced that HMRC had acted unreasonably. The case was not made that HMRC already knew the material facts before the hearing or that it should have withdrawn faster from the hearing after the admission of the new evidence – which it was entitled to take further time to assess – and cost application failed.

• Stage One Creative Services Ltd v HMRC [2024] UKFTT 1059 (TC)

In this case, the company involved specialises in engineering and installing sophisticated automated systems for live events and made claims for R&D relief under the pre-2024 regime for SMEs. HMRC contested the claims arguing that it was invalid both because it was “subsidised expenditure” (an exclusion abolished in 2024) and because it was conducting “contracted out” R&D on behalf of another party.

HMRC had raised discovery assessments for accounting periods ended 31 December 2017 and 31 December 2018 but had been in time to open an enquiry into the period ended 31 December 2019. The company appealed the validity of the discovery assessments in tandem with appealing HMRC’s technical position. The company had submitted reports to support the claims which it argued made available to HMRC all information reasonably required to open an enquiry within the enquiry window (Para 44 Sch 18 FA 1998) and moreover the returns were “prepared in accordance with the practice generally prevailing at the time when made” (Para 45 Sch 18 FA 1998).

The FTT dispensed with HMRC’s arguments on “subsidised expenditure” following the rationale in Quinn [2021] UKFTT 437 (TC) – in essence, that the two parties had agreed a specified end product for an agreed price. It was up to the appellant how it went about doing that and what R&D it might need to conduct to get there – as the taxpayer here put it, the clients wanted “the picture on the jigsaw box, but [had] no interest in putting the puzzle together”.

With regard to the question of contracted out R&D expenditure, there was no contractual obligation for the company to perform R&D and it was a means to an end to enable it to fulfil its contractual obligations not a contractual end in itself – when performed in the context of a particular client project.  The Tribunal rejected HMRC’s statutory interpretation that qualifying R&D must be “freestanding” i.e. not connected to a specific client.

To compound HMRC’s embarrassment, the Tribunal concluded that HMRC’s discovery assessments had been invalidly issued too and the company succeeded on both grounds whilst needing only one – the detailed R&D reports were sufficient to meet the Para 44 prohibition and, besides, the returns had been prepared in accordance with HMRC’s own previous guidance before HMRC changed it in 2021 – so the Para 45 prevailing practice prohibition applied too.

Other news and announcements

• Freedom of Information (“FoI”) request reveals taxpayer success rates in challenging decisions with HMRC’s Independent Reviewer

FoI data for the four fiscal years to 2023/24 obtained by Andrew Park of Price Bailey on behalf of the Contentious Tax Group – a multi-firm group of specialist tax accountants, tax advisers and tax lawyers – puts paid to the myth that appealing to HMRC’s Independent Reviewer is always futile. Indeed, it bears out our own experience at Price Bailey that success can often be had.  However, the data shows a wide degree of success in taking appeals of initial HMRC decisions to “Independent Review” at HMRC Solicitor’s Office depending on whose decisions are being appealed.

Whilst in generality over 70% of decisions taken by investigators within different departments of HMRC’s Customer Compliance Group (“CCG”) were fully upheld, the opposite was true of the number of more simple automatic decisions – like late filing penalties – made by HMRC’s Customer Services Group (“CSG”) where 70% of decisions were cancelled in 2023/24 and were even higher at 78% during Covid in 2020/21.

HMRC CCG comprises:

• Counter-Avoidance – dealing with investigating failed marketed tax avoidance schemes
• Fraud-Investigation Service (“FIS”) – conducting fraud investigations as well as complex non-fraud related investigations with large amounts of tax at stake (the data here only relates to FIS’s civil investigations)
• Individuals and Small Business Compliance
• Large Business
• Wealthy and Midsized Compliance

Additionally, during the three years to 2023/24, CCG also included the now disbanded Covid Taxpayer Protection Taskforce with its figures showing as “Compliance Operations Directorate”.

There was broad variation within CCG – with only 19% of Counter-Avoidance decisions being varied or cancelled most recently at the least successful end compared to 58% of Covid Taskforce decisions being varied or cancelled most recently at the most successful end. Only 1% of Counter-Avoidance decisions were cancelled altogether in 2023/24 compared to 21% of Covid Taskforce decisions.

HMRC initiatives and new legislation

• Late payment interest raised to punitive levels – Autumn Budget 2024

Chancellor Rachel Reeves announced that the Government will: “increase the interest rate on unpaid tax debt to ensure that people pay on time” – the forthcoming increase to statutory late payment interest shown in the Budget notes and draft legislation to be a floating rate of Bank of England Base Rate plus 4% – up from the existing base plus 2.5%.

This change and the Chancellor’s explanation for it now frames late payment interest squarely as a punitive deterrent measure.  Speaking to the Telegraph, Price Bailey Contentious Tax Partner Andrew Park said: “This is a worrying shift from charging enough to deny taxpayers an advantage in paying late to creating another punishment by the backdoor.”

The change – effective from 6 April 2025 – means that HMRC will rake in an additional estimated £200 million per year.  5% more interest than the measly base rate minus 1% HMRC pays taxpayers to whom it owes refunds.

Taxpayers are already charged statutory late payment penalties, late filing penalties and heavy penalties for underpaid tax and these penalties come with legal protections and can be appealed or mitigated – late payment interest cannot irrespective of the circumstances.  So it seems likely that the new late payment interest regime will be subject to human rights challenges through the courts, or else HMRC will find itself obliged in many circumstances to waive late payment interest altogether for want of it legitimately being able to charge it at the punitive rate set by the new legislation.

If the Treasury are determined to go ahead, it would surely make sense for the new draft legislation to be modified before enactment to provide for a basic “neutral” level of interest equivalent to normal commercial rates (as before) and a punitive top up level of interest appealable like any normal penalty on grounds of reasonable excuse.

• Crackdown on umbrella companies – Autumn Budget 2024

Further to HMRC concern over the ongoing abuse of umbrella company arrangements to improperly shield contractors from the application of the IR35 employment status rules, new measures effective from April 2026 will require that where a recruitment agency uses an umbrella company to supply workers, the agency will become legally responsible for ensuring that the umbrella company operates PAYE properly and that the correct amounts of Income Tax and employee and NIC are accounted for to HMRC. Where there is no agency in a labour supply chain, the responsibility will instead sit with the end client itself.

These changes are expected to boost compliance and the ease with which HMRC can pursue debts for non-compliance.  Moreover, the due diligence burden arising from the need to take legal responsibility for the actions of third party umbrella companies is likely to result in a dramatic reduction in their use.

• Crackdown on promotors of tax avoidance schemes – Autumn Budget 2024

The Government announced plans for new powers and measures to:

• Focus on those who own or control organisations promoting tax avoidance schemes.
• Tackle legal professionals behind avoidance schemes.

It will become more clear what options are planned when HMRC publishes a new consultation in early 2025.

• New “nudge letters”

Notwithstanding all the focus on the Budget, during October HMRC began issuing nudge letters to:

• Gas engineers who HMRC have identified as being personally registered with the Health and Safety Executive to perform gas safety work but who have not filed tax returns: Individual Small Business Compliance letter.
• The registered tax agents of people who have received notices to file 2022/23 tax returns but are now more than nine months past the 31 January 2024 filing deadline: Self Assessment Tax Return letter for tax agents.
• The tax agents of people who submitted 2022/23 tax returns with provisional figures but have yet to amend them with finalised figures and are fast approaching the end of the amendment window on 31 January 2025: Finalised figures for Self Assessment Tax Returns letter for tax agents.
  

  Case decisions

  • Andrew Quay Hull LLP v HMRC [2024] UKFTT 00842 (TC)

  The appellant partners entered into Alternative Dispute Resolution (“ADR”) with HMRC with regard to a disputed VAT assessment of £750,000 and a 63% deliberate inaccuracy penalty of £472,500.  The ADR meeting took place on 3 February 2020 on a “without prejudice basis” with the two parties in different rooms at the venue and the two mediators “shuttling” between the parties relaying proposals and counterproposals. The parties did not communicate directly with each other even at the end.

  The taxpayers understood that the ADR had concluded with HMRC agreeing to withdraw the VAT assessment.  This was on the basis that the Output VAT would reverse out by way of Bad Debt Relief.  Since HMRC were vacating assessment of the VAT, it followed to the taxpayers that HMRC were also withdrawing from pursuing the penalties and the taxpayers withdrew their penalty appeal on that understanding.  However, HMRC’s actual position was that – notwithstanding relief for the VAT liability – there had still been a deliberate misstatement on the VAT return based on the Potential Lost Revenue at that time and the VAT penalty still stood.

  The First-Tier Tribunal accepted that the taxpayers that made a mistake but did not accept that the mistake was known or ought reasonably to have been apparent to HMRC and therefore concluded that the unilateral mistake on the part of the taxpayer did not invalidate the formation of the contract – whose language the Judge found unambiguous.

  Why this matters

  It might seem harsh that a tax geared penalty can be levied on tax that is not ultimately payable.  However, such outcomes do happen regularly with regard to VAT – where there is often more scope than for other taxes for subsequent relief or reversal – and had they had more resources for professional advice and representation the taxpayers would likely have been alive to that possibility.

  The case serves as a valuable reminder that:

  • ADR exit agreements form binding contracts with HMRC and that the basis of the agreements needs to be fully explored by both parties and made explicit in order to avoid the risk of miscommunication;
  • there is more scope for misunderstandings if shuttle mediation is relied upon in isolation – best practice surely being that the parties should at the very least meet directly at the end of the session to confirm the bases of any agreement reached as understood by their respective sides;
  • the Tax Tribunal can assume jurisdiction to determine whether a binding legal contract has been concluded for tax purposes.

  That said, HMRC itself should take heed to avoid such misunderstandings happening in future.  The outcome of this ADR – resulting as it does from a binding contract held to be formed notwithstanding that the taxpayers believed themselves to be agreeing something very different – leaves a sour taste and will be perceived by many future taxpayers considering their options as undermining the credibility of the ADR process.  That is not in HMRC’s interests – or those of a clogged Court system either – if it results in more taxpayers opting to forego ADR and proceed straight to the Tax Tribunal.

  Other news and announcements

  • HMRC compliance and debt management staff to increase by 5,000 – Autumn Budget 2024

  In her Budget speech on 30 October 2024 Chancellor Rachel Reeves announced plans for the recruitment of an additional 5,000 HMRC staff to boost efforts to close the “tax gap” by identifying or preventing more non-compliance and more effectively recovering determined tax debts.  However, it’s not clear how those additional staff will be allocated across HMRC and what the grade structure of those people will be.  Most new recruits will likely go in at very junior grades and require considerable training to become effective.

HMRC Initiatives and New Legislation

• Targeted HMRC letter to suspected non-payers of the Remittance Basis Charge (“RBC”)

Not so much a “one-to-many” letter as a “one-to-a-targeted-few” letter, the letter is understood to have been sent to fewer than 100 taxpayers who are believed to have been a UK resident for 7 of the last 9 years or 12 of the last 14 years in 2022/23 but have not paid a £30,000 or £60,000 RBC charge.

The letters put the “non-doms” concerned on notice that HMRC believe they probably alternatively had overseas income and capital gains to declare to HMRC instead for the year and that they probably need to either pay the RBC charge late or pay UK tax on the overseas income and gains.

Anyone who needs to rectify their position will suffer late payment interest as well as potential penalties and should seek appropriate advice.

• Remittance basis – 7-9 Letter
• Remittance basis – 12-14 Letter

Case Decisions

• Wyatt v HMRC [2024] UKFTT 867 (TC)

The appellant had been subject to Income Tax and Capital Gains tax discovery assessments for tax years 2007/08 and 2009/10 in relation to rental income and contended property development activities.  The HMRC officer included accompanying alternative Income Tax and Capital Gains tax computations with the assessments depending on whether the property disposals concerned were subject to Income Tax as trading income or Capital Gains Tax as disposals of property investments.  The quantum of the HMRC assessments was based on both the alternative Income Tax and Capital Gains Tax liabilities combined.

Mr Wyatt appealed against the validity of the assessments represented by his own father and the First-Tier Tribunal (“FTT”) found in his favour on the basis that discovery assessments made under S29 Taxes Management Act 1970 (“TMA”) can only make an assessment in the amount which in their opinion makes good to the Crown the loss of tax.  In this instance, that was not the case because the assessments charged the same disposals to tax twice over.

The Court decided that the assessments were invalid in their entirety rather than subject to amendment by a Tribunal because that would give rise to the unfairness from the outset of having denied the taxpayer the option of accepting assessments which taxed the disposals only once rather than being forced to appeal the assessments because the quanta was grossly overstated.  For that reason, S29 TMA should be read as constraining the power of an officer to raise an assessment for more than the maximum amount which in their opinion needs to be charged to make good the loss of tax.

• Demetriou and Turner v HMRC [2024] UKFTT 00830 (TC)

In this case before the FTT, the Estate of a deceased sought to contest HMRC refusal to grant 100%  Business Property Relief (“BPR”) from Inheritance Tax on a wild fishery business.

Under S104 Inheritance Tax Act 1984 BPR only applies on “relevant business property” and under S105(3) of that act property is not relevant business property if the business consists mainly of holding investments.

The deceased had operated the fishery business as a sole trade for 17 years after her husband’s death.  In the course of her business, she operated an office, a reception room, provided a “rod room” for storage, fisherman’s huts, car parks, kept and operated equipment to maintain the land around the river and paid for river keepers and other staff.  In the early part of her tenure, the deceased had stocked the fishery with brown trout but the business became a wild fishery after conservation pressure from the Environment Agency.  The wild fishery was less popular with anglers and the business declined.

HMRC contended that the deceased was exploiting the land to produce income – which is an investment activity.  The appellants argued that the deceased had operated a business providing services rather than one of holding investments.

The Tribunal found for HMRC.  It considered that the starting point is that owning land in order to obtain an income is generally an investment activity, one must look at the nature of activities not the level of them, there is a spectrum of businesses involving land with investment businesses like property letting at one end and trading businesses like farms at the other end, one must consider things as a whole and decide in the round if any non-investment activities are sufficiently important that the business is not mainly an investment business.

Looking at the fishery business in the round, the Tribunal concluded that non-investment activities like providing advice and guidance and monitoring the fishing were sufficient to outweigh investment activities like maintaining the land and warding off poachers.  The Judge made clear that it might have been different had the business sold more other services such as tuition, providing ghillies, equipment for sale or hire or catering.

Other News and Announcements

•  Gifts received in the course of employment or self-employment

There has been considerable media attention on gifts, benefits and perks reported to have been given to senior Labour MPs over the last few years by a wealthy party supporter.  That has included some debate and confusion over whether such gifts are tax-free in the hands of the recipients.

In practice, UK tax legislation and case law provides broad scope to treat material benefits and perks received in the course of employment or self-employment as taxable income in the hands of the recipients.  If the “source” of the “gifts” is connected to how the recipients earn a living they can generally expect them to be taxable.  This can apply irrespective of whether the gift or perk is provided directly by an employer and even if the gift or perk is instead provided to a spouse.  The obvious question to address with HMRC – even if there is an element of friendship involved – is would the gift or perk have been provided were it not for the employment or client relationship?

The situation often arises in the private sector when a client of a firm makes a generous gift to one of the firm’s employees and then puts them in the position of either having to treat the value of the gift as taxable earnings or refuse an unsolicited gift rather than suffer tax on something – like gaudy jewellery maybe – that perhaps they would never want anyway.

In some cases specific rules apply – for instance, with regard to clothing – where being provided with obligatory uniforms or protective clothing not suitable for personal use might not give rise to taxable benefits but ordinary suits or spectacles certainly would – even if worn to work.

Anyone receiving gifts in the course of how they earn a living should seek professional tax advice.  In some circumstances, failure to seek tax advice for fear that such things might be taxable might be held to be tax evasion by virtue of wilful negligence.  That could lead to more severe penalties, the ability for HMRC to go back up to 20 years to raise tax assessments and even possible public naming as a deliberate tax defaulter.

• Price Bailey Freedom of Information (“FOI”) request reveals thousands of R&D claims removed or amended by HMRC Fraud Investigation Service (“FIS”)

Between 2022 and 2023 HMRC FIS issued 2,860 letters to companies alleging fraud and cancelled or otherwise amended c. 2,100 R&D claims making controversial use of HMRC’s “Para 16” powers at Sch 18 of FA 1998.

Para 16 expressly permits HMRC to amend tax returns to remove “obvious errors or omissions” or “anything else in the return that the officer has reason to believe is incorrect in the light of information available to the officer”.  However, in the case of FIS’s R&D claim interventions – which it has normally made without opening formal enquiries – FIS may have been routinely amending returns to remove claims because of insufficient information at that time to support a claim – which is fundamentally different and outside the scope of Para 16.

In many instances companies appear to have been targeted because they have used the services of an R&D claim boutique regarded by HMRC as dubious or because they operate in an industry which HMRC does not expect to be engaged in R&D in generality.  Often HMRC’s suspicions will have been well founded.  However, it is also evident that a significant number of companies making bona fide claims have also been caught up in the FIS initiative and have found dealing with FIS an intimidating experience which has left them questioning whether to continue with pursuing a claim.  Contesting Para 16 amendments involves resubmitting tax returns to reinstate claims prematurely removed by FIS under Para 16 and then putting the ball back in HMRC’s court to open a formal enquiry or allow the claims to stand.

Any company receiving an HMRC FIS letter challenging the validity of an R&D claim should seek reputable, regulated professional advice.

HMRC Initiatives and New Legislation

• New round of HMRC “nudge letters” to crypto investors

HMRC’s Wealthy Team has started sending targeted further letters to individuals who are suspected of disposing of cryptoassets without declaring the resulting taxable gains or income. A limited number of these were sent out in August, with a larger wave expected in September.

HMRC has a lot of data now on the holders of cryptoassets it has gleaned from crypto exchanges or has obtained from other tax authorities such as the US IRS who are conducting similar coordinated data gathering.

Recipients are advised to review their tax situation and, if necessary, take corrective action through the Cryptoassets Disclosure Service. Those who believe they have no tax liabilities are asked to inform HMRC, providing a clear explanation and any relevant supporting documents to clarify their position.

HMRC remains concerned that many crypto investors continue not to understand or are choosing to ignore the tax consequences of buying and selling cryptoassets, exchanging one form of cryptoasset for another or using cryptoassets to purchase conventional assets

• Disposal of cryptoassets letter.

• HMRC intervention letters to Investors’ Relief claimants

HMRC’s Wealthy Team has launched a new letter campaign aimed at individuals who claimed Investors’ Relief in their 2022/23 tax returns.

Those receiving the letters are urged to review their claims and, if necessary, update their tax returns within 30 days of the letter’s date. Failure to do so could result in HMRC opening a formal enquiry and imposing penalties if errors are discovered during their investigation or else in HMRC seeking to apply its “Paragraph 16 powers” to amend the return to remove any claim they feel is unsubstantiated.

The use of Paragraph 16 Sch 18 FA 1998 powers is controversial because the wording of the legislation only provides for the correction of obvious errors or omissions or anything else that appears wrong in light of the information HMRC already holds.  Insufficient information to support a claim would not obviously meet those criteria.

Two different letters are being issued: one for those who, according to HMRC, may not meet the eligibility criteria for the relief, and another for individuals whose submissions lack sufficient information for HMRC to confirm the claim.

• Investors Relief insufficient information letter
• Investors Relief invalid claim letter

• HMRC “nudge letters” to suspected dog and cat breeders

HMRC has launched a new “One to Many” letter campaign aimed at dog and cat breeders.  Pet breeding has been a boom industry in recent years – particularly fuelled by the growth in demand for pets during Covid and the persistent switch to homeworking.  Large numbers of people are understood to have started breeding animals either as a “side hustle” or as a bigger scale organised activity and HMRC is concerned that breeders have failed to declare their income.  In many cases, individuals have been “ghosts” – making substantial income completely outside the Income Tax Self-Assessment (“ITSA”) system.

HMRC is understood to have identified likely breeders using data obtained from insurance companies, pet selling websites, social media and the RSPCA.

To assess the effectiveness of their communications, HMRC is using two different versions of the letter in this campaign. These letters inform recipients that they may need to make a voluntary disclosure regarding undeclared income. Breeders who have additional tax liabilities are encouraged to make the necessary disclosures to HMRC.

The letters outline the various processes available for making a disclosure, and it is important for individuals to choose the method most suited to their circumstances, considering the nature of the inaccuracies and how they arose and to seek specialist professional advice – particularly, if they might need to disclose the deliberate evasion of tax under the Contractual Disclosure Facility.

• Tell us about income from breeding/sale of animals letter
• Declaring income from breeding/sale of animals

• HMRC letters to people earning over £200,000 but failing to submit tax returns

HMRC’s Wealthy Team has begun issuing “One to Many” letters targeting individuals with annual earnings exceeding £200,000. These letters are being sent to individuals who fall into one of three categories:

• those who have not registered for Self-Assessment despite holding a dormant account with HMRC,
• those who received a Notice to File for the 2021/22 tax year but did not submit a return, and
• those who have never registered for Self-Assessment at all.

The recipients are being asked to review their circumstances and assess whether they meet the criteria for submitting a tax return. Should they fail to act, HMRC may proceed by issuing a formal Notice to File. Non-compliance could lead to further penalties or investigations.

• Dormant account letter
• SATR letter
• Register for SATR letter

Case Decisions

• Go City Ltd v HMRC [2024] UKFTT 745 (TC)

In this case before the First-Tier Tribunal (“FTT”) the appellant had sold tourist passes to enter attractions and use transport.  In light of previous disputes with HMRC and changes in VAT voucher legislation, the company had evolved the terms of its passes in an attempt to ensure that the sale of them would not be treated as a taxable supply for VAT purposes and no VAT would be payable until the passes were used to access attractions.  HMRC disputed that and also disputed the company’s position that VAT would become payable in proportion to the total number of credits sold with the pro-rata payment in relation to any unused credits remaining outside the scope of VAT.

In order to safeguard its assessment position HMRC raised the first two of its VAT assessments protectively before it became time-barred under the two-year VAT assessment window after originally becoming aware of the facts.  At that time HMRC was still considering its position.

The taxpayer appealed on the grounds that:

• the first two assessments were invalid – no discovery had been made at the time they were raised
• the initial supply of the passes was outside the scope of VAT as they were Multi-Purpose Vouchers
• the initial supply was in any event outside the scope of VAT as it was a preliminary transaction not an aim in itself
• the pro-rate proportion of the consideration relating to unused credits should not be subject to VAT

Judge Redston found for the taxpayer on all four counts.

• HMRC v S&L Barnes Ltd [2024] UKUT 262 (TCC)

The taxpayer – a TV rugby co-commentator and pundit – had successfully won an IR35 employement status appeal against HMRC at the First-Tier Tribunal (“FTT”).  HMRC then appealed that decision to the Upper Tribunal arguing that the FTT had made errors in considering the so-called “Third Stage” considerations laid down in a previous case involving Ready Mixed Concrete (South East) Ltd.

The Third Stage test of employment status requires a court to consider whether or not a hypothetical contract would be a contract of employment taking all the circumstances into account.  HMRC contended in this instance that the FTT had allowed its decision to be swayed by irrelevant factors whilst failing to take into account other factors that were relevant.

The Upper Tribunal agreed with HMRC and was itself bewildered at some of the factors that the FTT had considered relevant – including that Mr Barnes was a co-commentator not a commentator or that the broadcaster could also interview him.

What Happened in July 2024

HMRC Initiatives and New Legislation

• HMRC crackdown down on non-compliant workplace nursery schemes

The provision by employers of workplace nursery arrangements is legitimately exempt as an employment benefit under S318 ITEPA 2003 – subject to meeting the necessary qualifying criteria.  Unfortunately, HMRC has now concluded that many nursery salary sacrifice arrangements sold to employers by scheme promotors – whereby the cost is claimed not to be subject to PAYE Income Tax and National Insurance – do not meet all the necessary criteria and HMRC has launched a new crackdown.

In particular, notwithstanding HMRC issuing revised guidance over two years ago, HMRC are concerned that many employers are falling foul of “Condition C” of the S318 requirements that the premises on which the care is provided must either be made available by the scheme employer, or the “partnership requirements” must be met, namely that:

• the care is provided under arrangements made by “persons” who include the scheme employer,
• the premises on which care is provided are made available by one or more of those persons, and
• under the arrangements the scheme employer is wholly or partly responsible for financing and managing the provision of the care.

In practice, HMRC considers that where nurseries are shared with other employers through the auspices of a promotor too often, the requirement for employers to play a role in the financing and managing of the care provision is delegated to the scheme promoter as intermediary in a way that leaves the employers with a token and insufficient participation in financing and/or playing no real part in the management.

If arrangements are found to fail, employers will be responsible in the first instance for making good the unpaid Income Tax and National Insurance – albeit, in the event that the employer pays the additional tax on the employees’ behalves, those payments of tax will in themselves constitute further taxable earnings for the employees.  In many cases there will also be other unwanted knock-on effects – for instance, in employees exceeding the Higher Income Child Benefit Charge cliff-edge threshold with their unexpected earnings.

• HMRC “nudge letters” to insurance companies potentially caught by Construction Industry Scheme (CIS) obligations

A new round of HMRC letters was issued to insurance companies during the week beginning 8 July 2024 encouraging them to consider the potential CIS obligations where they may have been involved in commissioning building work directly or through loss adjusters when processing customers’ claims.  Insurance companies involved in construction expenditure exceeding £3m in any 12-month rolling period need to register under CIS as a deemed contractor and deduct tax made to subcontractors and / or loss adjusters.

In this instance, a particularly niche new nudge letter – however, as such, it serves to illustrate the huge range and scope and increasing sophistication of HMRC’s ongoing nudge letter campaign.

Where once HMRC would have relied upon picking up such oversights in the course of a labour-intensive enquiry increasingly HMRC are using targeted industry specific letters to highlight likely non-compliance issues to taxpayers to pre-empt errors before they happen or prompt taxpayers to make voluntary disclosures.

• “Nudge letter” to insurance companies

• HMRC “nudge letters” to Construction Industry Scheme (CIS) contractors

Commencing at the end of July 2024, HMRC also began writing to CIS contractors asking them to verify the CIS status of their subcontractors.  The letters remind contractors of their obligations to:

• verify all new subcontractors before they pay them,
• verify subcontractors they’ve used before if they haven’t included them on a CIS return in the current or last two tax years, and
• make sure they apply the correct CIS deductions.

The letters make clear that failure may result in contractors coming under investigation, being liable for the unpaid tax themselves and subject to a higher level of penalties.

• “Nudge letter” to CIS contractors

• HMRC “nudge letters” to Person/s with Significant Control (PSC/PSCs)

HMRC is sending letters to PSCs who have either not filed 2021/22 tax returns or who have done so but reported unexpectedly low income for someone in their position.  The letters highlight to them some of the various ways they could have incurred a personal tax liability from their involvement in their company, or companies, – including the use of company assets, the receipt of loans and the payment by the company of personal expenditure.

By HMRC’s own reckoning, 60% of the total “tax gap” is now due to the under payment of tax by small businesses – businesses with turnover of less than £10m a year and typically 20 or fewer employees.  Inherently, small businesses tend to be owner managed and the under payments often relate to the untaxed “leakage” of cash and benefits to those controlling parties.  We anticipate that the number of HMRC investigations into small businesses is set to increase significantly – however, there are c. 5.2m of them – so we can expect the ever-increasing use of targeted letters such as these too.

• PSC – registering for self assessment letter
• PSC – ensuring self assessment return is correct letter

• HMRC “nudge letters” to tax agents re potential errors in clients 2022/23 Self-Assessment returns

Commencing in mid-July 2024, HMRC began writing to tax agents to advise them they have identified potential discrepancies in their clients’ 2022/23 tax returns relating to P11D benefits, P14 employer PAYE returns and/or the High Income Child Benefit Charge.

Agents and their clients have until 31 January 2025 to revisit the 2022/23 returns and amend them if necessary without HMRC seeking to apply penalties.  What’s more, HMRC will further contact the respective agents in the next few weeks to provide them with schedules of the clients with suspected anomalies and the nature of those anomalies.

• Self Assessment discrepancies – tax agents letter

Case decisions

• Centrica Overseas Holdings Ltd (Appellant) v HMRC [2024] UKSC 25

The Supreme Court has upheld the Court of Appeal decision in Centrica Overseas Holdings Ltd v HMRC to deny a Corporation Tax deduction for various professional advisory fees incurred by the seller upon the disposal of a subsidiary group acquired in 2005 which had proven a poor investment.

Although qualifying “expenses of management” are allowable deductions, “expenses of a capital nature” are not.  However, the Court of Appeal found that the two are not mutually exclusive.  Depending on the facts, expenses can be expenses of management and of a capital nature too – when applying the same capital / revenue test as for trading companies.

The appellant argued that the test should not be applied to an investment company in the same way as for a trading company.  Moreover, since it was an investment management business with the core function of buying and selling assets the management of that function couldn’t be capital in nature.

The Supreme Court was not swayed by either argument.  The application of the trading concept of capital expenditure is the correct test and the professional fees were clearly incurred from the outset with the one-off purpose of achieving a disposal of a capital asset even if success was initially uncertain.

Why this matters

The decisions serves to highlight that “expenses of management” cannot be conflated with “expenses of a capital nature”.  Depending upon the facts, expenses can be either or both.  In determining the fact position no special or distinct rules apply for investment management companies and the decision in principle to sell a subsidiary will likely render all subsequent related fees incurred non-deductible.

• HMRC v General Electric FI [2024] EWCA Civ 797

In this appeal brought by HMRC to the Court of Appeal, the company was a UK subsidiary of the US General Electric Company Group.  The company was subject both to UK and US tax on loan interest it had received on loans it had made within the Group – this was by virtue of normal principles in the UK and of anti-avoidance legislation in the US because its shares were “stapled” to those of a US company (requiring the sale of both sets of shares to any future purchaser).

HMRC had denied the company’s claim for double tax relief under the UK/US Double Tax Agreement (“DTA”) on the ground that it was not dual resident for these purposes under the DTA.

The First-Tier had found in HMRC’s favour only for the Upper Tribunal then to find in the company’s favour because it considered the company was resident in the US under the DTA.

The Court of Appeal has restored the FTT’s decision on the basis that the company meets none of the stipulated criteria in Article 4(1) of the DTA to be liable for tax in the US notwithstanding it was instead liable under anti-avoidance legislation.  Additionally, the company did not meet the alternative criteria to be taxable in the US as a permanent establishment since it was only a passive holding vehicle for loan receivables.

Why this matters

The case serves as a cautionary warning of the potential for novel forms of domestic anti-avoidance legislation to fall outside the scope of international agreements – with potentially unfair consequences.

Other News and Announcements

• HMRC annual report published for 2023/24

HMRC published its latest annual report and accounts on 30 July 2024 for the year to 31 March 2024.  They contain a wealth of information – including a lot of information on HMRC’s customer compliance and enforcement activities.

Once again, the accounts are qualified by HMRC’s auditors at the National Audit Office because of fundamental material uncertainties about the amount of tax still being lost to Research and Development (“R&D”) relief fraud, tax credit fraud and Child Benefit fraud.  However, HMRC estimates that its crackdown on R&D fraud and the intensive scrutiny which claims now come under has halved R&D fraud to c. 7.8% from c. 17.6%.

Other trends includes a year-on-year reduction of c. 1/3 in the number of whistleblower reports made about tax fraud (perhaps because a number of previous reports related to Covid support fraud), a significant growth in the number of tax disputes now being taken to Alternative Dispute Resolution (“ADR”) and a big growth in the number of appeals to HMRC’s Independent Reviewer – for which, falling percentages of original HMRC decisions were upheld.

The increase in appeals to HMRC’s Independent Reviewer is likely mainly related to the delayed downstream effect of HMRC investigation effort being ramped up again after Covid.  However, the reduced percentages of HMRC decisions being upheld also suggests the quality of the original decision making by HMRC officers has declined.

HMRC initiatives and new legislation

• New nudge letters to businesses suspected of till fraud

Further to an initial nudge letter campaign in late 2022 – which the overwhelming majority of recipients are now understood to have ignored – HMRC began a new more aggressive round of letters to businesses on 3 June 2024.  The letters linked below state that: “We have information that suggests you may have misused your till system to reduce your tax bill” – in other words, the letters put recipients on notice that they are suspected of tax fraud.

• Example 1 – Undeclared sales
• Example 2 – Undeclared sales 

The letters direct recipients to disclose to the HMRC website with the apparent preference that they should use the HMRC digital disclosure facility HMRC has put in place for till misuse.  However, it is vital that they seek specialist professional advice as in most circumstances the alternative HMRC Contractual Disclosure Facility (CDF) for the voluntary disclosure of tax fraud in return for a guarantee of non-prosecution – subject to acceptance into the facility and full disclosure – will be the most prudent option. Only the CDF offers a formal guarantee of non-prosecution.

Inevitably, HMRC’s suspicions will be unfounded in some cases. However, HMRC do have substantial intelligence now on many of the UK businesses which have purchased electronic sales suppression software designed for the sole purpose of suppressing the recorded level of till receipts.

The aforementioned software is designed and sold internationally for download and the law enforcement effort is international too – with substantial cooperation and coordinated raids involving HMRC and other UK law enforcement and counterparts in Australia, the United States and elsewhere.

In many cases, it is only limited UK human resource at HMRC that has allowed taxpayers more time to come forward before HMRC formally investigate them.

• New letters to wealthy people suspected of over claiming Business Asset Disposal Relief (BADR)

Another round of nudge letters has just been issued targeting individuals HMRC believes may have exceeded their lifetime limits for Business Asset Disposal Relief (BADR). Gains qualifying for BADR attract a 10% rate of Capital Gains Tax (CGT) up to a lifetime limit of £1 million.

The recipients of the letters have made claims for BADR in the 2022/23 tax year, where HMRC believes the individual has already previously exceeded the £1m limit or else have failed to notice their 2022/23 claim has taken them over the threshold.

The letters invite recipients to review their claims and amend as necessary – failing which, HMRC will remove any obvious such errors from the returns and, implicitly, may adopt a punitive position regarding penalties.

The letters are now becoming an annual fixture and follow similar rounds of nudge letters issued relating to BADR in the previous two tax years.

Case Decisions

• HMRC v Basic Broadcasting Ltd [2024] UKUT 00165 (TCC) – aka “the Adrian Chiles IR35 case”

In this – one of a number of “IR35” status cases involving high profile media figures who HMRC contend were de facto employees rather than self-employed for tax purposes – Mr Chiles won at the First-Tier Tribunal (FTT) only for HMRC to pursue a dogged appeal at the Upper Tribunal in pursuit of c. £1.7m.

The Upper Tribunal concluded that the FTT had misapplied one of the key factual tests derived from case law – the so-called “third test”, on whether the company in question constitutes a business on its own account (from Ready Mixed Concrete Ltd v Minister of Pensions [1968] 2 QB 497).  The FTT was found to have erred by failing to make findings as to whether factors identified as relevant at the third test stage were within the actual, or constructive, knowledge of the BBC and ITV, as described in the recently concluded case HMRC v Atholl House Productions Ltd TC/2018/02263 aka “the Kaye Adams case”.

In the absence of all the necessary findings of fact, the Upper Tribunal could not remake the FTT decision and opted instead to refer the case back to the FTT to make the further findings of fact required and apply the “third test” correctly for itself.

Why this matters

The two Upper Tribunal Judges were at pains to express both their sympathy for Mr Chiles and their dissatisfaction with the state of flux in which this area of the law finds itself:

Presented with this moving target, taxpayers and their advisers must nevertheless grapple with whether the legislation applies to any particular engagement, and the courts and tribunals must do the same. However, it should not be forgotten that behind every personal service company is a person, and, as we have seen in this case, the uncertainty and financial exposures generated by the difficulty in establishing a clear and stable legal position continue to produce a very real human cost.

Through no fault of his own, Mr Chiles is yet another person going through the wringer.  This situation surely cannot persist and if the courts cannot evolve stable case law which the lower courts can adequately interpret, then the statutory draftsmen must intervene.

• Paul Baxendale-Walker v HMRC [2024] UKUT 00154 (TCC)

In a case originally heard by the Upper Tribunal in July 2023 – for which, the decision was handed down on 28 July 2023 but not made public until 24 June 2024 – the appellant sought to strike out an application by HMRC to the Upper Tribunal for the imposition of penalties of £14,031,851 for non-compliance with an HMRC information notice issued under Sch 36 FA 2008.  The appellant is a well-known former lawyer and serial designer and promoter of aggressive tax avoidance arrangements – many of which have failed before the Courts – and which are estimated by HMRC in total to have cost HM Treasury c. £1billion in lost revenue.

Paul Baxendale-Walker (PBW) was initially subject to the Sch 36 notice approved by the First-Tier Tribunal (FTT) on 10 January 2022 – for which, the FTT gave him until 11 March 2022 to provide all the stipulated information.  On 15 March 2022 – after PBW had already failed to comply – his solicitor sought and obtained an extension from HMRC to comply by 28 March 2022.  On 29 March 2022, when PBW continued to fail to comply, HMRC issued a notice for £300 daily penalties under para 39 Sch 36 – which PBW appealed to HMRC.  On 1 March 2023 the original penalties were withdrawn by HMRC to be followed by new para 39 penalties on 15 March 2023 (appealed by PBW the following day) with an accompanying letter informing PBW that if non-compliance continued to 28 March 2023 HMRC would seek further penalties under para 50 Sch 36.  On 28 March 2023 with still no compliance, HMRC applied to the Upper Tribunal for the £14m+ of tax-related non-compliance penalties – an arbitrary figure which the Upper Tribunal would vary as appropriate if confirmed by it in principle.

In the event, the Court struck out the penalty application in its entirety because either:

• HMRC were correct they have power to vary the date for compliance in an information notice, even where the date for compliance in the information notice has passed and the information notice was approved by the tribunal. In which case, their assessment of a paragraph 39 penalty on PBW on 15 March 2023 was invalid, because, at the time the officer made the assessment and began the process of notification, PBW had not yet failed to comply with the information notice [further to HMRC giving a further extension to 28 March 2023].

or

• On the other hand, if HMRC’s only power in these circumstances is to allow a further period within which PBW could purge his existing failure to comply with the information notice, then the period in which they could apply for a paragraph 50 penalty expired on 15 March 2023 (assuming that HMRC have power to amend the information notice as approved by the tribunal before serving it) and they did not apply to the tribunal until 28 March 2023.

Why this matters

The case has raised key questions that the decision acknowledges as thorny, but then leaves unanswered about HMRC’s Sch 36 information powers and whether HMRC has the power to vary the terms of information notices – by extension, even where it seeks to do so out of fairness to taxpayers and/or in the best interests of the investigation process.

Faced with such fundamental uncertainty it is likely that on the one-hand HMRC will adopt a more inflexible approach – for instance, in allowing cooperative taxpayers more time to comply where such time is genuinely needed – and on the other hand, faced with HMRC inflexibility many, otherwise cooperative taxpayers, will be forced to adopt a more aggressive approach towards HMRC themselves.  It would be highly regrettable if the repercussions of a technical victory scored by one bad actor were to mar the working of the system for everyone else.

Other News and Announcements

• Small businesses estimated to be responsible for 60% of all underpaid tax

According to HMRC’s latest estimate in Measuring the Tax Gap 2024, £39.8bn is currently going uncollected annually through error, fraud and taxpayer insolvency.  As large as that sum is, it’s still thought to be a record low of 4.8% of the total theoretical tax take.

60% of the underpaid £39.8bn/c. £24bn is thought to be underpaid by “small businesses” – those with annual turnovers of less than £10m and typically fewer than 20 staff.  That’s up from 44% in 2018/19 and comes as relative levels of non-compliance from large and mid-sized businesses, criminals and the wealthy have gradually fallen.

Notwithstanding political attention on cracking down on non-compliance by the wealthy – people with incomes of £200k or more per annum/£2m+ assets – after years of cracking down on offshore arrangements and marketed tax avoidance schemes the wealthy are now only thought to account for c. 5% of the total tax gap.

It seems highly likely that HMRC will have little alternative but to focus heavily on increasing the number of investigations into Britain’s 5m+ small businesses in an effort to bring the tax gap down. HMRC’s efforts on these taxpayers have most scope to reduce fiscal pressure on the incoming government in gross terms.

At Price Bailey, we have already seen ever higher levels of random or risk based investigations into owner-managed businesses and we strongly encourage all such clients to subscribe to our “TIS” tax investigation fee reimbursement offering.

HMRC Initiatives and New Legislation

• New letters to wealthy people with missing tax returns for 2020/21 and / or 2021/22

HMRC’s systems have spotted that several wealthy people have now filed tax returns for 2022/23 and have filed tax returns for earlier years but are missing taxing returns for 2020/21 and 2021/22.  The letters request that the missing returns are submitted by 12 July 2024. If they fail to do so, the people concerned can expect HMRC to issue them with determinations for the estimated tax due.

In many cases, the taxpayers will not have submitted tax returns because they had no assessable income or gains during the year.  However, if they received a notice to file a tax return from HMRC they must still comply with that obligation and in the absence of a reasonable excuse they will be subject to late filing penalties up to £1,600 regardless of the ultimate absence of a liability.  If there are tax liabilities for the year, tax geared late payment penalties will also apply and can be much more substantial.

HMRC determinations based on estimates are often wildly inaccurate.  Such determinations cannot be appealed and can only be displaced by filing the outstanding return for the year in question.

• New letters to taxpayers who made provisional claims for business asset roll-over relief

HMRC began writing to taxpayers who made provisional claims for business asset rollover relief in their 2020/21 tax returns that those claims are not valid and HMRC will disallow them if they are not replaced with finalised valid claims by 31 January 2025. HMRC may still allow late claims beyond that but that will depend upon the circumstances.

If claims are disallowed, assessments will be raised for the deferred Capital Gains Tax payable as well as late payment interest. Tax geared penalties may apply too where the provisional claims were not made with reasonable care. The situation can be mitigated by contacting HMRC to withdraw any provisional claims that now lack foundation.

Case Decisions

• Afzal Alimahomed v HMRC [2024] UKFTT 00432 (TC)

In this case before the First Tier Tribunal (FTT), HMRC sought to recover tax on indirect remittances of foreign income made by a non-domiciled individual for the benefit of his family in the UK.  HMRC had initially opened an enquiry into his 2016/17 tax return and then later, on 31 March 2020 made a discovery assessment on the 2015/16 tax return. The taxpayer then appealed the closure notice for 2016/17 and the discovery assessment for 2015/16.

The Tribunal had little truck with arguments that the remittances did not constitute “money or relevant property brought to, or received or used, in the United Kingdom by or for the benefit of a relevant person” under the taxable remittance provisions of S809L(2)(a) ITA 2007.  Accordingly, the taxpayer’s appeal failed for 2016/17.

However, the Tribunal set aside the 2015/16 discovery assessment in full.  HMRC had valid grounds for assessing the tax but were found to have bungled the discovery assessment itself and their defence of it at the Hearing. Although the discovery assessment was made within four years of the end of the tax year in question and need not have relied on careless or deliberate behaviour to be in time, HMRC’s stated case was that the discovery assessment had been made S29(4) TMA 1970 on the basis that the taxpayer’s was deliberate.  In nailing their case to S29(4), which specifically relates to deliberate behaviour, and then being found to fail to discharge their burden of proof that such deliberate behaviour had occurred the Tribunal found that HMRC failed to make any valid case to support the discovery assessment at all. This is notwithstanding that a discovery assessment clearly could and would alternatively have been in time had HMRC based it upon the normal four year rules which would not have required carelessness.

Curiously, it transpired that similar remittance issues also occurred in 2014/15, which the HMRC officer decided not to raise a discovery assessment for in March 2020 since HMRC was already outside the normal four-year window, unless the behaviour was careless or deliberate.

Why this matters

This case illustrates the importance of expertly examining the basis on which HMRC seek to raise discovery assessments to ensure that HMRC has followed the necessary lawful process.  Arguably, it also illustrates the need for increased investment in HMRC training to prevent such basic mistakes happening in future.

In leaping to a completely unnecessary contention of deliberate behaviour rather than relying on the normal rules, HMRC missed an open goal.

• Hotel La Tour Ltd v HMRC [2024] EWCA Civ 564

In this VAT case, the Court of Appeal has overturned decisions by both the First-Tier Tribunal and the Upper Tribunal and found that a parent company could not recover the Input VAT incurred on professional legal and marketing fees upon the sale of shares in its subsidiary.

Both the lower Courts had found that the “ultimate purpose” of the sale was to raise funds for the appellant’s taxable business to develop a new hotel.  However, the Court of Appeal, upon analysis of potentially conflicting authorities in European cases, has come down differently and identified a “direct and immediate link” between the costs and the sale of the shares, which was an exempt supply for VAT purposes.

Why this matters

The costs incurred by businesses in the sales of subsidiaries can be very substantial, as can the cost of any disallowable VAT.  Any businesses that have recently conducted such a transaction, or were about to will have been watching for the outcome of this Hearing with some concern and will be very disappointed at the outcome – even if it does reinstate the previous status quo.  Given the complexity of the case and the nuanced and finely balanced interpretations of the European case decisions relied upon, the case appears to be likely still arguable before the Supreme Court.  In the meantime, businesses should consider making protective claims for Input VAT where similar circumstances apply.

Even if the decision ultimately stands it will still not entirely lay to rest the question of whether in different circumstances a direct and immediate link might still be drawn with the commercial activities of a business as a whole rendering the related costs allowable.

There is also perhaps something profoundly unjust and distorting about businesses raising funding to support their commercial activities having to price in substantial VAT costs if they sell shares that would not apply if they opted for an alternative source of funding.

Other News and Announcements

• 85% of Pandora Papers nudge letters ignored by taxpayers / only 1.4% lead to disclosures

Information obtained from HMRC under a Freedom of Information (“FoI”) request by TaxWatch shows that from June 2023 to the reporting date, which appears to predate a further round of new letters in April 2024, HMRC sent 968 “nudge letters” to people named in the “Pandora Papers”.  The Pandora Papers data leak first broke in 2021 with the announcement by the Institute of Investigative Journalists that they were in receipt of 11.9m confidential documents originating from 14 different offshore service providers in the Americas, Europe and Asia.

Of the 968 nudge letters, 822 letters were ignored by recipients and only 14 resulted in disclosures of additional previously unpaid tax.  In other words, the letters have been ignored by 85% of recipients and have prompted only 1.4% of recipients to realise they have additional tax to pay and to disclose it.

Commenting in the Financial Times, Price Bailey Tax Investigations Partner Andrew Park explained that although HMRC have been relying on frightening people, those people often still do not understand they are not compliant and that when they are not, it is often not done deliberately. Instead it is due to the complexity of the rules and individuals not updating their arrangements and advice with time as circumstance have changed.

• HMRC offshore information activity holds high and steady

Meanwhile, FoI data obtained by Price Bailey from HMRC shows that HMRC sent 23,500 offshore related nudge letters to UK residents in 2023/24 – only a little down on the 23,936 sent out in 2022/23. Meanwhile, inward and outward information requests between HMRC and its overseas counterpart were at a combined level of 2,388 in 2023/24, the highest since 2017/18 and possible ever.

What HMRC is still less forthcoming about is how many offshore related investigations it is conducting into serious matters and where the nudge letters do not work.  However, that seems set to increase in the likely event that an incoming Labour government makes good on its published strategy and gives HMRC more resource to do just that.

What Happened in April 2024

HMRC Initiatives and New Legislation

• New Pandora Papers nudge letters

HMRC began issuing a new round of letters on 8 April 2024 to wealthy UK residents identified in the so-called “Pandora Papers” leak of client data from 14 offshore financial service companies.  The International Consortium of Investigative Journalists first began publishing data from c. 11.9 million stolen documents in 2021 – since when, HMRC had already contacted many of the UK parties involved.

The new letters differ from typical overseas income and gains “nudge letters” in that they spell out the recipients’ connection with the Pandora Papers, they ask for a response within 60 days rather than 30 days and they anticipate that the recipients may need to get professional advice on complex technical areas which they highlight – including:

• The UK’s “transfer of assets abroad” anti-avoidance provisions,
• The attribution of trust income and gains to settlors and beneficiaries,
• The possible central management and control of overseas companies from the UK,
• Possible “tainting” of protected overseas trusts arising from loan arrangements or the provision of services,
• The UK’s complicated remittance rules.

Additionally, the letters are formulated in different versions – depending on the claimed UK residency and domicile and remittance statuses of the recipients – so it is clear that HMRC have already spent time looking up each taxpayer on their systems, considering their circumstances and identifying likely areas of technical non-compliance that might apply even in the absence of any deliberate wrongdoing.

The different versions of the letters are available on the links below:

• UK resident and UK domiciled – example 1
• UK resident and UK domiciled – example 2
• UK deemed domiciled (under condition A or B) and resident – example 1
• UK deemed domiciled (under condition A or B) and resident – example 2
• Non-domiciled but UK resident – example 1
• Non-domiciled but UK resident – example 2

Recipients should treat the letters as putting them on notice that their overseas tax affairs are at high risk of formal investigation by HMRC.

Anyone concerned they might not have been fully tax compliant at any time over the previous 20 years should seek urgent professional advice.

 Case Decisions

• J Cooke v HMRC [2024] UKFTT 272 (TC)

In this case heard by the First-Tier Tribunal (“FTT”) the taxpayer had set out to acquire a 5% investment in a company which would later qualify for Entrepreneurs’ Relief (now Business Asset Disposal Relief) upon subsequent sale.  He entered into an explicit agreement to acquire 5% of the company and pointedly insisted an anti-dilution clause to ensure that his interest could never fall below a 5% holding – which was the minimum holding required to qualify for the Capital Gains Tax relief in due course.

Unfortunately, due to a rounding error the appellant had strictly acquired a 4.99998% holding with his 245,802 shares and HMRC then sought to disallow the subsequent claim on the basis that he had fallen 0.00002% short . . .

The Court considered that the contract had by mistake not reflected the common intention to transfer a minimum 5% holding to the appellant and further concluded that were it to come before the High Court the High Court would order rectification – such rectification not prejudicing the interests of any other parties.

Why this matters

This is a highly unusual situation in which the FTT has claimed jurisdiction to anticipate the outcome of a rectification action that was never brought before the High Court in order to decide a tax outcome that relied upon that rectification.

The FTT took it upon itself to consider all of the factors that it felt the High Court would consider and to apply an equitable remedy to treat a specifically enforceable contract to do a thing as if it were already done.  This is not entirely without precedent in the tax courts – and relied heavily on the rationale in the landmark taxpayer win at the Upper Tribunal in Joost Lobler v The Commissioners for HM Revenue and Customs – [2015] UKUT 0152 (TCC). Such situations are still few and far between, but the application by the tax courts of such methodology appears set to grow as equitable principles become more engrained.

HMRC may yet appeal. Irrespective of that, the case serves as a broad warning to taxpayers of the extremely literal and inflexible way in which HMRC will generally seek to apply legislation. If something is required to be a certain thing, better to ensure with total precision that it is such a thing than risk denial or a dispute of this nature.

• Blackrock Holdco 5 LLC v HMRC [2024] EWCA Civ 330

A complex case involving the acquisition of Barclays Global Investors by the BlackRock investment management empire. In essence, as now decided by the Court of Appeal, loan interest deductions claimed by an intermediary UK company – interposed into what would otherwise have been a wholly US to US share transaction – were found to be disallowable for UK tax purposes.

The Court of Appeal determined the only reason for the existence of the UK company and the loan made to it by its US parent was to create a UK tax advantage. In consequence, it fell foul of the unallowable purposes rule in SS441-442 Corporation Tax Act 2009. It was therefore just and reasonable that all interest deductions should be apportioned to that unallowable purpose and disallowed in full notwithstanding that as a by-product the company was also purposed with trying to make a commercial profit.

Why this matters

The case puts a useful marker down that the commercially unnecessary introduction of another entity into the midst of a genuine bona fide transaction for the tax planning purposes of engineering a UK loan relationship advantage can be expected to constitute a step too far in acceptable tax planning.  However, two more unallowable purpose cases will be heard by the Court of Appeal later this year that may throw more light – or perhaps more confusion . . .

Other News and Announcements

• HMRC Samaritans

HMRC has come under sustained criticism in recent years for the extreme stress and anxiety experienced by many taxpayers during HMRC investigations and enforcement actions. This has particularly been so with regard to suicides attributed to people caught by the controversial retroactive loan charge legislation – many of whom faced financial ruin.

The criticism appears to have borne fruit. A Freedom of Information request by The Telegraph newspaper has revealed that HMRC has referred over 300 taxpayers to the Samaritans since it began a partnership with the charity in September 2022. The Telegraph has also revealed that over 200 HMRC staff have now received training from the Samaritans in identifying vulnerable people and that the collaboration will continue for another three years.

We are delighted to see our Price Bailey charity partner working with HMRC to help struggling taxpayers, long may it continue.

• Labour plans to boost tax enforcement.

The Labour Party has announced an incoming Labour government will seek to raise an extra £6bn to reduce NHS waiting times and introduce free primary school breakfast clubs by targeting tax avoidance.

Shadow Chancellor Rachel Reeves plans to increase the HMRC budget by c. £555m / 12% – primarily to recruit and train an additional 5,000 compliance officers by the end of the next parliament. That being the case, the level of investigations will radically increase but it will take time to ramp up.

• HMRC unable to provide basic information on criminal investigations.

A Freedom of Information request by the Contentious Tax Group of specialist professional practitioners asked:

Of the criminal investigations opened in each of the five tax years, how many have resulted in charges being brought by end of 2022/23, and how many have resulted in a decision being taken that no further criminal investigation action is required (broken down by year of investigation commencement).

Of the criminal investigations opened in each of the five tax years, many were into corporates?

HMRC declined to provide the information, stating:

Our Management Information (MI) systems hold data on criminal investigations and on charging decisions separately. Reconciling the two sets of data is a manual process, which would exceed the FOIA cost limit . . . except for data relating to the Corporate Criminal Offence, our Management Information systems do not allow us to extract aggregated data showing whether an investigation concerns an individual or a corporate . . .

Perhaps some of Labour’s planned additional spending would be well invested in improving HMRC’s management reporting systems.

HMRC Initiatives and New Legislation

• Finance (No. 2) Bill 2024 – New “Anti-Fisher” Amendments to Transfer of Assets Abroad Legislation

Somewhat unsurprisingly after HMRC’s Supreme Court loss a few months ago in HMRC v Fisher [2023] UKSC 44, new “anti-Fisher” measures were announced in the 2024 Budget.  Indeed, in handing down the Decision, the Supreme Court counselled the Government that it should think carefully about how to fill the gap they had exposed “in a fair, appropriate and workable manner”.  A summary of the Fisher decision can be found in the November 2023 edition of this bulletin.

As enacted in the Finance (No. 2) Bill 2024 the new measures will extend the explicit scope of the UK’s “Transfer of Assets Abroad” regime to encompass “relevant transfers” abroad made by closely-held companies rather than just directly by individuals.

The transfer of assets abroad regime is a key and longstanding pillar of HMRC’s anti-avoidance architecture. It includes the potential ability to personally assess UK resident individuals on an arising basis on the income generated within overseas structures where they have made deemed relevant transfers and have the power to enjoy said income by virtue of their interest in the structure.

Ironically, the current draft legislation appears to create fundamental uncertainties of its own. Inevitably, many companies making relevant transfers abroad will have multiple participators with varying levels of personal financial interest and varying degrees of direct or indirect involvement with the decision-making process. As drafted, it is not at all clear which participators in the closely-held company might or might not escape being categorised as “involved” for the purposes of the new legislation and how attributed income might be apportioned between suitably involved participators – or whether, for instance, HMRC might be able to arbitrarily apportion all of the income to one qualifying participator. One can only hope that HMRC and the Parliamentary draftsmen will pause to take stock of current concerns.

Case Decisions

• Ms Jennifer Webster v HMRC [2024] EWHC 530

A bizarre new High Court development in ongoing litigation seeking a ruling that it was unlawful for HMRC to provide the taxpayer’s information to the US authorities under its FATCA arrangements with the UK.

The taxpayer was born in the US but moved to the UK in 2000, became a British citizen in 2010 and ultimately renounced her US citizenship in 2019 – whereupon the US internal Revenue Service finally lost its taxing rights on her worldwide income.

FATCA – the US’s Foreign Account Tax Compliance Act – came into being in 2010.  Since then, the UK, like just over half of countries around the world, has cooperated with it and revised treaty arrangements with the US to provide the specified required banking and investment data on US citizens to the US on an annual basis.  Included in that data was financial data from Ms Webster – who contends that this was a breach of her data protection rights.

The High Court has now upheld HMRC’s submission that the identity of the party funding Ms Webster’s legal fees must be disclosed in order to address HMRC’s legitimate concerns about potential abuse of process and:

 . . . whether this is a genuine private law claim, albeit a test case, generously funded by a disinterested and publicity-shy benefactor with a commitment to human rights, or whether the court’s processes are being abused by an unregulated attack, on a government department exercising statutory public functions in the public interest, made in the service of agencies whose own commitment to the UK public interest, and the interests of justice . . . 

In the likely event that the unknown funder – who is said to be known only by the solicitors involved – does not agree to identify themselves, Ms Webster’s claim will be terminated and her test case against FATCA will not be heard.

Why is this important?

According to HMRC, the solicitors involved have stated in correspondence that the claim is part of “an international strategic data protection litigation campaign focusing on the implementation of various ‘transparency’ measures for individuals’ fundamental rights” which is intended to force a renegotiation of FATCA, the development of a new system and to force reconsideration of other bulk transfers (such as the Common Reporting Standard (“CRS”) of tax information to other countries).  It seems HMRC may have successfully weaponised these forces’ very shadowiness against them.

Arguably, the real significance of this case is that the campaigning focus on FATCA and similar data exchange protocols such as the CRS is acting as a big distraction from a fundamental truth.  The exchange of financial information between international tax authorities is nothing new:

The taxation authorities of the contracting Parties shall exchange such information (being information available under the respective taxation laws of the contracting Parties) as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of the present Convention . . .

That text comes not even from the current UK / US tax treaty but from Article 20 of the very first “Tax on Income” convention between the UK and US in 1945.

FATCA is comparatively new but HMRC and the IRS are increasingly “joined at the hip” and they share vast amounts of financial data with each other bilaterally outside of FATCA under a massive upscaling of what they were already able to do under longstanding existing protocols.  Unlike FATCA and CRS – which only transfer known prescribed information annually in a prescribed format – the information bilaterally shared between HMRC and the IRS and other close international partners is shared privately and normally without taxpayers’ knowledge and follows no prescribed format, frequency or time period.

Just as US citizens living in the UK must be conscious that the IRS will receive financial data on them from the UK under FATCA or under the much broader and longstanding bilateral arrangements, so too must UK residents be aware that although FATCA is only one way and the US does not transfer any information abroad under FATCA, the HMRC nonetheless privately receives data on UK residents’ US financial interests and assets from the US under the older bilateral arrangements.  Many are the UK residents who have unexpectedly received HMRC “nudge letters” relating to unpaid UK tax on assets they hold in the US.

• Rabina Kajla v HMRC [2024] UKFTT 00193 (TC)

In this case before the First-Tier Tribunal, the taxpayer claimed child benefits for three children and exceeded the £50,000 earnings threshold in 2018/19 and 2019/20.  HMRC sent her a “nudge letter” in December 2019 suggesting she might be subject to the High-Income Child Benefit Charge (“HICBC”) and after the nudge letter went unanswered HMRC then opened an investigation which culminated in tax assessments and penalty determinations.

The taxpayer was on weak ground in appealing the tax assessments, but did successfully appeal the penalties on grounds of reasonable excuse.  She was reasonably ignorant of the obligation to pay tax under the HICBC and as a “truthful and reliable witness” her assertion that she had not received the nudge letter was believed.

Why is this important?

This is yet another of a raft of recent cases where the Tribunal has applied the rationale set out in Perrin (Christine Perrin v HMRC [2018] UKUT 156 [TC]) to find that ignorance really is a valid reasonable excuse defence in the eyes of the law – at least where HICBC penalty cases are concerned and where there is no unreasonable delay in taking remedial action once the taxpayer is finally aware of the filing obligation.

However, this takes things a step further in showing that even where HMRC are accepted to have issued a nudge letter advising a taxpayer of their obligations they can still fail to levy penalties in the face of a credible taxpayer contending they never received it.

What is going to be very interesting over time, given the slew of HICBC cases applying Perrin, is the extent or otherwise to which taxpayers will find successful application of the Perrin tests of reasonable taxpayer ignorance in other areas of tax obligation.  If the principles hold in so many HICBC cases why shouldn’t the application be much wider than HMRC are presently inclined to accept?  Plenty of tax obligations and outcomes are perverse, unexpected and beyond anticipation of the need to act or to seek professional advice.

HMRC Initiatives and New Legislation

• New suspected distributions “nudge letters” issued to company shareholders

Further to the increasingly thorough way that HMRC trawls through financial statements, HMRC started issuing a new round of “nudge letters” to company shareholders on 5 February 2024 telling them that the accounts of their company show a drop in profit and loss (P&L) reserves, thus suggesting that the shareholders have distributions or dividends.

The letters pressure the recipients to either disclose any receipts omitted from their tax returns or else to respond within 30 days to confirm they are tax compliant.

As with all “nudge letters”, often HMRC’s computer generated suspicions will be unfounded.  However, the letters should not simply be ignored, HMRC have published a pro-forma copy of the letter.

Case Decisions

• S Malthur v HMRC UKUT 38 (TCC)

In this case, heard by the Upper Tribunal, the taxpayer appealed HMRC’s treatment of a £6m payment from her former employer as a termination payment taxable as employment income under ITEPA 2003 s 401(1)(a).

The appellant had her employment terminated by an investment bank in 2015 in the wake of a regulatory investigation into the rigging of interbank lending rates.

The appellant had her employment terminated by an investment bank in 2015 in the wake of a regulatory investigation into the rigging of interbank lending rates. The New York regulator insisted on the dismissal of her and several colleagues. Upon her dismissal and upon receiving the offer of a c. £82,000 termination payment from the bank, the appellant began proceedings against the bank for harassment, discrimination and victimisation.

The bank ultimately agreed a £6m no admitted liability settlement and paid it to the appellant, net of PAYE Income Tax and National Insurance and with all of it treated as taxable above the statutory £30,000 tax free termination payment allowance.  She then sought repayment of the tax from HMRC when she filed her tax return, on the basis that it was an exempt settlement payment rather than employment income.

The Court found in HMRC’s favour that the payment fell within the scope of S401 ITEPA 2003 since it was received either indirectly in consequence of or otherwise in connection with the termination of her employment.  The termination was found to trigger the settlement claim.

Why is this important?

The case serves as a cautionary tale to anyone successful in leveraging the size of their compensation upon departure by bringing a mistreatment claim. The scope of S401 ITEPA 2003 (and the context in which the courts apply it) is sufficiently broad to stop individuals from having their cake in gross settlement terms and eating it in tax terms too.

Other News and Announcements

• 1.1m taxpayers miss filing deadline

According to HMRC figures, c. £1.1m self-assessment taxpayers missed their 31 January 2024 filing deadline.  This is an increase of c. 100,000 people compared to last year.

They now face an initial £100 fine unless they successfully appeal with a valid reasonable excuse.  Late filing penalties will escalate further unless outstanding returns are filed within three months of the due date.

In addition to late filing penalties – which can apply even without any tax liability – there are also separate late payment penalties for any tax outstanding.  These begin with a 5% penalty on any tax outstanding for 30 days and are separate from the late payment interest that also applies.

• HMRC consulting on possible changes to enquiry and assessment powers

In an open call for evidence published on 15 February 2024, HMRC is consulting on what changes should be made to its enquiry and assessment powers, penalties and taxpayer safeguards.  The review encompasses concerns that:

• HMRC’s enquiry and assessment powers and penalties might benefit from simplification.
• The assessment and penalty regime has inconsistencies between, for instance, direct and indirect taxes – some of which should perhaps be removed.
• Tougher escalating penalties might be justified against the wilfully and repeatedly non-compliant.

Some of the ideas suggested by HMRC are highly controversial.  For instance, HMRC is floating the idea of abandoning the current behavioural model for tax geared penalties – where the level of penalties depends upon the nature of the behaviour that led to the error at the time – and replacing it with a system just based on their past history and level of cooperation.  As HMRC themselves acknowledge, that could lead in some circumstances to people who took reasonable care, suffering the same level of penalties as people who acted fraudulently.  This tentative proposal appears to be driven by HMRC’s desire to simplify the penalty regime so it can be dealt with by less trained staff in less time and will likely meet stiff resistance.

Another HMRC suggestion regarding penalties is to change the fixed penalty regime, so that rather than applying the same fixed amount to all taxpayers – for instance, the initial £100 late filing penalty – the size of the penalty would vary depending on the amount of tax involved.  That seems less obviously unfair, but could have unintended consequences given, for instance, the increased professional negligence risks for any tax professionals involved in the filing process and how that might drive up costs.

One cannot argue with HMRC’s core policy aims for the tax administration framework which strive for:

• certainty
• flexibility and adaptability
• making it easier to get tax right and harder to get it wrong
• trust
• simplicity
• driving down the cost of meeting obligations for the taxpayer and running the system for the Exchequer

However, fairness and taxpayer protections are vital and should not be eroded to help compensate for any lack of resource or training within HMRC.

The call for evidence ends on 9 May 2024.

HMRC Initiatives and New Legislation

• HMRC issuing a new round of “nudge letters” to Airbnb landlords

Further to the mass of data HMRC obtained from Airbnb last year on client lettings going back to 2017/18 a new round of nudge letters has just gone out to Airbnb clients headed: “You may need to declare income from short-term property letting”.

The latest letters demand a response within 30 days and are explicit in stating that HMRC will open a compliance check if no response is received.  If there is any income from previous years to declare, the letter directs recipients to search for how to do so on HMRC’s website, and  if there is no income to declare, the letter requests notification of that by telephone or by email.

HMRC’s letter does not suggest that recipients should take professional advice on how to respond and how to make any voluntary disclosure that might be required.  However, it would be foolhardy not to do so.

• “Nudge letters” to landlords claiming repair and maintenance costs

As the 31 January 2024 amendment deadline loomed, HMRC issued “nudge letters” to private landlords regarding their 2021/22 tax returns where HMRC’s data analytics had identified that repair expenditure seemed higher than the norm compared to the level of income.

The letters explained the difference between repair expenditure and capital expenditure but didn’t give recipients very long to revisit or seek advice.

Case Decisions

• HMRC v Dolphin Drilling Ltc [2024] EWCA Civ 1

The company had chartered a tender support vessel from an associated company – the tax deduction for which HMRC sought to restrict under the “hire cap” provision of the special “oil contractor regime” applying to petroleum exploration.  Dolphin used the support vessel to provide support services to an oil platform operated by Total.  Those services included the provision of accommodation on the vessel for around 50 of Total’s workers.

The case turns on the meaning of “incidental” – the hire cap would not apply if the accommodation part of the provision was merely incidental to other services provided to the oil platform under an exemption at S356LA(3) of CTA 2010.  The First-Tier Tribunal (“FTT”) had decided it did on the basis that to be “incidental”, something need only be subordinate or secondary to it.  The Court of Appeal has decided differently and allowed HMRC’s appeal on the basis that something should instead be considered “incidental” to something else if it arises out of it.  On the facts, the provision of accommodation was “an independent end in itself (of some significance), unconnected with its other uses”.

Why is this important?

The relevance of this case extends far beyond HMRC’s obscure oil contractor regime to a plethora of tax legislation featuring the term “incidental”.  This is a valuable exploration by a Senior Court of what “incidental” really means when applied as a legal test.

• Walkers Snack Food Limited v HMRC [2024] UKFTT 00031(TC)

In this case at the First-Tier Tribunal (FTT) Walkers appealed HMRC’s decision to treat its “Sensations Poppadoms” as potato crisps and therefore 20% standard rated for VAT.  Walkers argued that they should be treated as conventional poppadoms and therefore zero-rated.

After careful consideration of whether the product has potato as its principal ingredient and after applying a multi-factorial analysis to determine what the product is closest to the FTT Judge concluded: “. . . the use of the word “poppadom” is something of a red herring . . .”.  Sensations Poppadoms are no more poppadoms than Monster Munch is a food for monsters.

Although made from both potato granules and potato starch, Walkers argued that potato granules should not qualify as the granules are only derived from potato- whereas HMRC argued that potato granules are merely dehydrated potato. The Judge was more receptive to HMRC’s argument.

Walkers’ argument that Sensations Poppadoms are objectively similar to ordinary poppadoms was undermined by its own marketing material showing them eaten like crisps rather than dipped.  Collectively a range of factors including; ingredients, use, portions, appearance, packaging and texture all pointed towards HMRC’s position that the product should be treated as a form of potato crisp.

Why is this important?

The case serves as a useful reminder to the food industry that product names are of little bearing for VAT purposes if the true character of products is substantively different and more akin to other products for which different VAT treatments apply.

Other News and Announcements

• HMRC confirms it will not appeal the Kay Adams decision – Atholl House Productions Limited v HMRC – [2024] UKFTT 00037 (TC)

As expected, HMRC have confirmed that they will not appeal the latest FTT decision which came after the Court of Appeal referred the case back to the FTT (where Ms Adams’s personal service company had won at the start of the saga) after allowing the introduction of additional witness evidence and submissions.  Since such disputes over whether an individual, such as a TV presenter in this case, is truly self-employed or not are based on fact, HMRC’s best legal arguments had already failed before the higher courts.

One hopes that in the future HMRC will be more inclined to accept FTT decisions in good grace in status cases, given that it is the FTT not any higher court that decides the facts, rather than attempt to appeal on an obscure and futile point of law when the FTT has already decided the facts against them. However, that hope appears forlorn for the moment.

In Kay Adams’s case, five years of litigation over c.£70,000 in tax has cost her c.£300,000 in legal fees and HMRC considerable credibility.

HMRC Initiatives and New Legislation

HMRC seeking to enlist tax agents of vendors suspected of suppressing takeaway food sales

HMRC started issuing an unusual new “nudge letter” – not directly to taxpayers, but to the tax agents of businesses in the hot food sector. The letter encourages tax agents to assist HMRC by requesting details of all such registered clients for whom HMRC is in receipt of transaction data from card payment providers and online intermediaries.  The letter asks that tax agents then work with their clients to ensure that their latest tax returns are complete and accurate, and correct any tax returns they are still in time to amend.

The subtext is clear – HMRC has enough third-party transaction information to know that many businesses are deliberately understating their takings.  However, HMRC is short of resources and cannot immediately open investigations into all such businesses. HMRC is therefore seeking to use tax professionals to assist them in the process and pre-empt likely investigations at a later date.

Businesses and their agents should engage with HMRC but with caution, and seek specialist assistance. Getting the latest returns right will do nothing to regularise the position where takings have been understated in previous years.  In cases of fraud, as well as possible criminal prosecution, HMRC can go back up to 20 years to recover tax, interest and penalties.  Moreover, agents who become aware of longstanding fraud have a professional responsibility to ensure that the earlier years are regularised too or else to cease to act and to report the criminality of the clients in question.

Automatic reporting by digital sales platforms of customer data

As above, HMRC is already accustomed to using its information powers to get bulk data from online intermediaries.  It is also accustomed to sharing data with overseas counterparts like the IRS.  However, from 1 January 2024, all such data will be both automatically provided to HMRC by UK-based platforms, as well as shared with HMRC by many other overseas tax authorities where platforms in their jurisdictions provide such services to UK residents.

The first automatic exchanges of digital sales data will be in January 2025 for the previous calendar year – after which, HMRC will have constant eyes on all vendors on eBay, Vinted, Etsy etc who make 30 or more sales or earn EUR 2,000 / c. £1,700 a year.

The purpose of the regulations is to ensure that people who were previously generating undeclared income through such sites will be under no illusion that they can evade tax and will be readily identified.

Unfortunately, much of the recent press reporting has been unhelpful and has implied that everyone, for instance, using eBay to sell their old clothes, clear out the attic, sell unwanted Christmas gifts, or dispose of the inherited chattels of a family member must ensure that they pay tax to HMRC on the proceeds.  To be taxable, the vendors must either be conducting a trade with the intention of making a profit or else must be realising capital gains upon the sale of investment assets.  People getting rid of old junk for less than they paid for it, or selling gifted or inherited items for what they were worth at the time of recent acquisition, will not find themselves subject to UK tax – albeit they will be increasingly likely to get a letter from HMRC seeking confirmation of what they’ve been doing.

Alternatively, people who have been “wheeler dealing” or operating a “side hustle” – for instance, buying and selling antiques or making and selling craft items will be squarely taxable to the extent the gross income exceeds their £1,000 Trading and Miscellaneous  Income Allowance and their total income including their net trading profit exceeds their £12,570 Personal Allowance.

Anyone in any doubt about whether or not their online selling activities are taxable should seek professional advice rather than making an assumption one way or the other.

Further tranche of HMRC letters to UK residents named in the “Pandora Paper” offshore data leak

HMRC are continuing to work through data stolen from 14 offshore service providers which was provided to the International Consortium of Investigative Journalists and began issuing a further batch of “nudge letters” to parties named in the leaks- urging them to review their tax affairs and ensure they are UK tax compliant.

Inevitably, many of the recipients will be fully UK tax compliant.  However, some may have used offshore structures to act dishonestly. Others might have honestly implemented arrangements that HMRC might nonetheless seek to challenge under complex anti-avoidance legislation.  Anyone with definite knowledge they have made omissions, or who has fundamental uncertainty about whether their arrangements “work” should seek urgent professional advice about making a voluntary disclosure to pre-empt an HMRC investigation and mitigate their position.

Case Decisions

• Felicity Harber v HMRC [2023] UKFTT 1007 (TC)

In this First-Tier Tribunal case, which has received much publicity, the appellant represented herself after failing to notify HMRC of a Capital Gains Tax liability arising on the sale of an investment property.  She appealed the tax penalty on the basis that she had a reasonable excuse – her mental health issues and/or her reasonable ignorance of the law.

The Tribunal found that the appellant’s mental health condition had not prevented her from dealing with lodgers, selling the property, and estimating the likely capital gain.  A reasonable person in that situation should still have notified HMRC of the sale and dealt with the CGT.  Moreover, ignorance of the law was no excuse; a reasonable taxpayer in her position should have sought advice.

The notable feature of an otherwise straightforward and unremarkable case was the appellant’s apparent use of an AI system such as ChatGPT in representing herself.  In her written Response to HMRC’s Statement of Case she cited nine cases; five to support her mental health argument, and four to support her position that ignorance of the law could be a reasonable excuse in her circumstances.  HMRC’s litigator and the Tribunal were unable to recognise or identify any of the cases cited and the appellant was evasive about the source – initially claiming that they came from “a friend in a solicitor’s office,” before conceding it was “possible” they were AI-generated.  The Judge did not press her for absolute confirmation but instead found as fact, based on a review of the citations that they had “been generated by an AI system such as ChatGPT”.  In this example, there was a jumbling of names, facts and outcomes identifiable from real cases with which the Judge was familiar.

Why is this important?

AI is rapidly advancing and some people are understandably quick to try to take advantage of it.  However, it is still entirely unfit as a means to try to dispense with the need for professionals to exercise their intellect and experience in performing detailed work in complex matters – like tax disputes and litigation.  This and other incidents around the world highlight how even when AI correctly identifies some of the relevant names, facts and concepts, it is still prone to misapply them and produce completely false citations, arguments, summaries and conclusions.  A little bit like in the famous sketch with Eric Morecambe and André “Preview”, AI is good at picking up many of the right “notes”, but then manages to rearrange them into a complete mess.

In this case, whilst pointedly spelling out the seriousness of misusing AI and its potential to undermine the vital importance of legal precedent, the Tribunal exercised considerable forbearance with the self-representing taxpayer – likely in light of their mental health issues. Court time and public money was wasted, but the Judge was well aware of the relevant actual case law and wasn’t about to be misled.  The Judge did not consider that the taxpayer had deliberately sought to mislead the Court, however that will not necessarily hold true for other taxpayers – or indeed, for any legal representatives tempted to use AI to take shortcuts – for whom, the consequences could be severe.

Other News and Announcements

The amount generated from serious tax avoidance and fraud investigations slumps despite surge in HMRC staffing numbers

The amount of tax, interest and penalties generated per large-scale tax avoidance and fraud case undertaken by HMRC has slumped in recent years despite a huge boost to staffing numbers, according to data obtained by Price Bailey.

The “FoI” data released under the Freedom of Information Act, reveals that while the number of serious tax avoidance and fraud cases closed by HMRC has generally been increasing, the yield per case has declined.

HMRC generated a total return of £70.2 million from serious tax avoidance cases (known as “COP8”) in the most recent tax year for which data is available (2021/22) with a yield per case of £204,013, the second lowest in six tax years.  The two lowest yielding years of the last six tax years were both in the last two tax years.

For the much more serious civil investigation of fraud cases (known as “COP9”), HMRC generated a total return of £104.4 million in the most recent tax year (2021/22) with a yield per case of £202,708, again the second lowest in six years, and down from a high of £367,708 per case in 2016/17. The two lowest yielding years of the last six years were both in the last two tax years.

The number of tax officers in the Fraud Investigation Service (“FIS”), the elite unit responsible for these COP8 and COP9 cases, has increased by 539 staff in the last year alone, rising from 4,386 in 2021/22 to 4,925 in 2022/23 – the highest number in six tax years.

The rising numbers of cases and falling yields suggests that either the selection criteria for investigations needs to be sharpened or that HMRC is consciously widening its net to lower value targets.  It certainly appears that a rising number of taxpayers can expect to be caught up in one of these expensive and time-consuming investigations.

HMRC’s estimates of the amount of tax lost to fraud has fluctuated between £31 billion and £35 billion per year over the last five tax years – so the shrinking yield from COP9 fraud investigations cannot be explained by the diminishing level of estimated fraud.

It should be noted that these figures go up to 2021/22 and pre-date HMRC’s spectacular one-off civil tax settlement with Bernie Ecclestone for £652m. This case was reported to have begun as a COP 8 investigation and then escalated to a COP 9 – ultimately conducted in tandem with a successful criminal prosecution. Ecclestone’s case was a one-off HMRC pay day and equivalent to more than the worth of all COP 9 cases in six years’, which just goes to further underscore how significant that outcome really was.

Still no HMRC estimate of the “offshore tax gap”

On 13 July 2022 UK Financial Secretary to the Treasury, Lucy Frazer, announced that “HMRC plans to calculate and publish a new stand-alone offshore tax gap, which estimates the amount of offshore tax not being correctly reported by UK taxpayers next year, for the ‘Measuring tax gaps 2023 edition’.” This was in response to Parliamentary questioning in the aftermath of HMRC’s admission that it no longer had a current estimate. In the event, HMRC published no such estimate in 2023.

HMRC have now confirmed to Price Bailey, in declining an FoI request, to disclose their current estimate of the so-called offshore tax gap – and in justification for their refusal – that HMRC will publish a new estimate in June 2024 in ‘Measuring tax gaps 2024 edition’.  The reason for a further delay of one year is unclear.

HMRC Initiatives

HMRC launches a new campaign targeting undisclosed capital gains on crypto currency and other digital assets

HMRC’s new push is aimed at making taxpayers who have neglected to declare capital gains on cryptoassets come forward to make disclosures through the Digital Disclosure Facility.  The new guidance can be found on the Government website.

Contrary to what many people initially assumed, the same UK Capital Gains Tax (CGT) treatment applies to cryptoassets as to other sorts of investments and that includes so-called cryptocurrencies – which many wrongly assumed would be treated like government issued “fiat” currency.  Furthermore, the initial apparent secrecy of crypto has proven illusory. The UK HMRC and its sister tax agencies around the world now have access to an ever expanding wealth of information on who holds or has previously held cryptoassets. They already exchange information and will soon start doing so automatically.

HMRC are offering no special disclosure terms. All of HMRC’s normal assessment and penalty powers apply, leaving unprompted voluntary disclosure the best way for anyone with overlooked liabilities to mitigate their position.

In some more serious circumstances, involving very large amounts of possible tax and/or possible dishonesty, the Digital Disclosure Facility might not be the best disclosure option.

Anyone needing assistance should please get in touch.

“New “nudge” / “one-to-many” letter – foreign tax credit relief on employment income

HMRC has issued a new round of nudge letters targeting taxpayers who claimed Foreign Tax Credit Relief in their 2021/22 Self-Assessment returns on overseas employment income.  The letters highlight some of the factors affecting eligibility and urge the recipients to properly consider whether they’re eligible to claim before doing so again for 2022/23.

This continues a recent theme of HMRC seeking to intervene to better educate taxpayers and prevent errors. This sort of educational nudge letter also puts HMRC in a stronger position to argue carelessness or maybe even deliberate wrongdoing and seek higher penalties if “educated” recipients go on to be non-compliant anyway.

“New “nudge” / “one-to-many” letters  – users of money service businesses

Further to HMRC now receiving a vast amount of data from money service providers on the transfers of cash overseas arranged by them for their customers, taxpayers are now receiving a new round of letters prompting them to consider whether the amounts they have transferred overseas were of untaxed income assessable in the UK.

The letters urge the individuals concerned to report any such amounts they might have been tempted to divert and hide or gift overseas for the 2022/23 tax year in their Self-Assessment tax returns by 31 January 2024, including amending any return already submitted if necessary.

Case Decisions

• Atholl House Productions Ltd v HMRC – TC/2018/02263

After a 9-year odyssey through HMRC’s investigation process and then the tax courts, it appears that TV presenter Kaye Adams has finally achieved victory against HMRC in rebutting HMRC’s tax assessments treating her as a BBC employee rather than a self-employed contractor.

Very unusually, the case has found its way to be decided once again at the First-Tier Tribunal (“FTT”) after progressing all the way to the Court of Appeal.  It was first heard by the FTT in April 2019 – where Ms Adams won.  HMRC then appealed to the Upper Tribunal in November 2020 contending that the FTT judge had made an error of law – only to lose once again but get permission to go to the Court of Appeal. In February 2022, the Court of Appeal agreed with HMRC that the lower courts had made some errors of law but referred the matter back down to be heard once again by the FTT. It was also noted that new evidence had become available that the Court of Appeal directed could be heard in order to cast a light on what Ms Adams’s employment status truly was. In the second FTT decision released on 29 November 2023 after the second hearing in October 2023, the FTT found once again in Ms Adams favour in a heavily fact based and finely balanced decision, relying in part upon the new evidence Ms Adams was permitted to produce.

Despite winning at every stage, Ms Adams and her production company are understood to have incurred c.£95,000 in legal costs, despite winning at every stage except at the Court of Appeal and even then only losing on points of law which did not ultimately impact on her tax position.  HMRC, for its part, is understood to have incurred taxpayer funded legal costs of c.£250,000 in a dispute over tax of only c.£70,000.

Why is this important?

This saga highlights yet again – as so many other unfortunate case already have – why reform is required of the IR35 employment status rules as well as why HMRC should consider a major policy reboot. HMRC’s aggressive attempts to enforce the heavily fact based, but in practical application often very subjective status rules, has caused financial hardship for many conscientious taxpayers whilst achieving no definitive victories for HMRC in the courts as each case is decided on its own merits.  Rather than seemingly attempting to use the courts to deter freelance self-employment, HMRC should surely seek new legislation or else only go the tribunal in clear cut circumstances. There need also be a willingness to accept the decisions reached by the FTT on the facts rather than pursue extended litigation based on tenuous points of law.

• HMRC v Fisher [2023] UKSC 44

A Supreme Court win for the Fisher family against HMRC. In order to remain competitive with rivals doing likewise, the Fisher family moved their tele-betting business from their UK company to a new company in Gibraltar in February 2000. HMRC later sought to personally assess the four family members to UK Income Tax under the S739 ICTA 1998 and successor S720 ITA 2007 “transfer of assets abroad provisions” on all the income arising within the Gibraltar company for eight years through to 2007/08. The S739 / S720  provisions can apply where:

• there is a relevant transfer of assets abroad;
• income becomes payable as a result of the transfer to a person resident or domiciled abroad (including a legal “person” such as a company);
• individuals who made or procured the transfer have the power to enjoy the income of the overseas “person”.

The Supreme Court found for the four family members on the ground that they were not the transferors of the business, either individually or collectively.  The provisions did not apply with respect to the individuals for a transfer made by a company in which they were the shareholders regardless of their respective shareholdings.

The appellants other alternative (and ultimately unneeded) grounds of appeal were rejected, these included that application of the provisions would breach EU human rights legislation or that a valid non-tax avoidance motive defence existed. The presence of a tax avoidance motive was clear and inseparable from the commercial motive since the business was moving abroad like its competitors to remain viable by moving outside the reach of the UK’s gambling levy.

Why is this important?

The potential scope of the UK’s transfer of assets abroad tax avoidance provisions are broad-ranging. In large part this is due to the purposely vague way in which they are constructed to prevent artful circumvention. UK residents setting up offshore structures and people becoming resident in the UK with existing structures have run the gauntlet of S739 and S720 for many years; often unknowingly due to lack of adequate professional advice or the sheer nuanced complexity involved. In this ruling the Supreme Court has taken issue with the breadth enabled by the wording and has restricted the scope of the legislation where it felt it would otherwise be unduly punitive and against “rudimentary notions of justice and fair play”.

This brings binding clarity in similar situations where companies have made transfers abroad in the natural course of business.  However, the Supreme Court put a marker down that were such transfers to be made for artificial reasons the analysis might be different.

• HMRC v Delinian Ltd (formerly Euromoney Institutional Investment plc) [2023] EWCA Civ 1281

This is a Court of Appeal ruling in a case HMRC had continued to pursue despite losing both previous stages. The company had entered into a transaction to sell the shares in a 50% subsidiary to an unconnected third party and, when the transaction was already well advanced, they succeeded in getting agreement with the purchaser to modify the consideration so that it could combine and take advantage of two commonplace forms of tax relief in a fairly straightforward way:

• rollover relief on the exchange of shares received in consideration – which relies on successfully applying to HMRC to give clearance to allow the taxing of gains to be deferred to the disposal of the new shares;
• later anticipated substantial shareholding exemption on the future disposal of the exchanged shares.

HMRC sought to deny the rollover relief as under S137(1) TCGA 1992 the exchange could not “form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax”.

The case turned on whether or not tax avoidance was the main purpose and whether what was done constituted the whole relevant scheme or arrangement.  The Court of Appeal has agreed with the lower courts that the legislation should be applied to the wider context of the transaction – where the facts determined by First Tier Tribunal were very helpful to the taxpayer i.e., this was a transaction that was destined to happen already for bona fide commercial reasons, and was already in motion before the taxpayer’s director of tax identified a way to make the transaction more tax efficient. In addition, the transaction went ahead without waiting to see if the application for tax clearance was successful i.e. as per para 32 of the decision.  Therefore, any tax saving was seen to be a bonus rather than the point of the transaction.

It stood to reason that although the Court of Appeal disagreed with the company’s Counsel on whether tax avoidance was involved, nothing turned on that as tax avoidance was not a main purpose and the rollover relief was allowable.

The Court of Appeal distinguished this case from another case involving the tax avoidance main purpose test involving an individual – Snell v HM Revenue & Customs [2006] EWHC 3350 (Ch) – where HMRC won because the person had contrived a transaction ostensibly sought to defer a gain to be taxed at a later date, but in reality in anticipation of a planned departure from the UK before the deferred gain would crystallise and fall into charge.

Why is this important?

This was surely always the right outcome and will hopefully deter HMRC from similar action to try to move back the goal posts in terms of what is permissible in structuring transactions in a tax efficient manner taking legitimate advantage of reliefs purposely offered by Parliament.  However, it does not open the door to abuse because, even where transactions are viewed as a whole, relief will still depend upon what the facts of each situation actually are.  Companies will still only benefit where any tax saving truly isn’t one of the main reasons driving the transaction.

• Parker Hannifin (GB) Ltd (TC8992)

In this case before the FTT, HMRC had issued a S36 information notice against the company in the course of an enquiry into the deductibility of interest it had paid on a Eurobond.

Rather than set out the specific documents required, which would have to be part of the company’s statutory records or else reasonably required to check its tax position, HMRC instead set out a demand for copies of all company emails identifiable using a list of search terms such as “avoidance”, “commercial” and “debt”.  Instead of appealing the notice at the outset, the company’s external accountants performed the requested searches and identified over 11,000 emails of which they provided nearly 1,700 emails to HMRC which they felt were actually relevant.  HMRC then sought to insist on receiving the remainder of the emails.

The company appealed on the grounds that the notice was invalid because it did not specify the documents actually needed and the requirements of the notice were too wide.

The Tribunal found for the company that the additional emails were not reasonably required and that HMRC’s scope was too broad and amounted to “fishing”.  Had the company made the notice at the outset, the Tribunal would have rejected the HMRC notice in its entirety.

Why is this important?

This serves as a reminder that HMRC sometimes exceeds its powers in the information that it asks for.  All information notices received from HMRC should be carefully professionally reviewed.

Interestingly, the FTT did not find that HMRC had exceeded its powers simply by setting out a list of email search terms in the S36 notice rather than listing specific documents. Albeit, as a lower court decision, that conclusion does not form a binding precedent on other hearings.

Other News and Announcements

More money for HMRC Debt Management but no unexpected new enforcement measures in the 2023 Autumn Statement

There were no nasty new shocks when the Chancellor delivered his Autumn Statement on 22 November 2023.

The Autumn Finance Bill 2023 includes new legislation to increase maximum prison sentences for tax fraud from 7 years to 14 years, but that development had already been announced in the Spring Budget 2023.

Similarly, the Autumn Finance Bill 2023 includes new legislation to criminalise tax avoidance scheme promotors who continue their activities after receiving a Stop Notice as well as a new power to disqualify company directors involved in promoting illegitimate tax avoidance. However, plans to implement these measures were already well publicised.

What was unexpected but will be welcomed by the general public was an announcement of an additional £163m of funding to HMRC Debt Management to help it make better inroads into HMRC’s gargantuan tax debt mountain. As at 30 September 2023, unpaid outstanding tax debt stood at £45.5m. The new funding will be invested in HMRC’s debt data management systems to focus and target HMRC’s debt collection people and resources more efficiently on identifying and chasing down people not in genuine hardship who have the means to pay their tax debts.

HMRC Initiatives and New Legislation

• New data agreement with Companies House

HMRC have just signed a new data usage agreement with Companies House to enable HMRC to better identify and explore discrepancies in company accounts.

HMRC compare Companies House data with the equivalent HMRC companies statutory account information. Where accounting discrepancies that indicate possible fraud are identified, HMRC will disclose the results to Companies House.  For its part, Companies House is aware that companies can sometimes file differing accounts at Companies House and HMRC to manipulate their credit worthiness and/ or tax position.

The new protocol is to address the following specific stated risks:*

• “where companies are overstating their position with Companies House with a view to gain credit/grants etc. and understating with HMRC in order to reduce their tax/VAT burden (fraud by misrepresentation)
• companies filing with Companies House but not filing anything with HMRC, such companies often have links to a substantial number of others who are using this as a fraud device, these companies are likely to be of interest to the Insolvency Service, this is fraud by omission (creating undeclared tax liabilities) as well as fraud by misrepresentation (when a company is not generating revenue in the way that it supposes to be)
• disqualified directors running companies (fraud risk indicator)
• mini-umbrella companies claiming multiple employers allowances (company tax avoidance)
• company directors receiving consulting fees for their own company (company tax avoidance)

Wording taken from HMRC

We can expect an upsurge in targeted corporate investigations by HMRC in these areas – often in parallel with enforcement activity conducted by other public bodies.

This is part of a broader picture of HMRC and other public bodies adopting smarter data sharing and cross-working capabilities to better identify and address fraud across the public sector.  HMRC are also embarking on similar initiatives with other bodies to assist them in cracking down on fraud against local authorities, the Apprenticeship Levy funding scheme, Apprenticeship Learning Funding, and Bounce Back Loans.

• New “nudge”/”one-to-many” letters- apparent discrepancies in 2021/22 returns

Tax agents are now receiving a new round of nudge letters from HMRC’s Agent Compliance Team referring to discrepancies identified by HMRC in submitted 2021/22 Self-Assessment returns. The discrepancies are understood to relate to information provided to HMRC in P11Ds and P14s and the High-Income Child Benefit Charge.

The letters seek to prompt tax agents to work with clients in making voluntary amendments, prior to 31 January 2024, so that they incur no formal enquiry and penalties.

Case Decisions

• HMRC v G Lee and Another- [2023] UKUT 242 (TCC)

A ground-breaking decision in favour of the taxpayers from the Upper Tribunal on Principle Private Residence relief (PPR) for Capital Gains Tax.

The fact pattern was clear and not in dispute.  Mr & Mrs Lee had bought a plot of land in October 2010 and did substantial work demolishing the existing residential property and building a new one on the site.  The title deed number remained the same.  The appellants finally moved into the new house on 19 March 2013, four days after it was completed.  They then sold it for a significant gain in May 2014.  They claimed full PPR on the sale – resulting in no assessable capital gain.

HMRC took the different, well established view, that the PPR rules should be applied to the whole period the Lees had owned the plot, and therefore the period during which the new “dwelling-house” was not completed and/or occupied should be disallowed for relief pro-rata and subject to Capital Gains Tax.

The judges for the taxpayers and allowed PPR relief on the full gain.  They considered the asset to which the “period of ownership” referred to in the legislation was obviously the “dwelling-house” to which the legislation as a whole referred to, rather than the plot.  This being because S223 Taxation of Chargeable Gains Act 1992 is not concerned with any other sort of asset. They were not swayed however by HMRC’s arguments that, in order to allow full PPR in such circumstances would confer an advantage that Parliament could not have intended upon “demolishers” rather than “renovators”, or that using a brief period of final occupation could be abused to mask a gain on the land itself.

Why is this important?

This is an area of PPR that was never directly considered in the courts before despite PPR existing since 1965.  HMRC and tax advisers all acted in the belief that the law required PPR to be restricted in such circumstances.  Accordingly, it is clear that many taxpayers have overpaid tax upon the sale of a home and are now in a position to reclaim it.

HMRC have confirmed that they are not contesting the decision and implicitly accept that they misapplied the law.  The normal time limit for making a claim is four years, however, HMRC are directing taxpayers and their advisers to the HMRC guidance at SACM10040.  This guidance explains the procedure for taxpayers to make late claims and HMRC’s extra-statutory concession ESC B41 to allow such claims where the overpayment of tax has arisen because of an HMRC error.  Taxpayers must be sure to notify HMRC of a late claim, as soon as they reasonably can, once the overpayment comes to their attention.

Anyone concerned they could be in the same position and might have similarly overpaid tax on the sale of a home should seek urgent professional advice on their possible eligibility to claim a refund.

• Abigail Wilmore v HMRC [2023] UKFTT 00858 (TC)

Another example of a property case won by the taxpayer, but this time turning on whether or not the appellant had transferred a beneficial interest in a joint property to her ex-husband during the year of their separation. Under S58(1) TCGA 1992, Abigail would still be covered by spouse-exemption and it would be a no-gain-no-loss transfer. She was not assessable on a capital gain upon the disposal.

The appellant separated from her husband on 10 September 2015, within the 2015/16 tax year, and divorced the following tax year in 2016/17.  The Consent Order for the divorce was dated 17 October 2016 and the Decree Absolute was dated 23 December 2016.

HMRC argued that no binding agreement for the transfer had happened by 5 April 2016 and, besides, under S53 of the Law of Property Act 1925 and S2 of the Law of Property (Miscellaneous Provisions) Act 1989, a transfer of an interest  in land and a contract for the sale of such an interest must be in writing.

The evidence was found to demonstrate that an agreement was reached in substance during the year of separation, as demonstrated by the respective actions of both the appellant and her ex-husband. Upon coming to that agreement, Abigail had relinquished beneficial ownership and only held the legal interest in the property within constructive trust for him.  It did not matter for the creation of the constructive trust that the parties had not finalised all the terms of the divorce later embodied in the Consent Order.

Why is this important?

This situation is much less likely to occur in the future due to changes in the law as of 6 April 2023. The law provides divorcing couples far longer than just the year of separation to benefit from no-gain-no-loss transfers of assets between each other.

However, this case is an excellent example of a tax matter that turns not on a point of tax law but on a wider external body of law;  this time, as so often, law of equity. Such situations can put HMRC and their in-house lawyers outside their core competencies and lead to HMRC making fundamental errors of law.

Although the taxpayer still needed to demonstrate that a constructive trust was established during the year of separation in order to effect the transfer of beneficial ownership, HMRC’s position that such a transfer of an interest in land can only be made in writing was absurd.

For their part, taxpayers and their advisers dealing with tax matters that turn on an area of law outside of tax, like issues of beneficial ownership, should themselves consider whether the input of a legal specialist in that particular area of law might be called for in conjunction with the mainstream tax advice.

Other News and Announcements

• Successful HMRC Conviction of Bernie Ecclestone

Bernie Ecclestone had been due to stand trial in November on a single charge of fraud by false representation. Ecclestone’s admission of guilt on 12 October 2023 at Southwark Crown Court, resulting in a 17-month suspended sentence, comes as a rare and spectacular win for HMRC.

In advance of the criminal trial, and as a separate matter, Mr Ecclestone reached a £652.6m civil settlement with HMRC for unpaid tax, late payment interest, and 200% penalties on the unpaid tax.  Comments from Price Bailey on the civil settlement, which is surely a new record for a settlement of its type with a private individual, were published in the Financial Times on the 12 October 2023.

Unlike most traditional tax prosecutions, HMRC’s criminal case was based upon a false statement made by Mr Ecclestone in the course of a previous civil tax investigation. He failed to disclose his beneficial interest in more than £400m of assets held in an offshore trust in Singapore.

HMRC has struggled to successfully prosecute wealthy high-profile people in the past due to the difficulty in explaining complicated matters to a jury of ordinary people and convincing them beyond reasonable doubt of deliberate intent. In this case, HMRC had one simple charge.

A major project is already underway in HMRC to prosecute far more people who are not fully cooperative and truthful in the course of civil tax investigations. This comes both from HMRC frustration with bad behaviour during civil investigations, and from a realisation that misrepresentations during civil investigations can sometimes offer a much easier path to successful prosecution than simply launching straight into a criminal investigation and trying to build a forensic picture to put before a jury.

It is always vital that taxpayers take civil tax investigations very seriously and understand the potential criminal consequences of failing to do so. Getting appropriate specialist advisors to handle the investigation, offering all reasonable cooperation, and making full truthful disclosure of all material facts are crucial.

HMRC Initiatives and New Legislation

• New “nudge” / “one-to-many” letters – Gift Hold-over Relief

HMRC have started issuing intervention letters to people who have made deficient claims of Gift Hold-over relief in their 2021/22 Self-Assessment tax returns. These state:

“Our records show that you (either):

• haven’t submitted the relevant claim form, which is required for any claim to GHO to be valid
• submitted the relevant claim form, but it’s not signed, which means the claim for relief isn’t valid

This means your claim is unlikely to be accepted, and you may need to pay tax on the capital gain on the disposal of that asset.”

The recipients are notified that they will either need to submit amended Self-Assessment (SA) returns, removing the claims, or submit the separate signed claim forms as required. If they do not comply, HMRC may either amend the return to remove the claim or initiate an enquiry that could result in a penalty.

Except where a gift is in a settlement, the transferor and the transferee will need to sign the form to confirm the agreement for the transferee to accept the held-over capital gain. Of course, they may not always have had that conversation.

Anyone still determining whether or not they qualify for Gift Hold-over Relief and how to make a claim should seek professional advice properly. Making weak and unsubstantiated speculative claims for tax relief can result in significant penalties even where HMRC reject the claim at the outset.

• HMRC are trialling use of “para 16” powers to reject R&D claims without enquiries or dialogue

HMRC have confirmed that they are now trialling the use of powers held under FA 1998 Sch 18 para 16 to correct “obvious errors” in a new way to reject R&D claims HMRC has reason to believe are incorrect. Previously, this power has been used little except for correcting the most obvious and basic of errors.

The use of “para 16” powers will not require HMRC to formally open an enquiry into claims or even to enter into any dialogue with the taxpayer and their advisors. The onus will then be on taxpayers to force the issue, amend their tax returns to reinstate the claims, and likely force HMRC to open enquiries. Taxpayers will need to be very confident of their position before taking such action, and there is a risk that legitimate claimants will be scared away.

Case Decisions

• Kenan Altunis v HMRC – [2023] UKFTT 00719 (TC)

It is difficult for HMRC to prove participation in aggressive tax avoidance is fraudulent. Albeit, in the Kenan Altunis v HMRC civil penalty appeal at the First-Tier Tribunal (“FTT”), maybe the Revenue might have fared better if they’d argued the taxpayer had acted fraudulently by virtue of completing “the return recklessly, not caring whether it be true or false” rather than instead arguing he had made a false representation in his 2007/08 tax return. The tax return included a claim for scheme-generated losses of £5,344,836.

The Tribunal found the taxpayer to be an intelligent, rational, a sophisticated investor – as one would expect of someone who held a senior role at a major City bank. Moreover, it found him to be an evasive and unconvincing witness who had clearly understood that he was participating in a loss creation scheme, he understood its purpose and participated on that basis. Indeed, the taxpayer obtained written assurances from Montpelier confirming it would fight HMRC were the scheme to be contested and would refund his “initial margin” (found by the Tribunal to be a fee) of 12.5% of the loss to be created – were HMRC to win. [The assurance on the fee came personally from the Chairman of Montpelier – against whom HMRC were to later unsuccessfully attempt a criminal prosecution relating to another scheme.]

HMRC argued the taxpayer had knowingly made a false representation in his SA return because he knew he wasn’t trading on a commercial basis with a view to a profit – upon which he knew the claim depended, he had obtained the fee indemnity which he had withheld from HMRC and his accountant and because the arrangements depended on a loan which was a sham. The Tribunal was not convinced that HMRC had met their burden. Where the alleged sham loan was concerned, HMRC had not run that argument during their COP 8 investigation and had not made the distinction between a loan that parties agree will not be collected and a sham agreement that does not create the legal rights and obligations it gives the appearance of creating.

The Tribunal then considered whether the taxpayer was negligent and found that he was. He knew the scheme was aggressive, and he doubted its success, but he had not sought professional advice on the scheme from anyone besides Montpelier – not even from his accountants, who he instructed to claim the loss.

In light of the negligence finding, the Tribunal reviewed and reduced the quantum of the penalties – starting with a maximum of 45% (there being a Category 2 multiplier for Bermuda) and allowing 30% mitigation – all for “co-operation”. That resulted in a revised penalty of £652,549 versus the £1,657,268 under appeal and versus a reduced penalty of £1,139,271 that HMRC were arguing for.

Why this matters

The case demonstrates that on similar facts, sophisticated taxpayers can enter into aggressive tax avoidance arrangements without the tax courts finding them to be fraudulent by making false representations on their tax returns.

However, a note of caution – the Tribunal painted an alternative argument that appeared to hint that HMRC should have run instead that in such circumstances, the actions might be fraudulent by recklessness. We can now expect HMRC to push that line of argument in the future.

• Delphi Derivatives Ltd v HMRC – [2023] UKFTT 00722 (TC)

The FTT upheld deliberate and careless penalties for operating a Clavis Employee Benefit Trust (“EBT”) scheme in Delphi Derivatives Ltd v HMRC. The scheme – which ultimately failed further to the principles established in the Glasgow Rangers case decision – had sought to claim immediate Corporation Tax deductions for the company while avoiding PAYE and NIC upon payments into the offshore EBT. It relied upon the services of a Jersey human resources company to recommend the level of rewards to key employees – including the company directors.

The deliberate penalty related to a final fourth tranche paid into the scheme after it was already under review by HMRC Specialist Investigations in 2009. Not only was it under active HMRC review, but for the scheme to succeed on its terms, it required a new independent remuneration review to be carried out before the award of each tranche payment to the EBT for the benefit of the directors. The tribunal found that the Delphi directors knew this. Still, they decided the level of their remuneration at least a week before a remuneration evaluation meeting was held to give the veneer of an independent review. That made the inaccuracy deliberate – unlike previous tranches – where the independent reviews were performed following the scheme’s operating instructions.

The Tribunal upheld HMRC’s conclusion that careless penalties applied for the earlier tranches since it found the company had fallen short of the standard of being a prudent and reasonable taxpayer in taking no action to address possible areas of risk identified by its accountant – including his suggestion of seeking advice from independent Tax Counsel. The taxpayer had sought to argue that the accountant’s letter should be interpreted merely as a professional disclaimer.

Why this matters

• The case demonstrates that:
  scheme participants who knowingly do not follow operational advice for the scheme to succeed on its own terms risk not only the failure of the scheme if it otherwise proved sound but also risk facing deliberate penalties if the scheme is found to fail on other grounds;
• not following up on professional advice highlighting tax risks puts the taxpayer in a fragile position to argue against carelessness

• P Gopaul v HMRC – [2023] UKFTT 728 (TC)

The appellant was the sole owner and director of a company trading as a take-away pizza business, which HMRC concluded had systematically suppressed its turnover and taxable profits. HMRC, therefore, raised assessments for additional VAT on the turnover and for additional Corporation Tax on the further profits and under the S455 loans to participators provisions. A tax charge arose under the S455 provisions because the appellant’s takings wrongfully extracted from the company had to be repaid to the company and were, therefore, a loan until repaid.

The appellant was pursued for the company’s related penalties – all treated as deliberate wrongdoing – under a personal liability notice (“PLN”) on the basis that all the inaccuracies were attributable to him. The company, meanwhile, had gone into liquidation and been struck off.

The FTT fully upheld the VAT element and the profit adjustment element regarding the Corporation Tax. However, the FTT found that HMRC had failed to discharge its burden to prove that the company had deliberately omitted the S455 liability from its Corporation Tax return – “there is no evidence that Mr Gopaul even knew at the time the returns were made, that the extraction of money from his own company would trigger a [S455] corporation tax charge: nothing in the correspondence discusses his knowledge or understanding, and he was not cross-examined on this point”. The Tribunal reduced the level of the Corporation Tax penalty accordingly.

Why this matters

It is already well understood that all underpayments of tax must be considered on their own facts and relevant behaviours – one act of deliberate wrongdoing does not render fraudulent every other underpayment of tax by a taxpayer merely by association. However, this decision perhaps takes that principle a step further.

The appellant was found to have deliberately understated his company’s takings with the intention of underpaying tax. However, since the S455 understatement arising as a consequence of his actions was not demonstrated to be within his understanding, that element was not found to be deliberate. A direct adverse consequence of deliberate wrongdoing was not found to be deliberate and could not be punished.

Since this is an FTT decision, its reasoning will not bind any other court, but it could prove influential. It will be interesting to see whether HMRC will try to appeal this to the Upper Tribunal.

Other News and Announcements

• Two separate Price Bailey freedom of information requests show that HMRC employ growing numbers of compliance staff and that HMRC offshore compliance activity is increasing, too

Numbers of HMRC compliance staff surge

HMRC has added over 3,000 compliance enforcement staff since the 2021/22 reporting year – a 12% increase yearly. That includes over 500 more staff added to HMRC’s Fraud Investigation Service to conduct major investigations into tax evasion and severe tax avoidance. The UK Parliament’s Public Accounts Committee has criticised HMRC heavily for its reduced compliance performance in recent years, and this major investment appears to be part of an effort to put that right.

In practice, more compliance staff will result in more targeted larger investigations where HMRC has reason to suspect wrongdoing and more routine random enquiries into taxpayers who are often fully compliant.

Further commentary on this can be found in the Daily Mail / This is Money here.

Increased HMRC offshore investigation activity

HMRC is making the highest number of information requests to foreign tax authorities in five years – up from a low of 322 in 2021 to 620 in 2022. Offshore-related HMRC “nudge” letters to UK taxpayers are increasing by nearly a third on their Covid lows to almost 24,000 in the last full reporting year.

Thanks to global financial transparency measures like the Common Reporting Standard, the easy “low-hanging fruit” of UK residents with hidden offshore bank accounts is already largely a thing of the past. HMRC now seem to be adopting a more focused approach and concentrating on particular sorts of taxpayers – such as people claiming to be non-UK domiciled or overseas companies known to hold UK commercial property but not declaring the rental income.

Further commentary on this can be found in the FT here.

August was, predictably, a generally quiet holiday month – in particular, very few Court decisions were released.  However, HMRC’s computers were still busy issuing thousands of “one-to-many” / “nudge” letters for new HMRC campaigns which got signed-off before the annual hiatus.

HMRC Initiatives and New Legislation

New offshore investigation campaign

HMRC Campaigns and Projects team has started issuing a raft of letters to UK residents with offshore interests.  These differ from the “one to many” letters issued in the last six years in that they’re not just a “nudge”. Instead, they are notice of an investigation.  These letters initiate investigations into recently submitted tax years where HMRC is still within the statutory timeframe and leverage HMRC’s information powers to gather data from preceding years, aiming to issue discovery assessments for any underpaid tax during those periods.

These interventions appear to be targeted at individuals who have ignored previous “nudge letters” – where best practice is to engage with HMRC to either explain why they are tax compliant or else to make a voluntary disclosure under the Worldwide Disclosure Facility (or in some deliberate circumstances under the Contractual Disclosure Facility).

Under extended offshore assessment rules, HMRC can presently raise discovery assessments on offshore income or gains going as far back as:

• 2013/14 if a careless error was made in a filed return;
• 2015/16 even if the error was innocent since the taxpayer had taken reasonable care in filing the return or had a reasonable excuse for not notifying HMRC of the income or gains and filing a tax return;
• up to 20 years if the taxpayer made a deliberate error on a submitted return or else did not have a reasonable excuse for not notifying HMRC of the income or gains and filing a tax return.

Anyone receiving one of the opening letters should seek urgent specialist advice.  If not dealt with promptly, matters could escalate and dealing with it properly will significantly mitigate the potential liabilities.

New “nudge” / “one-to-many” letters to offshore companies owning UK commercial property

A new round of HMRC letters is targeting offshore companies that appear to have failed to notify HMRC of rental income on commercial properties of which they are the registered owners.

HMRC has a mass of information available to it – including Land Registry and bulk data notices served on letting agencies, and it is using increasingly sophisticated computer algorithms to identify possible discrepancies. Inevitably, many of the companies concerned will have legitimate explanations, but others will have real issues to address.

Unlike most previous nudge letters, which are silent about the potential consequences of ignoring them, these letters explicitly warn that HMRC will raise estimated tax assessments on the companies and/or open formal investigations with a view to levying penalties too. Like many previous types of nudge letter, but somewhat controversially, the letters include what HMRC calls a “Certificate of Tax Position” – a declaration which HMRC requests is completed, signed and returned to them.  HMRC cannot compel completion of that declaration, which comes fraught with a risk of possible criminal prosecution, nor is completion of the declaration strictly necessary in order to engage and co-operate with HMRC.

In the event that overseas companies have something to disclose, the letters request that disclosures are made under HMRC’s Code of Practice 9 (“COP 9”) / Contractual Disclosure Facility (“CDF”) civil investigation of tax fraud protocol.  This is highly controversial too as it requires:

• any application to use it to first be automatically routed through HMRC Fraud Investigation Service’s Criminal Investigations team to check whether they would prefer to embark on a criminal investigation with a view to prosecution and possible imprisonment;
• assuming acceptance into COP 9 / CDF, an upfront admission in the initial Outline Disclosure of deliberate wrongdoing;
• the parties concerned to be interviewed by HMRC without the protection of PACE procedures;
• an understanding that the guarantee of non-prosecution can be taken away at any stage if HMRC feel there is insufficient cooperation or a lack of full disclosure.

This is complicated further in that:

• although HMRC does not spell it out in the letters, companies cannot themselves enter COP 9 / CDF – only individuals can i.e. in this case the company directors involved would have to each enter COP 9 / CDF and admit tax fraud from the outset with the all of the attendant personal risks;
• in practice, most of the directors of such companies are likely to work for offshore service providers and to similarly be professional directors of multiple companies under different ownership;
• HMRC could seek to use COP 9 / CDF as a gateway to investigate those other companies too since the scope of the protocol encompasses all companies under the respective individuals’ control. Failure to cooperate and disclose any tax deliberately, or accidentally underpaid by any such company would violate the terms and could prompt a criminal investigation.

Anyone receiving one of these letters needs to seek urgent specialist advice before responding in any way to HMRC.

New HMRC interventions where provisional figures are still in submitted tax returns for 2021/22

These are initiated with letters which describe them as not a “formal enquiry or compliance check” but they are active interventions nonetheless.  Agents receiving one of the “one-to-many” letters chasing submission by 30 November 2023 can expect a telephone call from HMRC within two weeks and almost inevitable questions / maybe a formal enquiry once the amended returns are actually submitted.

Taxpayers wishing to minimise the risk of one of these interventions should avoid any more undue delay in finalising their figure and filing amended returns.  They should be mindful that HMRC does not accept that provisional figures are supplied simply because of heavy workloads and complexity, and HMRC can seek to levy tax geared penalties based on a percentage of any tax originally misstated, even after provisional figures are amended.

New “nudge” / “one-to-many” letters to nursing and care home companies about potential R&D claims

Another new round of HMRC letters is being issued en masse to companies in the nursing and care home sector.

The letter warns recipients that HMRC has:

“ . . . seen very little evidence of businesses in these sectors doing any qualifying R&D activity.

We reject most R&D claims in these sectors, as they’re usually based on:

• normal day-to-day business activities, such as individual patient meals or care plans
• observing behaviour
• digitising admin
• constructing sensory gardens”

Doubtless, HMRC is also busy sending out similar letters to companies in other sectors which it regards to be high risk.

Recipients of these letters should be mindful that HMRC will consider them warned and “educated” and may now take a much harder view on penalties if the companies press ahead and make invalid claims.

HMRC can charge tax geared penalties based on the “Potential Lost Revenue” were HMRC to have allowed a claim, even when HMRC rejects such a claim from the outset.  That could mean penalties of up to 100% of the saving sought.

Case Decisions

Exceptional circumstances in statutory residency test: HMRC v A Taxpayer [2023] UKUT 182 (TCC)

An important personal residency case at the Upper Tribunal turning in part on whether a moral or social obligation can constitute an exceptional reason preventing departure from the UK under the UK’s statutory residence test and the exceptional circumstances provision at Sch. 45, para 22(4) FA 2013.

The First-Tier Tribunal (“FTT”) had allowed the taxpayers appeal for two trips totaling five days, which she claimed she made in light of her sister’s alcoholism and depression and the need to ensure the sister’s minor children were take care of.  That reduced the 2015/16 day count to 45 days and took an £8m dividend receipt outside UK Income Tax.

The Upper Tribunal was not impressed and allowed all four of HMRC’s grounds of appeal, finding:

• The FTT had erred in law in deciding that moral or conscientious inhibitions could meet the test for circumstances preventing departure from the UK.
• The FTT had failed in its requirement to apply the statutory residence test to each day separately.
• The FTT had erred in finding there were exceptional circumstances in the taxpayer’s case.
• The FTT had erred in failing to consider whether the exceptional circumstances it had found satisfied the remaining elements of the statutory residence test.

Some of the reasoning is interesting:

• “serious death and illness are, themselves, not ‘exceptional’ the former is commonplace and the latter is universal”;
• “moral obligations are not themselves exceptional circumstances; they are shaped by society and the subjective feelings of an individual” . . . “accordingly, the person is not prevented by exceptional circumstances from leaving the UK; he is instead prevented by a sense of obligation”;
• “it is possible for a person to meet each condition on each day for the same reason . . . However, it is still necessary to find the facts for each of the conditions and each of the days based on the evidence”;
• if alcohol and depression isn’t exceptional then it follows that the consequences for dependent children aren’t exceptional either even if they live in squalor.

Why this matters?

Unless successfully appealed to the Court of Appeal, this decision leaves the statutory residence test’s exceptional circumstances exception with far more limited scope than many believed.

What’s more, on a procedural note, since it is the first instance in which the meaning and effect of para 22(4) has come before it, the Upper Tribunal has seen fit to lay down a common sense step by step practical approach for future FTT hearings to apply to consider the evidence before it – that is now binding on the FTT too.