Contentious Tax Bulletin

Tax Investigations Partner, Andrew Park, provides a round up of the most recent and significant contentious tax news

In our contentious tax bulletin, Andrew Park, Tax Investigations Partner at Price Bailey, provides an overview of the most recent and significant contentious tax news, legislative changes, updates, and relevant case decisions that occurred throughout the previous month.

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:

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.

What happened in March 2024

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.

What Happened in February 2024

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.

What Happened in January 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.

What Happened in December 2023

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.

What Happened in November 2023

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.

What Happened in October 2023

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.

What Happened in September 2023

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.

What happened in August 2023

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.

What happened in July 2023

HMRC Initiatives and New Legislation

Reboot of HMRC Code of Practice 9 (“COP 9”) / the Contractual Disclosure Facility (“CDF”)

HMRC’s Contractual Disclosure Facility (CDF) provides individuals suspected of tax fraud with the opportunity to avoid possible criminal prosecution by making a full disclosure of tax fraud. Taxpayers can request the CDF proactively for voluntary disclosures, benefiting from lower penalties or, alternatively, HMRC may offer the CDF to individuals who it suspects committed tax fraud. COP9 represents an extensive and thorough tax investigation, it is not a routine enquiry.

However, HMRC are concerned that some taxpayers and advisors haven’t taken the requirements for HMRC’s flagship COP 9 / CDF civil investigation of fraud process seriously enough.

Reworded guidance spells out more strongly what is expected in return for the process’s guarantee of non-prosecution.  Greater emphasis is placed on the expectation that taxpayer’s should pay admitted liabilities early in the process and admit all non-deliberate as well as deliberate errors at the outset.

HMRC are understood to be particularly frustrated with how many improperly advised taxpayers have made initial formal admissions of deliberately underpaying tax in order to get the protection of COP 9 / CDF only to seek to attempt to later withdraw the admissions later in the process once they are no longer quite so worried about possible prosecution.

More so now than ever, nobody should enter into the COP 9 / CDF process without instructing investigation specialists.

New Draft Legislation to Increase Maximum Sentences for Tax Fraud from 7 to 14 Years

This was expected and comes as HMRC seeks to maximise the fear and deterrence value of what it calls the “criminal underpin”.

It remains to be seen if HMRC criminal investigations and prosecutions will increase significantly from their current level of c. 400 per year or how many convicted taxpayers will in future face the new longer sentences.  Indeed, the main purpose appears to be as a deterrent to increase compliance or else to ensure full co-operation with HMRC’s normally preferred civil COP 9 process.

Case Decisions

Class 1 National Insurance (NI) paid on company car allowances :
Laing O’Rourke Services Ltd / Willmott Dixon Holdings Ltd v HMRC – [2023] UKUT 00155 (TCC)

In a landmark decision, the Upper Tribunal has ruled that company car allowances are “relevant motoring expenditure” / “RME” and should be disregarded for Class 1 National Insurance purposes up to the relevant “qualifying amount” (i.e. 45p per mile applied to the number of business miles actually driven).  In these cases, which were heard together, neither company scheme had a minimum amount of business mileage nor did either scheme contractually require a car to even be purchased with the allowance – although that was the expected and anticipated use.  The Upper Tribunal found that expected or anticipated use by employees in general was sufficient for RME purposes, where claims were made in respect of employees who had done business miles.

HMRC will almost certainly seek permission to go to the Court of Appeal.  However, if this stands, employers will be in a position to reclaim tax both for themselves and their employees.  At the very least, employers should consider making protective claims pending the outcome of any HMRC appeal.  The issue also arises over how employers should calculate employee NI deductions going forward, again, likely subject to the outcome of any appeal.

For further commentary see our article covering the case decision.

Tax position on Employee Benefit Trust (EBT) loans : M R Currell Ltd v HMRC – [2023] UKFTT 613 (TC)

In this case the First-Tier Tribunal (“FTT”) concluded that a loan from an employee benefit trust (“EBT”) was taxable in full as disguised remuneration on the company director who received it.  This was notwithstanding that the loan was repayable.

Some of the loan had actually been repaid before the Hearing and used to fund taxed bonuses from the EBT to employees. The Judge was not persuaded by the argument that this scenario resulted in double-taxation and demonstrated why repayable loans should not be taxable.  He found instead that the additional tax was simply a consequence of the arrangements the parties had chosen to enter into.

Employment related tax reliefs : Jayanth Kunjur v HMRC – [2023] UKUT 00154 (TCC)

In this case, which HMRC appealed to Upper Tribunal after the taxpayer won at the First-Tier Tribunal (FTT), a dental surgeon sought tax relief for the costs of renting a second home close to his place of work.  The Upper Tribunal found that the previous FTT decision erred in law on several counts:

  • the FTT had failed to make the distinction between a personal choice to incur costs and an obligation;
  • the FTT was wrong to find that the costs were incurred wholly and exclusively for the purposes of the employment, since a dual purpose existed which could not be apportioned out;

the FTT had failed to understand the fundamental difference between expenditure incurred to put oneself in a position to do ones work and expenditure incurred wholly and exclusively in the performance of it.

  • A useful reminder of some of the fundamental principles involved for employees seeking employment related tax relief.

Other News and Announcements

HMRC published its annual accounts for 2022/23

These make interesting reading – not least, because they are qualified for the 17th year in a row by the National Audit Office – this time, in large part due to HMRC’s ongoing difficulty in identifying, measuring and recovering billions of pounds lost in fraudulent claims for R&D relief and for personal tax credits.

R&D relief losses Latterly, HMRC has tripled its estimate of the annual R&D loss to c. £1billion – which relates almost in its entirety to the scheme for SMEs – generally owner managed – rather than the one for large corporates.

COVID-19 support scheme fraud HMRC continued its work to recover monies lost to COVID-19 support scheme fraud and error during the year and raised its estimate of the total losses upwards by £0.5 billion to £5 billion.  HMRC expects to recover a total of £625 million before its special taskforce is returned to normal activities in September 2023.  After that point, fraudulent losses will still be recoverable for up to 20 years after the end of the period concerned and for up to 6 years where due to carelessness. Further recovery will become increasingly sporadic and will increasingly become part of broader HMRC investigations into wider suspected non-compliance by the business concerned.

Offshore related non-compliance – After so much focus in previous years, HMRC was silent on its work to address offshore related non-compliance.  It seems this has been deprioritised as a risk further to all the information HMRC now gets automatically from overseas tax authorities and further to all HMRC’s undoubted success in eliminating most of the “low hanging fruit” of undisclosed offshore investment accounts and aggressive tax avoidance schemes using offshore trusts and entities.  HM Treasury pledged last August that HMRC would release an estimate of the remaining offshore “tax gap” this year – that estimate is still awaited.

HMRC published data on Corporate Criminal Offences (CCO) investigations

These came into law in the Criminal Finances Act 2017 – since then there has been little visible activity.

The new release – which will now be updated biannually – shows that:

As at 30 June 2023:

HMRC currently has 9 live CCO investigations – no charging decisions have yet been made.

A further 25 live opportunities are currently under review – to date we have reviewed and rejected an additional 83 opportunities.

These investigations and opportunities span 10 different business sectors and sit across all HMRC customer groups – sectors include software providers, labour provision, accountancy and legal services and transport.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.


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