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 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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