Tax Disputes and Investigations – November 2024

The Autumn Budget contained several high-profile measures which have obviously been the subject of considerable debate since.  In this month’s newsletter, we have looked at some of the immediate announcements which may be specifically relevant for those dealing with tax disputes.  There were also specific commitments to consult on matters which could have profound impacts for those dealing with tax investigations and enquiries, in particular around the enquiry framework. We will be commenting on those as the consultations progress.  In the meantime, we have commented on some of the proposals which we believe are of more immediate interest.  

Rise in HMRC interest rates – the latest “stealth tax”?
By Ben Proctor

It was announced in the budget that from 6 April 2025 the rate of interest charged by HMRC on late paid tax will rise from Bank of England base rate plus 2.5% (currently 7.25%) to base rate plus 4% (8.75% based on today’s rates). This will prove controversial for a number of reasons:
 
·      No matching increase was announced in the rate of credit interest paid by HMRC, which will remain frozen at base rate minus 1% (currently 3.75%),
·      The increase will also magnify the disparity between the corporation tax treatment (deductible) and the income tax treatment (not deductible),
·      The amount raised in interest by HMRC had already doubled over the past year,
·      Taxpayers already face a whole suite of sanctions for late payment including tax geared penalties, and
·      The safeguards around imposition of large interest charges by HMRC are woefully inadequate and dysfunctional compared with the rights to seek appeal, statutory review and/or alternative dispute resolution in relation to tax and penalty assessments.
 
A key question arises as to the policy intention behind this change. Was it an unashamed revenue raising measure (some might say the latest stealth tax)? If so it seems exceptionally poorly targeted. The majority of businesses and individuals with significant interest liabilities accrue these through either genuine financial distress or because unanticipated tax charges were imposed retrospectively by HMRC action.
 
Alternately, is this an attempt to bear down on the stock of tax debt? Whilst an increase in rates is always likely to sharpen the focus on prompt payment, the issue here is that, as just explained, the majority of large interest liabilities arise involuntarily. This interpretation is also undermined by the Budget projections forecasting this measure to be a significant revenue raiser.
 
In our view, it is essential that this measure is accompanied by a strengthening and widening of taxpayer rights to appeal or otherwise dispute interest charges. In principle, HMRC guidance provides that its Interest Review Unit will consider interest objections in a fair and impartial manner. However, the same guidance immediately narrows the scope for application of HMRCs discretion solely to instances of HMRC error or unreasonable delay. In practice, even the most skilled and experienced dispute resolution specialists struggle to secure interest mitigation from HMRC in all but the most egregious instances of HMRC error and/or delay. There is little recourse where an objection is dismissed. The result is a situation which bears no resemblance to a fair and impartial process. And the Budget has just significantly raised the stakes.

Impact of the 2024 Autumn Budget on Trusts: Key Changes to Inheritance Tax
By Jon Pitkin

The 2024 Autumn Budget introduced anticipated changes to Inheritance Tax (IHT), replacing the concept of domicile with long-term residence. Starting on 6 April 2025, an individual who has been a UK resident for at least 10 out of the last 20 years will be classified as a “long-term resident” (LTR) and will be subject to IHT on their worldwide assets. Those who are not LTRs will no longer be liable for IHT on their non-UK situs assets. While these changes seem relatively straightforward at first glance, complications arise when we turn our attention to trusts.



Changing Status
For trusts with a living settlor, it will be the settlor’s long-term residence status at the time of a chargeable event, rather than their domicile at the time the trust was created, that determines the trusts ongoing IHT treatment from 6 April 2025. Trustees will need to know if a settlor is a LTR at key moments, such as distributions or the 10-year anniversaries.  



Potential Exit Charges
Non-UK situs assets held in trust will shift between Relevant Property (subject to IHT) and Excluded Property (not subject to IHT) depending on the settlor’s long-term residence status.  Trustees should be aware that IHT exit charges could be triggered by non-UK situs Relevant Property assets becoming  Excluded Property by virtue of the settlor no longer being a LTR.  It’s crucial to note that exit charges could arise without an actual change to the asset’s situs or a distribution from the trust.  This mechanism could trigger exit charges for many trusts on 6 April 2025 if the settlor is not a LTR under the new rules on that date.

Trustees will also need to ensure that IHT returns are filed, and payments are made to HMRC, within six months of most chargeable events. This will require robust systems to track the settlor’s residence status in order to maintain compliance with HMRC’s reporting requirements.



Treatment on Death
For settlors who pass away after 6 April 2025, the ongoing IHT treatment of the trust will be determined by the settlor’s long-term residence status at the date of death. This could significantly affect planning strategies that were previously based on a settlor’s non-UK domicile status. The changes also impact the “gift with reservation of benefit” (GWR) rules. Specifically, settlors of Excluded Property trusts who reserve a benefit in the trust property will no longer receive the same IHT protections on death or when the benefit ends. However, non-UK assets settled in trust before 30 October 2024 will not be subject to the GWR rules.



Temporary Repatriation Facility (TRF)
The TRF offers a notable opportunity for offshore trusts with accumulated unremitted foreign income and gains (FIG). Capital payments to beneficiaries made between 6 April 2025 and 5 April 2028 could be taxed at a rate of 12% (15% in 2027/28) where the TRF conditions are met.  This is a significant tax savings compared to the standard Income Tax and Capital Gains Tax rates that might otherwise apply.

To qualify for the TRF, an individual must meet the following criteria:


• Receive a benefit or capital payment from an offshore trust.


• Have used the remittance basis for any tax year before 6 April 2025.


• Designate the amount of unremitted FIG on their tax return in the year the benefit or payment is received.



While the TRF presents a valuable opportunity, it requires a thorough understanding of the unremitted income and gains within the trust structure. We are recommending that clients who believe they may be able to utilise the facility should review their position carefully now so that they understand the impact on their specific circumstances at the earliest opportunity.  We expect that it may also be helpful to engage with HMRC in due course to ensure the correct application of the rules. 
 
HMRC expects the TRF to be a popular facility, forecasting £9 billion in revenue from the proposed changed over its three-year lifespan.

A Further Loan Charge Review
By Jon Preshaw

The Budget included an announcement of a further review of the Loan Charge provisions.  This will be the second such independent review.  The Budget announcement indicated that the review was intended to “…help bring the matter to a close for those affected whilst ensuring fairness for all taxpayers…” but the precise scope of the review is to be determined.  

We continue to advise a large number of clients on the consequences of Disguised Remuneration schemes and the Loan Charge.  It appears that a very significant number of these arrangements have still not been settled and our view, based on our experience with clients, is that this is likely to be a result of the complexity of the rules creating technical difficulty and financial difficulties for affected taxpayers.  The proposed review is therefore welcome, and it is hoped that it will be sufficiently wide in scope to address the various anomalies which the combination of complex legislation, case law and HMRC practice have created.