Tax Disputes and Investigations – December 2022

Electronic Sales Suppression and Disclosure Facility

HMRC have arrested five people suspected of being behind a multimillion-pound global fraud involving the use of software to manipulate sales data to evade tax. This follows a co-ordinated crackdown on suppliers and users of electronic sales suppression (ESS) software with the Joint Chiefs of Global Tax Enforcement (J5), tax authorities from the UK, Australia, US, Netherlands, and Canada. Following this action, HMRC have made available a voluntary disclosure facility available to encourage anyone using ESS to come forward to correct any irregularities. By making a disclosure, those who have deliberately manipulated their till system to evade tax could see their financial penalties reduced. It is likely that HMRC already hold considerable information about businesses which have used ESS software and those who do not come forward can expect HMRC to respond very robustly. The timeframe for making a disclosure under the facility is extremely tight, with HMRC requiring a notification to be made by 5th January 2023 and a full account of the irregularities to be made by 28th February 2023. Where you believe that a client may need to make a disclosure involving Electronic Sales Suppression, it will be important to consider whether to utilise the disclosure facility or whether a disclosure under Code of Practice 9 may be more appropriate.

High Income Child Benefit Charge (‘HICBC’)

The Court of Appeal decided the Wilkes case this month in favour of Mr Wilkes ([2022] EWCA Civ 1612). The court found that the HICBC could not be recovered by way of a discovery assessment under s29 TMA 1970. HMRC have apparently decided not to appeal the decision. On the face of it, the decision will come as a significant relief to many taxpayers. However, the importance of the decision has already been undermined by retrospective changes introduced in Finance Act 2022. The changes mean that, notwithstanding the Court of Appeal’s decision, an assessment will still be valid unless an appeal was notified to the tribunal before 30 June 2021 and the grounds of appeal refer specifically to the invalidity of the assessment on the basis the HICBC was not income and therefore could not be assessed under s29 TMA 1970. We expect that there will be numerous debates around the specific wording of appeals in this context. We hope that a tribunal would ultimately take a sympathetic approach to such issues, particularly where appeals have been made by unrepresented taxpayers.

HMRC Activity – recent ‘nudge’ letters

A recent initiative involves ‘nudge’ letters being sent to non-UK resident companies where HMRC believe there is a risk that either the company has failed to file non-resident CGT returns or ATED returns. The letters may also reference the Transfer of Assets Abroad provisions. There are a large number of potentially complex issues which will need to be considered if one of these letters is received, including the company’s own liabilities, whether there is a risk that the company may be UK managed and controlled, and the interaction between the company’s tax position and that of its shareholders or anyone entitled to receive income from it. HMRC are likely to have issued these letters based on specific information and therefore are highly likely to follow up in the absence of a response. HMRC continue to rely heavily on the use of ‘nudge’ letters to encourage voluntary compliance. Dealing with these letters can involve difficult issues for advisers. Despite their wide-spread use, the interaction between these letters and the penalty provisions, and the status of a ‘certificate of tax position’ issued along with the letter are far from clear. If clients receive such letters, it will be important to take stock and consider how best to respond. Ideally, clients should be proactive about assessing their position before they receive such letters.

Loan Charge Assessments and Determinations

HMRC have also indicated that they will be issuing assessments and determinations to taxpayers who they believe are impacted by the Disguised Remuneration Loan Charge in 2018/19. The normal 4-year assessing time limit for the charge will expire on 5 April 2023 and HMRC have committed to dealing with these cases before the end of March next year. Our recent experience is that HMRC’s letters raise a range of issues including the complex provisions which carve out loan charge cases where there has been ‘sufficient disclosure’ at an earlier date. In addition, it will also be necessary to consider whether the primary conditions for a discovery assessment at s29 TMA 1970 are satisfied.

Notable Recent Cases

In Ravicher [2022] UKFTT 00454, the tribunal rejected an appeal against HMRC’s refusal to postpone the payment of tax due on discovery assessments. HMRC agreed postponement of substantial liabilities but were unwilling to postpone tax due on £500,000. This was the amount of untaxed remittances identified in an outline disclosure submitted for Mr Ravicher under the Worldwide Disclosure Facility. The judge felt that HMRC’s approach was generous and identified various apparent inconsistencies in the disclosure. The result was that the judge had no hesitation in refusing the appeal. It can be expected that, given the pressure to increase yield from enquiries and investigations, HMRC’s approach to postponement will harden over time. It will therefore be important for advisers to ensure that postponement applications are carefully drafted and that a client’s payments on account are managed to prevent unforeseen tax costs arising. In Futcher [2022] UKFTT 00401, substantial penalties were upheld for a deliberate failure to file a return. Mr Futcher had initially not filed his 2015/16 return on the basis that he was unable to afford to pay the tax due. He subsequently suffered very severe health problems and his failure to file a return continued for more than 12 months. The tribunal found that, on the plain words of the penalty legislation, a penalty was due in the deliberate range because Mr Futcher’s initial intention was not to file his return on time notwithstanding that he may subsequently have had good reason for the continuing failure as a result of his illness. The tribunal also considered whether ‘special circumstances’ would apply to reduce the penalty but concluded that they did not. Clearly there are sometimes circumstances under which returns are filed late and the case emphasises the need to ensure that such situations are carefully managed.