Tax Disputes and Investigations – January 2023

by | Jan 29, 2023 | Newsletter

HMRC ‘Nudge’ Letters

HMRC have kicked off 2023 with yet another batch of nudge letters. This round of letters targets taxpayers who they suspect have generated income from:
  • Online content creation on digital platforms
  • Online marketplace sales
HMRC are asking the recipients of these nudge letters to either make a disclosure or state they have nothing to declare. This comes as increasing numbers of individuals are making increased sums from online platforms. It is understood HMRC’s digital campaign is being coordinated with other members of the Joint Chiefs of Global Tax Enforcement (J5) which means the scope of the information available to HMRC is on an international scale and not only confined to a UK customer base. It is also understood HMRC are utilising third party information detailing ‘non-traditional’ forms of payment, such as income in the form of Amazon wish lists, crypto, the use of assets and other gifts such as holidays, clothes and so on. Anyone receiving one of these letters has been asked by HMRC to act and should take advice on that basis.

High Risk Wealth Programme (‘HRWP’)

HMRC have published updated information in relation to its High Risk Wealth Programme implemented by HMRCs Wealthy Unit. Complex tax risks associated with wealthy individuals are entered into the programme and will be accelerated by a team of HMRC specialists who have direct access to wide ranging HMRC resource. There are various reasons why a taxpayer may be included in the programme. The key considerations are:
  • High monetary value risks
  • Complex risks, often with technical offshore elements
  • A perceived high-risk attitude to tax
  • A history of non-compliance
  • Potential for risks to result in litigation
One of more of these may be a factor in HMRC’s decision to include a taxpayer in HRWP. HMRC intend to write to the taxpayers who are included in the programme and invite them and their advisors to a meeting with senior HMRC staff to explore ongoing issues. If a client is notified of their inclusion in HRWP, it will be important for clients and advisors to recognise that HMRC will be well-resourced (with access to both internal resources and external Counsel) and that HMRC will expect to work intensively and over a relatively short period of time to resolve matters. Our experience of HMRC’s parallel programme for large corporate taxpayers (the High Risk Corporate Programme) is that there were both positive and negative aspects to the process. In some circumstances, clients may benefit from being part of the programme as it will enable them to access HMRC specialists more quickly than would otherwise be the case.

Electronic Sales Suppression – Deadline extended

Following on from last month’s update concerning HMRC’s Electronic Sale Suppression Disclosure Facility, HMRC have unsurprisingly confirmed the deadline to make use of this facility has been extended to 9 April 2023. HMRC have confirmed thousands of businesses, typically high street restaurants and other food outlets, have been making use of ESS tools.

Register of Overseas Entities and HMRC activity

HMRC have publicised a project which aims to make use of the data which will be available to them as a result of the introduction of the Register of Overseas Entities (‘ROE’). Reports from non-UK companies holding UK property must be made to Companies House by 31 January 2023. HMRC intend to use the ROE data they receive to follow up on a variety of tax risks, including both corporate risks and personal tax risks for beneficiaries of structures holding UK property. We have already seen a few ‘nudge’ letters sent to non-UK companies holding UK property. In addition, we have seen a limited number of new, more targeted enquiries into UK resident beneficiaries in recent months (although this may be driven by CRS data rather than information they have already received through the ROE). HMRC are asking for upfront disclosure of any irregularities to be made before 28 February via the Worldwide Disclosure Facility. This is because they expect that the process of completing ROE registrations will flush out tax issues. This does not give a lot of time to make a disclosure if issues are identified. It is also likely that, where unreported tax liabilities are identified after 28th February, HMRC will be looking to understand why a disclosure was not prompted by work carried out to support the ROE filing. As well as the complexities around taxation of non-UK structures generally, there are risks of further complication caused by the conflation of the concept of Registrable Beneficial Owner with control for tax purposes. We frequently come across this issue in the context of the UK PSC register. Taken together, there are several potentially challenging issues which HMRC’s project is likely to present for both administrators of non-UK structures and UK resident settlors and beneficiaries.

Case Law of interest

In Kensall (2023) TC 08673 and Goodall (2023) 08680, the tribunal was (once again) considering the application of penalties in cases where taxpayers had failed to return tax payable as a result of the High Income Child Benefit Charge (HICBC). In both cases, HMRC were unable to demonstrate that ‘nudge’ letters had been received and therefore could not rely on them in arguing there was no reasonable excuse. Of more general assistance is the commentary about ignorance of the law in Kensall. In answer to the charge that the taxpayer ought to have known about changes to the law brought about by the HICBC charge provisions, the judge quoted his own decision in Leigh Jacques v HMRC UKFTT 311 as follows – “But equally it seems to me unreasonable for HMRC to expect taxpayers to trawl through HMRC’s website and the prolific number of public notices to see whether they might be affected by a tax change of which they have no knowledge… …In my view it is not incumbent on the objectively reasonable taxpayer without notice of a change in tax law to go rummaging through all of HMRC’s information on the off chance that there might be something which is hidden away in it which is relevant to his tax position.” This is a helpful restatement of previous case-law, and such arguments are likely to continue to be helpful in other failure to notify cases. In particular, these arguments may have application in respect of the Failure to Correct penalty regime. An important case around the operation of disguised remuneration schemes was also published in January. Wired Orthodontics Ltd (2023) TC 08679 involved a tax avoidance scheme under which funds were transferred to company directors. The company purchased gold bullion on behalf of its directors. The directors in turn promised to take on an obligation to pay an equivalent sum to an Employee Benefit Trust. The gold was immediately sold, and the directors’ loan accounts credited. It is not particularly surprising that the tribunal found that arrangements gave rise to a PAYE and NIC liability on the basis that the credits to the directors’ loan accounts constituted earnings. The case was however notable because the tribunal also found that no Corporation Tax relief was available for the costs of acquiring the gold. The tribunal held that, because it was a purpose of the company to obtain Corporation Tax relief for the payment, there was a duality of purpose, and no deduction was available. This is an odd decision and one which (in our view) is likely to be reconsidered if there is an appeal. For the time being, however, this will encourage HMRC to run similar arguments in other disguised remuneration disputes. The tribunal also briefly covered whether counteraction was required under the GAAR, but this was not addressed as the tribunal found for HMRC on other grounds. However, it is an illustration that HMRC are likely to seek GAAR counteraction alongside (and not in preference to) other technical arguments.
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