Our regular newsletter highlighting recent developments in the law and practice around Tax Disputes and Investigations.
Big step up in HMRC compliance activity
After a noticeable reduction during and since the pandemic lockdowns, HMRC has recently invested heavily in additional staff. HMRC "enforcement and compliance" headcount has risen by over 3,000 in the past year, including over 500 in the Fraud Investigation Service. This additional resource is expected to finally boost HMRC investigation levels beyond where they were before Covid-19.
One immediate sign of this is that offshore "nudge" letters issued by HMRC were up by nearly a third in 2022/23 compared to the previous year. Over the same period HMRC requests to overseas tax authorities for information on UK residents doubled. Offshore arrangements remain a key area of focus for HMRC investigators.
The Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023
New legislation will require digital platform operators to report information regarding transactions, including income earned by sellers on the platform, to HMRC. The requirements apply to rental of immovable property, personal services, sale of goods and rental of any mode of transport. When the regulations are implemented, data will be readily available to HMRC from UK and non-UK based platforms and will obviously be used to check the accuracy of customers tax liabilities.
These new regulations will see platforms such as Air B&B, Just Eat and Uber being required to report from 1 January 2024. Failure to meet reporting standards could see operators fined. This brings the UK into alignment with similar regulations which are already in place across Europe and creates greater transparency and ability for HMRC to tackle non-compliance.
Latest nudge letters – 2022 Gift Hold Over Relief claims
HMRC are issuing their latest round of nudge letters from the end of August 2023 targeting taxpayers who have made a claim for gift holdover relief under Section 165 and 260 TCGA 1992. It is expected that taxpayers in receipt of these letters may have failed to submit the necessary claim form or that the form submitted was incomplete. Like most nudge letters, action is required by the recipient within 30 days.
Two EBT cases with different outcomes
Two cases have been heard by the First Tier Tribunal involving the same EBT scheme. Although the cases addressed the same scheme, the tribunals in both cases came to the opposite conclusion on whether penalties should apply.
The first case, Magic Carpets (Commercial) Ltd v HMRC, involved Regulation 80 determinations made outside the normal four-year assessing time limit and penalty determinations issued for careless submission of forms P35. The determinations related to a scheme involving the payment of sums to an Employee Benefit Trust and subsequent loans to shareholder/directors of Magic Carpets Ltd. The precise mechanics of the scheme involved a payment being made to a Jersey recruitment and resourcing consultancy which, after deduction of fees, would make contributions to an EBT. The contributions were then allocated to sub-funds and loaned to the shareholder/directors. The arrangements purported to avoid both PAYE and NIC and also to enable a corporation tax deduction to be claimed. It was accepted by both HMRC and the taxpayer that the scheme did not have its intended effect.
The tribunal found that the taxpayers were told that the scheme was approved by HMRC and was also supported by an opinion from Tax Counsel.
There were a number of apparent errors in the implementation of the planning, and the tribunal’s view was that in a number of ways the company directors had been careless in their conduct (for example by failing to seek confirmation of the efficacy of the scheme). However, the tribunal found that the directors’ (and by extension the company’s) carelessness was not the operative cause of the under-assessment of tax. The tribunal held that, even if the directors had sought independent confirmation of the efficacy of the scheme, the payments would not have been subjected to PAYE and NIC. The case law as it stood at the time (before the decision in the Rangers case) indicated that PAYE and NIC was not due.
By contrast the tribunal in Delphi Derivatives Ltd v HMRC found that a penalty was due for a careless inaccuracy in filing forms P35 in respect of exactly the same arrangements. The tribunal in that case found that the company failed to take reasonable care because its adviser had indicated that there was a risk in entering into the arrangements and that the company should seek an independent Counsel’s opinion. The tribunal held that the company took no action in response to this advice and that it was the lack of any action at all (rather than the specific failure to obtain Counsel’s opinion) which was careless. The tribunal then went on to find that a further implementation of the same scheme in a later period gave rise to a deliberate penalty because the arrangements were not properly implemented.
Finally, the tribunal took a different approach to the question of causation from that taken in Magic Carpets. The tribunal’s approach was to determine whether there had been an error and then whether the company through its directors had taken reasonable care to prevent errors arising in the general sense (rather than the specific error which did occur). This approach to causation did not then require the tribunal to consider whether a second opinion would have produced a different result.
It is possible that one or both of these cases will be appealed. However, for the time being, the decision in Delphi Derivatives (particularly in respect of the ‘deliberate’ error) is likely to give HMRC encouragement that penalties can be assessed in both Clavis Herald and other EBT cases, and that assessments can be made based on the extended time limits.
If you would like to discuss the implications of any of the above, please do not hesitate to get in touch.
