Our regular newsletter highlighting recent developments in the law and practice around Tax Disputes and Investigations.
HMRC’s Annual Report
HMRC published its 2022/23 annual report in July. The report usually throws up some interesting information and this year’s report is no exception. Some specific highlights from the report which we noted are that -
HMRC’s overall yield from compliance activity increased this year to in excess of £34 billion. This figure is made up of a number of different components, so as well as including yield, which was obtained from investigations and enquiries, the figure also includes sums which HMRC anticipate will be saved as a result of changes made to legislation, and savings which will result from changes in taxpayer behaviour. There is clearly a high degree of estimation involved in at least some of these figures but they are an interesting reflection of HMRC’s continuing priorities. In particular, the report makes clear that HMRC will continue to utilise nudges and prompts and see these as a central element of their compliance strategy going forward.
HMRC reference a new risk-assessment service, which will be introduced in 2023/24 and which will enable them to better utilise data analytics to target both Corporation Tax and VAT risks for enquiry. It will be interesting to see whether this result in more effective targeting of HMRC’s investigations.
HMRC’s compliance strategy continues to involve a significant focus on criminal prosecution. The average custodial sentence for tax offences was in excess of 2 years. The average value of HMRC’s criminal investigation cases has increased to £6.2 million (3 times the value in 2016/17). HMRC’s recent announcement of changes to the Code of Practice 9 investigation process (which we highlighted in last month’s newsletter) are likely to result in a continuation of this trend.
Corporate Criminal Offence
The Corporate Criminal Offence of Failing to Prevent the Facilitation of Tax Evasion (known as the ‘CCO’) was introduced in Finance Act 2017. The offence applies at an entity level where an employee, agent, or individual acting on behalf of the entity facilitates tax evasion by another person. The offence can apply to evasion both inside and outside the UK. The offence is one of ‘strict liability’, so once the act of facilitation has been proved to a criminal standard, the only defence available to an entity is to demonstrate that it had reasonable procedures in place to prevent the facilitation occurring including a comprehensive risk assessment, staff training, and appropriate and proportionate procedures.
Although there have not yet been any prosecutions brought under the provisions, HMRC published their most up to date information about the offence in July. They confirmed that they are presently conducting 9 investigations but have not yet made a charging decision in those cases. In addition, they have 25 cases under consideration for investigation. The businesses under investigation or being reviewed include those in a range of sectors including accountancy and legal service providers, software providers, labour provision and transport.
Our view is that HMRC’s attempts to push up the quality of work carried out under Code of Practice 9 will inevitably lead them to consider a greater number of cases under CCO provisions. We would therefore urge any business which has not yet addressed the requirement for reasonable prevention procedures to do so urgently.
Employee Ownership Trusts
The last few years have seen a growing trend towards the use of Employee Ownership Trusts (‘EOTs’). An EOT is intended to encourage employee ownership of shares and provides some very attractive tax advantages.
Qualifying bonuses of up to a maximum of £3,600 per annum per employee can be made subject to income tax relief and no IHT charges will arise on the transfer of shares into an EOT. Perhaps the most significant relief is that shareholders do not pay any capital gains tax if they sell more than 50% of the share in a company to an EOT where the company employees are the beneficiaries. HMRC have increasing concerns that some of these reliefs may be abused.
HMRC are consulting around reform of the taxation of Employee Ownership Trusts and Employee Benefit Trust rules to ensure that the primary focus is on encouraging employee engagements and to reduce opportunities for avoidance and this may lead to restrictions in the available reliefs. In the meantime, any considering the implementation of an EOT should carefully consider the risk of HMRC challenge in future and ensure that relevant documentation is retained.
Case law update
The High Court in Adams and others v FS Capital and others [2023] EWHC 1649 (Ch) held that the sale of loans which had been held by trustees of EFRBS and similar arrangements was void. This is an important case for users of contractor loan and EBT schemes who have not repaid loans or settled with HMRC. A number of trustees sold the loan book that they held to FS Capital, who then took steps to demand repayment. The High Court found that the sale of the loans by the trustees was a breach of trust because there was an improper motive for the transfer. This means that the sale was void and therefore FS Capital had no standing to claim repayment. Borrowers will still need to address the tax consequences of the outstanding loans, and it is likely that further attempts will be made to close down the trusts. However, in the meantime, the decision will be a relief to those who have been faced with claims for repayment.
Hextall v HMRC [2023] UKFTT 390 (TC) is another in a long line of cases dealing specifically with the High Income Child Benefit Charge provisions but which has potentially much wider application. The case involved a failure to make returns including the High Income Child Benefit Charge. Because no returns had been made, HMRC could make assessments falling within the normal 4 year time limit, but in order to make assessments for periods falling outside that period, it would be necessary for there to have been a failure to take reasonable care or for Mr Hextall to be unable to demonstrate he had a reasonable excuse for failing to make a return. The tribunal took the view that Mr Hextall did have a reasonable excuse based on his lack of understanding of the rules and the confusing nature of the High Income Child Benefit forms. We understand that the case is not going to be appealed by HMRC. The decision is a useful illustration that, at least as far as tax is concerned, a lack of awareness of the law can be a reasonable excuse (despite the famous legal maxim). The reasoning in the case is potentially directly relevant to a range of other issues where taxpayers may not have been aware of their legal obligations.
In Illuminate Skin Clinics Ltd v Revenue & Customs [2023] UKFTT 547 (TC), the First Tier Tribunal (‘FTT’) considered whether standard rate VAT should be applied to cosmetic skin treatments. The FTT found in HMRC’s favour in deciding these services are not eligible for ‘medical services’ VAT exemption under VAT Act 1994, Schedule 9, Group 7, Item 1. Despite the treatments being carried out by a registered medical professional, the judge found the aesthetics, skincare, and wellness treatments fell outside the definition of ‘medical’ care. The appellant failed to satisfy the court that the principal purpose of administering the treatments went beyond cosmetic in nature and therefore did not constitute ‘medical’ care. A lack of ‘diagnosis’ also presented an issue in that patients refer themselves to the clinic to request treatments, rather than the treatment being prescribed by a medical professional. HMRC are targeting the ‘injectables’ industry with more enquiries and VAT inspections are likely following this judgement. It is important for businesses offering similar services to review their VAT position in light of the decision.
If you would like to discuss the implications of any of the above, please do not hesitate to get in touch.
