UK: Weekly Tax Update - Monday 19 March 2012

Last Updated: 28 March 2012
Article by Richard Mannion

1. GENERAL NEWS

1.1. Budget 21 March 2012

Initial thoughts and commentary on the Budget announcements will be available on the Budget page of our website from Wednesday afternoon onwards.

www.smith.williamson.co.uk/budget

2. PRIVATE CLIENTS

2.1. Whether HMRC has jurisdiction to consider a discretionary discretion

In the case of Michael Prince and related appeals (TC01852) the First Tier Tribunal considered whether it had the necessary jurisdiction to consider an appeal against HMRC's refusal to apply Extra Statutory Concession (ESC) A19.

ESC A19 states that arrears of income tax or capital gains tax may be given up if they result from the Inland Revenue's failure to make proper and timely use of information supplied by—

  • a taxpayer about his or her own income, gains or personal circumstances;
  • an employer, where the information affects a taxpayer's coding; or
  • the Department for Work & Pensions, about a taxpayer's State retirement, disability or widow's pension.

The appeals considered by the Tribunal all concerned HMRC's refusal to give up tax attributable to PAYE underpayments.

HMRC maintained that the FTT had no jurisdiction to adjudicate on HMRC's application of, or refusal to apply, an ESC (as was the case for its predecessors, the General and Special Commissioners and the VAT and Duties Tribunal). In its view any dispute relating to an ESC should be determined by way of judicial review.

The Tribunal concluded that it did not have the requisite jurisdiction saying:

"The tribunal is not being asked, as in Oxfam, to determine how much tax is due—that has already been agreed—but whether HMRC should be required to exercise their discretion not to collect the tax. That is not a tax dispute at all, but a matter governed by public or administrative law, and precisely the kind of issue which must be determined by judicial review. Nothing in the legislation could be construed as conferring any jurisdiction to determine such an issue on this tribunal, nor do I see any basis on which an argument of legitimate expectation that a statutory duty (as HMRC's obligation to collect tax which is due is) will, or should, be waived could properly be regarded as the province of a tribunal whose task is to determine the amount of tax which is due: in that, there is a clear distinction to be drawn between this case and Oxfam.

I conclude, therefore, that this tribunal has no jurisdiction to consider whether or not HMRC have exercised their discretion correctly, or reasonably, and it would correspondingly be purposeless for it to hear evidence and make findings about whether or not any individual appellant comes within the ESC as a matter of fact, since it would be unable to give effect to any such determination. In addition, as I have concluded that there is no jurisdiction in the tribunal in relation to an ESC, I see little purpose in my speculating what the jurisdiction might have been had I come to the opposite conclusion."

The Tribunal went on to consider whether it was possible for taxpayers to challenge a form P800 (the non-statutory income tax calculation) before the First Tier Tribunal.

HMRC argued:

  • There is no right of appeal against a P800, because it is no more than a means of reconciling PAYE records after the end of each tax year.
  • The form P800 had no statutory basis, and does not determine a liability—that is done only when they issue a coding notice which gives effect to the P800.
  • There is no statutory avenue of appeal.
  • The only way in which an appeal could be mounted would be to satisfy the tribunal first that a disputed P800 amounted to an assessment. HMRC accepted that in one decision of this tribunal (Robert E Clark, TC01164) it was decided, also in the context of an application to strike out an appeal, that it was "clearly arguable" that a P800 was an assessment.

The Tribunal concluded that the form P800 was not an assessment saying:

"30. At first sight it would be odd if HMRC were right. Here, the taxpayers do not challenge the calculation of the tax said to be due, but one has to ask, what would be their position if they did? There may be a multitude of reasons why HMRC have miscalculated the tax, by using incorrect figures, by failing to take account of a relief or allowance to which the taxpayer is entitled, or by reason of an arithmetical error, to identify only obvious examples. No doubt in many cases the astute taxpayer would write to HMRC with the necessary information or corrections, and the disagreement would be resolved in correspondence, but if there remained a disagreement it is difficult to accept that the taxpayer would be left with no remedy. I have concluded, however, that he is not, and that Mr Vallat is right to say that his course is to appeal against a new or amended notice of coding, in accordance with reg 18 or 19 of the PAYE Regulations.

31. I reach that conclusion by taking into account the context in which a P800 is issued. It reflects, as Mr Vallat rightly said, a reconciliation of the taxpayer's PAYE record. It is not the result of the ordinary assessment process, by which—quite outside the PAYE system—a taxpayer's income, gains, allowances and reliefs are determined, a calculation of the tax is made, the calculation is notified to the taxpayer and (subject to appeal) the amount so calculated becomes payable; nor is it akin to the adjustment of a self-assessment return, by closure notice or discovery assessment. It is, rather, an adjustment made in the course of the mechanical process I described at the beginning of this decision by which the PAYE system attempts to deduct the correct amount of tax over the course of a tax year. That some of that tax may be due in respect of a previous year seems to me irrelevant, since it is one function of the PAYE system to recover such under-payments.

32. As the challenge of an aggrieved taxpayer is to the manner in which the PAYE system is being applied to his affairs, it seems to me appropriate that his appeal route should be one provided for by the same system. Regulations 18 and 19 provide such a route, and it is adequate—indeed, the facts and matters to be taken into account by a tribunal dealing with an appeal under one of those regulations are exactly the same as those which would be taken into account in an appeal under s 31."

www.financeandtaxtribunals.gov.uk/judgmentfiles/j6268/TC01862.pdf

3. IHT & TRUSTS

3.1. New guidance on Gift Aid declarations: What charities need to do

In February, HMRC Charities published updated guidance on Gift Aid declarations and provided new model declarations. HMRC has received a number of queries in regards to these changes and has provided further information to clarify matters.

The mandatory information on the forms ensures that the donor is making an informed declaration, and understands the consequences if they have not paid enough tax to cover all the donations they make under Gift Aid, not just those to one charity or CASC. By incorporating the required information set out in the guidance on the Gift Aid declaration form, charities can be certain that HMRC will not challenge the associated Gift Aid claim on the grounds that the donor gave a valid declaration.

The Gift Aid declaration does not need to incorporate all the information set out in HMRC's model declaration in the guidance if the charity provides that information to donors in a different way, for example if volunteers explain the rules verbally using a set script that includes the mandatory information. But incorporating the information on the form is the simplest way for charities to show they have explained the tax consequences to the donor and ensure that the donor's Gift Aid declaration is valid.

Charities do not need to change their existing Gift Aid forms immediately; HMRC will continue to accept Gift Aid claims on donations made using forms based on the wording in the old model declaration until 31 December 2012. However where possible charities should seek to incorporate any additional information required under the new guidance as soon as possible, or amend their processes to ensure that staff and volunteers are providing the correct information to donors.

Finally, where a charity has already received a Gift Aid declaration based on the old wording in the guidance they do not need to ask the donor to supply a new declaration with the new wording to support that donation for gift aid purposes. It is only new and where charities are replacing enduring declarations going forward that need to be based on the revised wording. Charities may chose to replace their existing enduring declarations with new ones based on the new guidance if they so wish but there is no requirement that they do so.

www.hmrc.gov.uk/news/new-guid-giftaid.htm

www.hmrc.gov.uk/charities/gift_aid/declarations.htm

4. BUSINESS TAX

4.1. PHI premiums for equity partners – a reminder

The rules for PHI premiums for equity partners are relatively simple:

  • the PHI premiums do not qualify for tax relief,
  • any income benefits are free of tax.

4.2. Property losses anti avoidance

On 13 March the Government announced that it will introduce new legislation, effective from 13 March 2012, to counter tax avoidance that relies on property business loss relief or post-cessation property relief. Losses from property businesses with a capital allowance connection or a relevant agricultural connection, can be offset against general income (ITA s120) without the restrictions imposed on sideways relief for trade losses (ITA s64) through the commercial activities requirement (ITA s66) and the annual Ł25,000 cap for non-active partners (ITA s74A and s74C). An alternative method of obtaining loss relief against general income is through claiming post cessation trade or property relief (ITA s96 and s125 respectively). In response to disclosures made to HMRC, action has been taken to tighten the rules around loss relief in these areas, where the loss relief is claimed as a result of 'relevant tax avoidance arrangements'.

Post cessation relief for a trade or property business is available where a qualifying payment is made (one made for remedying defective work done, or by way of damages, or for meeting legal or professional expenses, or in connection with insurance for such liabilities, or for the purpose of debt collection in respect of a debt previously brought into account for calculating profits), or there is a qualifying event in respect of a debt previously brought into account in calculating profits (such as a release as part of an insolvency arrangement).

A relevant agricultural connection for the purpose of establishing a property loss relievable against general income is one which was carried on in relation to land that consists of or includes an agricultural estate and the expenses in relation to the agricultural estate related to those deductible for maintenance, repairs, insurance or management and otherwise in respect of interest payable on a loan.

Post cessation trade and property relief

Draft legislation introduces new ITA s98A which states that post-cessation trade relief is not available to a person in respect of a payment or an event which is made or occurs directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements. Relevant tax avoidance arrangements were those to which the person was a party and the main purpose, or one of the main purposes, of which is the obtaining of a reduction in tax liability as a result of the availability of post-cessation trade relief. This section also applies for ITA s125 (post cessation property relief).

With respect to post cessation trade relief, this new provision has effect for payments made on or after 12 January 2012, unless they arise as a result of an unconditional obligation in a contract made before that date. With respect to post cessation property loss relief the new provision has effect for payments made on or after 13 March 2012, unless they arise as a result of an unconditional contract made before that date

Post loss in connection with a relevant agricultural business

Draft legislation introduces new ITA s127B which prevents sideways property loss relief where the business has a relevant agricultural connection, where allowable agricultural expenses deducted in calculating the loss arise directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements. Relevant tax avoidance arrangements here are arrangements to which the person is a party and the main purpose, or one of the main purposes, of which is the obtaining of a reduction in tax liability by means of property loss relief against general income.

This new provision has effect for expenses arising as a consequence of arrangements, or transactions forming part of arrangements, entered into on or after 13 March 2012, unless they were incurred as a result of unconditional obligations in a contract made before that date.

www.hmrc.gov.uk/budget-updates/march2011/index.htm#13Mar12

4.3. Speech by Exchequer Secretary to the Treasury

On 8 March 2012 David Gauke MP spoke to the Oxford Centre for Business Tax on the government's aim to create the most competitive tax system in the G20. On certainty and predictability he highlighted the difficulty of drafting new legislation correctly at the first attempt, and the value added by correcting errors from the consultation process.

On tax avoidance, and following the announcement of retrospective legislation in respect of arrangements adopted in the banking sector, he commented:

"Retrospective legislation should only be used in exceptional circumstances. But where a taxpayer has signed a code of practice agreeing not to engage in aggressive tax avoidance and where government has previously legislated to close down very similar loopholes and, in doing so, put up a very clear 'keep off the grass' sign and where failure to act would cost hundreds of millions of pounds, I believe that this decision was justified. ....

Aggressive and highly contrived tax avoidance merely serves to chip away at the sustainability of our tax regime.

Greater tax stability and certainty can't be a one way street.

It depends on constructive, positive and pro-active engagement from businesses.

It's only by working together with full transparency and open engagement that can we secure a stable and competitive tax system."

On improving tax transparency and making tax administration easier for businesses, he also announced:

".. from this April we will be introducing three new digital services. Business will be able to register for all the main business taxes in a single online process with a new Online Tax Registration Service or 'Registration Wizard'.

Those setting up a new company at Companies House will be able set up for corporation tax at the same time removing duplication and there will be a new Tax Dashboard that will enable businesses to see simply and clearly in one place online their position on multiple taxes with HMRC."

www.hm-treasury.gov.uk/speech_xst_080312.htm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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