UK: Tax Update - 14 January, 2013

Last Updated: 1 February 2013
Article by Smith & Williamson

1 General news

1.1 The validity of a discovery assessment and the Charlton case

HMRC has lost its appeal against the First-tier Tribunal decision in the case of Dr Michael Charlton and Others (TC01317)

This was a case where the taxpayer had given substantial disclosure of the computational aspects of a scheme to use a capital loss purported to be generated on a life insurance policy in circumstances where there was no economic loss, to cover gains realised on other assets. It was determined by the High Court and Court of Appeal in a case involving another taxpayer that the scheme failed from a technical perspective.

Mr Charlton's tax returns were submitted after the decision of the High Court, with the DOTAS scheme reference number. An oversight within HMRC meant that not all the tax returns with the relevant SRN were enquired into, so that HMRC were out of time to raise enquiries into Dr Charlton's and others' tax returns. Thus HMRC sought to raise discovery assessments.

The First-tier Tribunal concluded that there had been sufficient disclosure for an officer to be aware that there was a potential insufficiency and to have considered the relevant law or sought further advice internally within HMRC which meant that the conditions for making a discovery assessment were not present.

The Upper Tribunal has reached the same conclusion, but in contrast to the First-tier Tribunal's decision that "...the mere fact that the notional officer is to be treated by s 29(6) as being aware that, once an SRN has been allocated to a particular scheme, an AAG1 form, with relevant scheme information on it, must exist, does not mean that the notional officer must be treated as being aware of the content of that information....", the Upper Tribunal concluded that:

"..on the construction of s 29(6)(d)(i), the form AAG1 submitted by the promoters of the scheme should be regarded as information made available for the purpose of s 29(5). The SRN was included in each Respondent's tax return, but on a different page to the white space disclosures of the scheme and the pages setting out the capital gains computations and the figure for income on the surrender of the policy. We are, however, in no doubt that, first, the existence of the form AAG1 could reasonably have been expected to have been inferred by the hypothetical officer, and secondly, that the physical separation of the SRN number from other relevant entries on the tax return would not have prevented an officer from making the necessary link between them so as reasonably to infer the relevance of the form AAG1 to the insufficiency...."

This decision helpfully clarifies that in assessing whether the discovery assessment conditions have been met, providing the level of disclosure is of sufficient quality, an officer of HMRC can be treated as being aware of the implications of that disclosure in terms of a potential tax insufficiency.

1.2 House of Lords enquiry into Government policy on consultations

The House of Lords Secondary Legislation Scrutiny Committee has completed its inquiry into the Government's new policy on consultations.

By issuing new consultation principles in 2012 the Government wished to apply greater flexibility to consultation processes than the previous guidance under the 2008 Code of Practice seemed in their opinion to allow.

The report on the inquiry comments as below and makes a number of recommendations for improvement of the consultation principles:

The new Principles may allow the Government to make legislation more quickly, but there is a risk that the resulting statute will be less robust because rushed consultation processes make it too difficult for external interests to provide expert critique at the right time. In the light of the evidence, we call on the Government to recognise that the July 2012 Principles are failing to provide the consistency and transparency that others look for in consultation exercises.

We urge the Government to launch an independent, external review of their new approach to consultation without delay, and to publish the outcome by Easter 2013.

If handled properly, consultation improves the formulation and implementation of policy. This is an objective of the Government, but we consider that it will be inadequately achieved unless the July 2012 Principles are reviewed and revised.

2 Private client

2.1 Penalties for late payment of tax where there had been a refusal of an application for a time to pay arrangement

Stephen Brand has succeeded in his appeal to the First-tier tribunal against a penalty for late payment of tax arising from the sale of land generating a capital gain of £39,313 payable by 31 January 2011. The proceeds from the disposal had not been paid to Mr Brand, who was nevertheless confident he could borrow the money to pay the tax. On the advice of his local tax office he wrote on 9 February to HMRC Liverpool requesting time to pay, but this was refused on 20 March. He then borrowed the money and paid the tax on 12 April 2012. The penalty of £1,965 was raised as he had not paid the tax by 2 March 2011.

Stephen Brand's brother also had a similar tax liability on the disposal and had applied for and been granted time to pay after the January 2011 deadline. In the circumstances of the case the Tribunal concluded there was a reasonable excuse for non-payment and allowed the appeal.

2.2 Whether HMRC can challenge a main residence election

The First-tier Tribunal has recently considered the case of Ellis v Revenue & Customs. The case concerned an election made by taxpayers to decide which of two private residences should be regarded as the main one for the purposes of capital gains tax exemption. HMRC accepted that the taxpayer had two residences but did not accept that the one that they elected was in fact the main residence.

Property 1 had been purchased on 31 March 1999 for £100,000 and was later sold on 13 April 2005 for £187,500. After the property had been purchased in March 1999 it was continually let until 31 August 2004. Mr and Mrs Ellis then decided to use the property as a residence from 01 October 2004. On 29 October 2004 an election under section 222(5).

CGTA 1992 was sent to the Inland Revenue and duly acknowledged by a letter dated 22 November 2004. The appellants had another residence (Property 2), a detached four- bedroom house.

In HMRC's Statement of Case it said that the point at issue was "Whether the appellant's occupation of a property in the period October 2004 to March 2005 deems that property to be a "residence" for the purposes of a claim for principal private residence relief."

However by the time that the appeal was heard the issue seemed to have changed. In a document headed "Speaking Notes" produced by Mr Boal (HMRC's representative), the 'Point in Dispute' was "Whether the occupation of 1 Jessamine Cottage by the appellants in the 6 1/2 month period from October 2004 to 13 April 2005 was sufficient to deem the property as a "main residence" for the purpose of principal private residence relief."

Mr Boal stated that HMRC accepted that the property was a residence used by the taxpayers but that the nature and extent of the use made of the property did not permit of the conclusion that it was their main residence. It therefore became clear that HMRC was not arguing that the property was not properly to be viewed as a residence used by the taxpayers; but simply that even though it was a residence it was not, as a matter of fact and degree, their main residence.

Mr Boal argued that the tribunal should look at the comparative amount of time spent at each of the two residences, the nature and quality of the use made of each residence and the fact that Property 2 was also used by the taxpayers when two of their granddaughters resided with them, often for significant periods of time, for family reasons.

The judges pointed out to Mr Boal that once HMRC conceded that the property was a residence and it was accepted or admitted that the taxpayers had two residences, the effect of section 222(5) CGTA was to allow the taxpayers to make an election which was determinative of the issue as to which of the two residences was, for capital gains tax purposes, their main residence:

"The important point to note about the construction of section 222 CGTA is that once it is established (or accepted) that a taxpayer has more than one property that can properly be called his residence, it is the taxpayer who can make an election as to which of two or more residences is to be his main residence. It is equally important to note that subsection 5 of section 222 specifically provides that "the individual may conclude that question by notice to the inspector ......... "and that this is a case in which such notice was given.

Thus the section envisages that a taxpayer may make an election; but does not have to do so. It then provides that if a taxpayer does decide to make an election the effect of that election is to conclude the issue as to which of two (or more) residences is his main residence, so far as capital gains tax matters are concerned. In other words, the respondents can challenge the assertion made by a taxpayer that a particular property is a residence used/occupied by him, but once it is proved or accepted that a particular property is a residence used/occupied by the taxpayer, the respondents cannot argue that as a matter of fact and degree that residence is not the taxpayer's main residence if an election has been made in favour of that property under section 222(5). That is because upon its true and proper construction the statute specifically provides that the question of which property is the main residence is conclusively dealt with by the election made under subsection 5.

It follows that, in our judgment, given that the respondents concede that the property was a residence used by the taxpayers, the appeals must succeed because an election was made. The respondents cannot go behind the election notwithstanding Mr Boal's contention that it was open to the respondents to challenge whether or not, as a matter of fact and degree, the property could properly be described as the taxpayers' main residence. If Mr Boal was correct in his submission, it would mean that an election made under section 222 would not be conclusive as provided by section 222(5). In our judgment his submission was contrary to the plain meaning and effect of that statutory provision."

This is a remarkable case where on any analysis it should have been clear to HMRC that it had no prospect of winning. It is understood that HMRC does have a filter system in place to prevent hopeless cases from going before the tribunals, but this filter seems to have failed spectacularly on this occasion.

3 PAYE and employment matters

3.1 Employment Related Securities Bulletin (January)

HMRC's latest Employment Related Securities Bulletin covers (i) a trial on dealing with enquiries and (ii) academics and spin-out companies.

Quick response to enquiries – a trial

HMRC is aware that customers sometimes need a quick response to enquiries in relation to the tax-advantaged share schemes. It has worked with members of the ERS Forum Tax Advantaged Share Schemes sub group to design a 'quick HMRC response' arrangement for certain enquiries, which will start on a four month trial basis from 14 January 2013. This trial will help HMRC assess whether to offer such an arrangement on a permanent basis.

The terms of the trial are as follows:

  • HMRC will only respond to queries on a 'quick response' basis if it is satisfied that the query is capable of being dealt with quickly and relates to one of the following:

− a variation of share capital;

− an alteration to an identified key feature;

− a company reorganisation;

− other circumstances in which HMRC is satisfied that a quick response can be made and is required.

  • HMRC will only respond to queries using this arrangement if all the necessary information is submitted with the query;

  • A query will not be eligible for this arrangement if it takes HMRC more than one hour to deal with;

To read the full article, please click here.

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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