UK: Weekly Tax Update - August 10, 2015

Last Updated: 18 August 2015
Article by Tina Riches

1 General news

1.1 HMRC Issue Briefing - direct recovery of debts

HMRC has published an issue briefing setting out how the direct recovery of debt (DRD) provisions, are to be implemented. DRD will enable HMRC to recover tax debts from bank accounts of certain taxpayers and imposes obligations not only on HMRC and taxpayers but also banks and other deposit takers, who will need to comply with stringent time limits. The issue briefing highlights the safeguards that HMRC plans to introduce.

There have been calls to include all the safeguards in legislation (currently in Finance Bill Sch 4 and a draft statutory instrument) to ensure they are robustly followed. The non- statutory safeguards highlighted include:

  • a face-to-face visit from 'HMRC agents', ie not necessarily HMRC officers, before the debts are considered for DRD to:
  • personally identify the taxpayer and confirm it is their debt;
  • explain to debtors what they owe, why they are being pursued for payment, and discuss payment of the debt;
  • discuss options to resolve the debt, potentially including offering 'Time to Pay';
  • identify debtors in a vulnerable position and offer them support from a specialist team to help them settle their debts;
  • DRD will only proceed after such a visit;
  • strengthening governance procedures, including oversight by HMRC commissioners;
  • publishing statistics on the number of times this power is used and appeals raised;
  • reviewing DRD fully after two years and laying the report before parliament.

HMRC estimates that it will use the powers in a very small minority of cases (around 11,000 times a year). Its research indicates that taxpayers typically affected by DRD owe, on average, more than £7,000 and that almost half of those debtors have more than £20,000 in their accounts. The provisions are expected to come into force from Royal Assent.

1.2 HMRC guidance on accelerated payment notices updated

HMRC has updated its guidance on accelerated payment notices (APN), which was first issued in 2014 when the APN legislation was introduced.

APNs are issued to taxpayers, requiring them to make a payment on account of potential tax liabilities in respect of certain tax schemes, such as ones under enquiry or appeal and covered by DOTAS. The update sets out:

  • what HMRC considers the taxpayer should consider on receipt of an APN;
  • making representations; and
  • that the amount payable on an APN may differ from the eventual liability.

1.3 Scotland Bill progress

The Scotland Bill is progressing through the UK Parliament. Having completed the parliamentary committee stage, the report stage should follow in the autumn with Royal Assent expected to be given in May 2016.

As mentioned before, the Bill covers a wide range of new financial powers including the power to set rates for income tax (as opposed to merely for the Scottish rate of income tax) and to permit the Scottish Parliament to keep all the money raised in Scotland, together with half of VAT raised in Scotland. The Bill will also devolve Air Passenger Duty and the Aggregates Levy to the Scottish Parliament.

You can sign-up for the Scotland office newsletters at:

1.4 HMRC: creating a digital future

HMRC has announced that further existing IT services will be brought under its direct control, while it continues to plan the transition to a new IT delivery model following the ending of the Aspire contract in 2017. HMRC says that the changes will ultimately enable it to make savings of up to 24 per cent on its £800m annual IT budget by 2020-21 while 'maintaining consistent delivery of services to customers'.

HMRC also announced that Capgemini would be providing 'test and release' services until 2020, to provide vital quality assurance during the digital transformation.

The New Personal and Business Tax Accounts are due to be available to ten million personal individuals and five million businesses by early 2016.

2 Private client

2.1 Collection of self-assessment amount ignoring loss carry back

In a judicial review case the Upper Tribunal (UT) has held in favour of HMRC that it is entitled to demand the amount of self-assessment tax for a year ignoring the loss

relief carried back to that year appearing on the return. The amount due and payable for a tax year is not reduced by the relief of a later year as the claim to relief for the later year is related to that later year, although calculated by reference to the earlier year. The UT did not consider it was bound by the Supreme Court decision in Cotter, as different legislation was relevant, but the same principles applied.

In R (on the application of Derry) v HMRC [2015] UKUT 416 (TCC) Mr Derry claimed a judicial review of a demand made on him by HMRC. In 2009/10 the taxpayer had an income of £519,625 (with a net tax liability of £95,546, before the loss relief claimed) and the return submitted online on 24 January 2011 included a claim for share loss relief in respect of a capital loss in 2010/11 of £414,500 (tax reduction of £165,800). HMRC said that Mr Derry had made a self-assessment of £95,546 whereas Mr Derry contended it was for a tax refund of £70,254. On 18 October 2011 HMRC repaid tax of £70,498, which is slightly different from the £70,254 difference between loss relief credit and the net tax liability.

HMRC wished to investigate the facts as to the alleged capital loss and opened (or purported to open) an enquiry into the claim under TMA 1970 Sch 1A. Mr Derry said that the only enquiry that could have been opened was one under s.9A (as the loss was claimed on the return) so the enquiry had no effect and one under s.9A was by then out of date.

On 21 February 2014 HMRC made a demand on Mr Derry for tax allegedly due of £166,044, plus interest. On 6 June 2014 this was replaced with one for £95,546, plus interest.

The proceedings had been brought as a claim for judicial review. The judge did not think that this was appropriate as although there was no appeal against a demand the service of a demand does not create a debt or other liability. There are means available to question the validity and effect of a demand. Notwithstanding the inappropriate procedure used in this case, the judge gave a decision on a number of points.

The share loss relief provisions in ITA 2007 Part 4 Chapter 6 do not contain a reference to the application of TMA 1970 Sch 1B para 2 for claims for relief spanning two or more years. This distinguished the case from HMRC v Cotter [2013] UKSC 69 where ITA 2007 s.128 says that Sch 1B applies to ITA 2007 Part 4 Chapter 5. However, the judge's conclusion was that Mr Derry's claim was subject to the general provisions of TMA 1970 s.42, for the procedures in making claims, and that these applied as there was no other provision providing otherwise. Therefore Sch 1B para 2 is in point by virtue of TMA 1970 s.42(11A).

This meant that the tax due and payable was therefore the self-assessment amount for the year of £95,546, without adjustment for the loss relief carried back, and as per the amount demanded. In addition, as per the ratio of the decision in Cotter, HMRC was entitled to open the enquiry under Sch 1A – with that enquiry to still be concluded.

What was less clear were the implications of the £70,498 repayment made by HMRC. There appears to have originally been a free standing credit (FSC) of £165,000, at the time the system showed tax due of £95,546. This FSC was subsequently reduced to £70,254 but the tax due remained £95,546 and there was no clear statement that Mr Derry was entitled to a different figure of £70,254 together with a discharge of the tax due of £95,546. In view of the limited nature of the evidence about the repayment the judge was not persuaded it would be right to make a final determination against Mr Derry in relation to his contention that the payment amounted to HMRC giving effect to his claim to relief for the purpose of TMA 1970 Sch 1A para 4.

No doubt Mr Derry and his advisers are looking for evidence that the tax refund in October 2011 related to the loss carry back claim to show that was given effect to before the enquiry notice was issued.

2.2 HMRC online personal tax account beta testing

HMRC has launched the test version of the personal digital account as a private beta site, testing it with invited users to start with. To start with the account will provide:

  • the ability to view personal details (name, National Insurance number, and address);
  • a Tax Estimate Service indicating how much tax paid through PAYE, and allowing the taxpayer to check the information the estimate is based on – replacing the paper P2 tax coding notice;
  • links to income tax-related online forms on GOV.UK.

The full version will add further services in due course and is due to be launched in 2020. It is expected to allow taxpayers to register, file, pay and update tax information at any time using the digital device of their choice, and is expected to become mandatory for every individual taxpayer and business.

3 Trust, estates and IHT

3.1 Inheritance tax electronic communications Directions

HMRC has published directions under regulations 3(2), (4) to (7) and 9(3) of the Inheritance Tax (Electronic Communications) Regulations 2015 (S.I. 2015/1378). The directions set out how HMRC, taxpayers and their agents can communicate electronically in respect of Inheritance Tax (IHT), including the submission of returns and accounts.

The new system will require an individual or agent to be able to authenticate themselves using the Verify process, which most agents are not yet part of. The directions also, worryingly, require the person delivering the account to complete a declaration to confirm that the information is correct and complete to the best of the knowledge and belief of the person, who may be an agent, delivering it.

This wording is not in line with directions in some other areas, such as the January 2011 iXBRL directions, which instead requires the agent to confirm that the return is correct and complete to the best of the knowledge of the officer or person authorised to act for the company, ie the taxpayer.

It is hoped that the IHT directions will be changed. As currently worded, use of the electronic system may be difficult for agents unable to confirm the veracity of a return, and may deter use of the electronic system.

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We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015

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Tina Riches
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