UK: Private Client Briefing For April 2018

Last Updated: 2 May 2018
Article by Andrew Goldstone and Nicola Simmons

Speed read

In West, an employee was made liable for PAYE/NICs instead of the employer. In Ackroyd, a BBC/personal service company arrangement was treated as one of employment for income tax purposes under IR35. HMRC continued its run of defeats for filing penalties in Jackson. HMRC has issued further guidance on the deemed domicile rules for cleansing mixed funds, and it has also on published new guidance on the IHT DOTAS rules. Consultations have been launched on extending entrepreneurs' relief; countering avoidance by profit fragmentation; and the tax treatment of charities.

West: liquidated employer's PAYE liability transferred to employee

In HMRC v S West [2018] UKUT 100 (TCC), the Upper Tribunal (UT) allowed HMRC's appeal to transfer an employer's PAYE liability to an employee.

Mr West was an employee, the sole director and shareholder of Astral Telecom Limited. He received a salary in 2011 that was designed to extinguish his outstanding director's loan account before the company entered voluntary liquidation. Mr West signed the company's liquidation accounts and his own personal tax returns, each of which made reference to the liabilities for PAYE and NICs. Following its liquidation, the company was unable to pay its outstanding PAYE and NICs liabilities for 2011/12 and some earlier tax years.

HMRC sought to transfer the company's liabilities to Mr West, on the basis that he received the salary knowing that the company had wilfully failed to deduct tax and pay NICs, as per Income Tax (Pay As You Earn) Regulations, SI 2003/2682, reg 72 and Social Security (Contributions) Regulations, SI 2001/1004/, treg 86(1)(a)(ii) respectively.

The First-tier Tribunal (FTT) by casting vote determined that through various book keeping and accounting entries, the company had not wilfully failed to deduct the tax nor wilfully failed to pay NICs, which under R v HMRC ex parte McVeigh [1996] STC 91 was a pre-condition for the regulations to apply. The FTT therefore held that the company's PAYE and NICs liability did not transfer to Mr West.

The UT disagreed, holding that despite the accounting records, there had been no deduction of tax or NICs. As Mr West was the sole director of the company, his intentions and awareness were ascribed to the company and Mr West knew that no payment of tax could or would ever be made by the company. The company had therefore wilfully failed to deduct the tax and NICs. The regulations applied and the company's tax liabilities were passed on to Mr West accordingly.

Why it matters

There is perhaps cause for concern over the judgment, as it appears to use the regulations as a way of protecting a company's creditors (in this case, HMRC), rather than as intended by Parliament, i.e. simply to assess and collect income tax (as per ITEPA 2003 s 684).

Ackroyd: IR35 win for HMRC against BBC presenter

In Christa Ackroyd Media Ltd [2018] UKFTT 69, HMRC successfully argued that the BBC presenter Christa Ackroyd would have been an employee under the IR35 and was therefore liable to income tax and NICs.

Ms Ackroyd was engaged by the BBC through her personal service company under fixed-term contracts. The contract gave the BBC 'first call' on Ms Ackroyd's services. She was not allowed to work for any other UK broadcaster or any online service, or to write for any UK publication, without the BBC's permission. Ms Ackroyd's company was to be paid in equal monthly instalments for a fixed number of performances (225 days per year in a seven year contract). The sums were paid regardless of whether the BBC had used the full number of days. Receipts from the BBC formed over 95% of the income received by the company for 2009 and 2010.

Under the arrangement, Ms Ackroyd was classed as a self-employed contractor, thus circumventing the requirement for the BBC to deduct income tax and NICs. The BBC said the use of personal service companies was 'standard industry practice' at the time.

IR35 tax status is determined by a 'hypothetical contract' that would have been agreed by Ms Ackroyd and the BBC had they contracted directly. In determining this, the FTT considered that the arrangement had a clear mutuality of obligation akin to employment, as Ms Ackroyd had to work for the fee. Perhaps more importantly, the BBC also had ultimate control over Ms Ackroyd by virtue of its 'first call' over her services, the length of her contract and the restriction that she could only work subject to the BBC's consent.

The FTT held that under Ms Ackroyd's hypothetical contract with the BBC, she would be regarded for income tax purposes as an employee, as per ITEPA 2003 s 49 (IR35). Ms Ackroyd was therefore liable to pay income tax and NICs on the service fees received from the BBC.

A similar analysis was undertaken in another recent case in MDCM Ltd v HMRC [2018] UKFTT 0147, whereby an independent construction contractor was not considered to be an employee under his hypothetical contract as he was not entitled to a notice period, holiday or employment benefits and the employer did not have control over him. That case emphasises that one factor should not override all others, although in MDCM the outcome fell in favour of the employee.

Why it matters

This is HMRC's first IR35 win in nine years. The decision clearly states that it is not a test case, despite being one of several such cases by TV presenters and their personal service companies. Of course, the decision is not precedent unless appealed above the Upper Tribunal. Notably, by that time, responsibility under IR35 to determine whether an individual is an employee or a genuine contractor may have passed to the 'engager' in all cases and not just for public sector bodies such as the BBC (as has been the case since April 2017).

Jackson: penalties for unfiled no gain NRCGT return reduced

In Jackson v HMRC [2018] UKFTT 64, the taxpayer successfully appealed to have penalties for the late filing of his non-resident capital gains tax (NRCGT) return reduced because HMRC had misapplied the law.

Mr Jackson disposed of two UK residential properties in May and September 2015. Whilst the sales generated no gains, as a non-UK resident Mr Jackson should have filed NRCGT returns within 30 days of disposal. Mr Jackson did not realise that the rules had changed until October 2016, when he submitted the returns.

HMRC issued penalties under FA 2009 Sch 55 totalling £1,400 (£100 fixed penalty for being late, £300 for being six months late and £300 for being 12 months late, for each property). Mr Jackson appealed.

In deciding whether HMRC had applied the penalty legislation correctly, the FTT held that the fixed penalty of £100 is imposed without reference to the tax due, so HMRC had applied this aspect of the legislation correctly. As to the other penalties, each of which were levied at £300, being the higher of £300 or 5% of the unpaid tax (i.e. nil), the judge held that HMRC had overlooked Sch 55 para 17(3). This provides that where a taxpayer is liable for a penalty under more than one paragraph of Sch 55 that is determined by reference to a liability to tax, the aggregate of the amounts of those penalties must not exceed 100% of the liability to tax (i.e. nil). The judge therefore concluded that the £300 penalties should not have been issued as they were capped at nil.

Further still, following the case of Welland [2017] UKFTT 870, the FTT held that Mr Jackson's scenario involved special circumstances (para 16(1)), which HMRC should have considered to reduce the penalties. The special circumstances were that Mr Jackson had not been given an opportunity to correct his behaviour; he had made two property sales in quick succession and so was unable to learn from his initial noncompliance. The tribunal therefore considered that only the first £100 penalty should be payable.

Why it matters

This decision confirms the view of the tribunal in Welland that, because the appellant had had no opportunity to correct his behaviour between the two late returns, special relief should be given to reduce the penalties on a later return. Perhaps of greater significance is the interpretation that when penalties are raised under more than one paragraph of Sch 55 in reference to an amount of tax, para 17(3) limits the total amount of those penalties to 100% of the tax liability. Given the wider implications of this decision, HMRC may seek to appeal the decision to the UT.

Cleansing for deemed domiciled individuals

HMRC has issued further guidance on the deemed domicile rules for cleansing mixed funds which came into effect from 6 April 2017, with several examples (see

Very broadly, it is possible to cleanse mixed funds by transferring money from one offshore account to another if the taxpayer is non-UK domiciled, was not born in the UK, can identify the make-up of their mixed funds, has claimed the remittance basis in any year from 6 April 2008 to 5 April 2017 and meets certain conditions. Such persons have a two-year window to cleanse funds, ending 5 April 2019.

New IHT DOTAS guidance

HMRC has published new guidance on the requirement to report on IHT avoidance schemes under the disclosure of tax avoidance schemes (DOTAS) rules from 1 April 2018 (see

To be notifiable, the arrangement must provide an expected IHT advantage, the advantage must be one of the arrangement's main benefits and the arrangement must satisfy two conditions:

  • The tax advantage must relate to 'relevant property' IHT charges on trust assets, gifts with reservation of benefit or transfers that reduce the estate's value without giving rise to a chargeable transfer or a potentially exempt transfer.
  • The arrangement must involve a 'contrived or abnormal step' to achieve the tax advantage.

The guidance creates the concept of an 'informed observer' to determine whether the hallmark is met. The grandfathering rules have been replaced by a new 'established practice exception', meaning that previously excepted arrangements will need to be tested against the new IHT hallmark. HMRC has conceded that the use of trusts is not, in itself, notifiable.

What to look out for

  • HMRC has released details of the penalties framework under the new trust registration service (see, and confirmed that penalties for late returns for the trust registration service will not be automatically imposed.
  • HMRC is consulting on extending the eligibility requirements for entrepreneur's relief to include individuals who no longer hold the requisite 5% of the ordinary share capital in the company because of dilution by the company in issuing shares to raise capital for its trade (see The government does not propose to extend such rules to trustees. The new rules will apply to gains in shares held at the time of fundraising events from 6 April 2019. Responses are due by 15 May 2018.
  • The Charity Tax Commission has launched a consultation on the tax treatment of charities (see the first systemic review of charity taxes and tax reliefs in over 20 years. The review will examine the role the third sector plays in society and identify ways to improve the efficiency of the current system, including gift aid, VAT exemptions and IHT reliefs. The call for evidence closes on 6 July 2018.
  • In response to the BEIS's call for evidence, the government has reported its plans to implement a new register of the beneficial owner of overseas companies and other legal entities (other than trusts) that own UK property. The government intends to publish a draft bill imposing the register in Summer 2018, becoming operational in 2021.
  • The government has launched a consultation on how to tax UK traders and professionals currently avoiding tax by 'fragmenting' their UK business profits to entities resident in low-tax territories. A key focus is those currently falling outside of a charge under the transfer of assets abroad rules. Under the proposal the changes would apply from 1 April 2019 for corporation tax and 6 April 2019 for income tax. The closing date for comments on the consultation is 8 June 2018.

Originally published by Tax Journal.

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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