UK: June - Private Client Briefing From Tax Journal 2018

Last Updated: 3 July 2018
Article by Andrew Goldstone and Katya Vagner

Taxation of income: OTS report on savings and investment income

The Office of Tax Simplification published a report exploring the potential areas for simplification of personal taxation of savings and investment income. The report summarises the current tax regime and makes several recommendations for further review, including:

  • Streamlining income tax rates and allowances: The report acknowledges that the regime's current features (including the starting rate for savings, the personal savings allowance, the dividend allowance and other allowances) are complex, and that even HMRC's software doesn't always get it right. Some of the recommendations include exempting savings interest completely and amalgamating the starting rate and personal savings allowance.
  • Introducing a personal tax roadmap: Essentially the government's agenda for personal tax, this is part of the wider review of the direction of income taxation.
  • Simplifying ISAs, including a review of restrictions on transfers, types of investments and withdrawals: The proposals also include allowing third parties to access taxpayers' financial accounts under the Open Banking Project (the government's project to facilitate price comparison of financial products).
  • Reviewing guidance on pension withdrawals: This is particularly in relation to lump sum payments.
  • Reviewing the rules on partial redemption of life insurance bonds: This is to be undertaken as part of a wider review of this area and the changes introduced in F(No. 2)A 2017.

Why it matters

According to the report, whilst 95% of people pay no tax on their savings income (including savings income, interest, dividends, pension income and income from bonds and funds), the current regime is overly complicated and can lead to mistakes in tax returns, which HMRC software is also prone to. The simplification of the current regime would be welcome news and many will hope that the report's recommendations are implemented.

Harris: personal representative's liability to IHT

In Harris as personal representative of H N McDonald (deceased) v HMRC [2018] UKFTT 204, the FTT struck out an appeal by the personal representative of an intestate estate against a determination for the payment of inheritance tax. The lay personal representative distributed the estate to the deceased's brother, who then left the UK for Barbados and has not been heard from since. The distribution was made on the understanding that the brother would pay the outstanding inheritance tax. The personal representative thought this would be sufficient but the brother never paid the tax.

IHTA 1984 s 200(1) unequivocally sets out the position in respect of the liability to inheritance tax and confirms that the deceased's personal representatives are liable (with only limited exceptions).

In its very short judgment, the FTT found that the personal representative had no reasonable prospect of success, given that the inheritance tax was properly chargeable to him.

Why it matters

This widely reported case highlights that a personal representative's ignorance of his legal obligations is not a defence. Given the value of the estate (circa £1.2m) and the amount of tax payable (circa £341,000), it is perhaps surprising that the deceased did not leave a will and that no professional advice was sought during the administration. Given the facts, it is hard to imagine that the personal representative received appropriate indemnities from the brother before making the distribution, leaving the personal representative in a very unfortunate financial position.

Trust registration service latest

HMRC has agreed in correspondence with STEP that an offshore trust holding UK residential property via a non- UK close company does not have to register with the trust registration service (TRS) in the year that IHT is payable (and hence an IHT100 needs to be submitted); for example, due to a ten year anniversary charge or an exit charge. The TRS guidance has not yet been updated following this confirmation.

Why it matters

This is welcome news. However, of some concern is the position of those trusts which have already registered with the TRS and may now wish to de-register. There is no online facility to do so and the only option at this stage appears to be to write to HMRC to request de-registration. It is recommended that copies of HMRC's exchange of correspondence with STEP on this point should be enclosed with any such requests.

Haworth: yet another dismissal of an appeal against the issue of a FN and APN

In R (Haworth) v HMRC [2018] EWHC 1271, the High Court has dismissed yet another taxpayer's judicial review (JR) application against the issue of follower and accelerated payment notices. The challenge was made in response to the notices issued by HMRC in respect of gains arising to the trustees of a settlement from the disposal of assets in 2000/01. On the substantive issues, the taxpayer's argument was that the gains were not chargeable on him due to the provisions of the UK/Mauritius double tax treaty. The taxpayer's specific JR application was based on an alleged failure to follow the correct procedure for issuing the notices, arguing that they were unlawful.

HMRC contended that the taxpayer was involved in a scheme known as a 'round the world' arrangement, which was defeated in HMRC v Smallwood [2010] EWCA Civ 778. The High Court found that despite some criticism of HMRC (such as its record keeping), the notices were issued based on a relevant judicial ruling (in contrast to R (on the Application of Rowe) v HMRC [2017] EWCA Civ 2105 and R (on the Application of Vital Nut Co Ltd and others) v HMRC [2016] EWCA Civ 1797), they had a legitimate aim and were used proportionately.

Why it matters

This is yet another case in the line of public law challenges to HMRC's decisions, the number of which has been rising steadily over the last few years. The decisions in Rowe and Vital Nut paved the way for several other cases to progress, which had been stayed. The Court of Appeal is yet to hear the case of Walapu v HMRC, while permission to appeal is due to be heard in Dickinson v HMRC. However, what is clear is that HMRC is on a winning streak and its notices are being allowed to stand, despite identified failings in HMRC procedure.

HMRC clearance service: restrictions for non-statutory clearances

HMRC has updated its non-statutory clearances guidance to confirm that, in addition to previously excluded services, it will no longer provide a clearance service for:

  • incorporation relief under TCGA 1992 s 162; and
  • clearances on matters of fact, such as whether certain activities constitute a business.

Why it matters

An inability to obtain incorporation relief clearance means that those looking to incorporate a buy-to-let business and claim the relief to ensure that no capital gains tax is due, will no longer be able to approach HMRC for confirmation that the property letting activities are sufficient to fulfil the conditions for the relief. Professional tax advice will be of even greater importance in such situations.

Hart: failure to submit NRCGT return

In Hart v HMRC [2018] UKFTT 0207 (TC), the taxpayer appealed against penalties for late submission of a non-resident capital gains tax (NRCGT) return. There was no capital gains tax due on the disposal as the sold property was eligible for relief. However, as has been established in a line of recent cases (Hesketh v HMRC [2017] UKFTT 871 (TC) and Welland v HMRC [2017] UKFTT 870 (TC)), and in contrast to the conclusion in McGreevy v HMRC [2017] UKFTT 0690 (TC), a nil return is still required. Not knowing about the requirement to submit a return is not a reasonable excuse for late filing.

In this case, the taxpayer argued that his conveyancing solicitor had not mentioned the requirement and that, in any event, he relied on his tax adviser to deal with his UK tax affairs. The FTT found that whilst ignorance of the law is not a reasonable excuse, it was reasonable for the taxpayer to expect his tax adviser to inform him about the requirement to file a NRCGT return, as he was notified of the taxpayer's intention to sell the property. The appeal was allowed on this basis.

Why it matters

It is interesting that the FTT decided the case based on whether it was reasonable for the taxpayer to expect his tax advisor to inform him about the requirement without necessarily examining the extent of the advisor's retainer, and without that advisor being a party to the case. Whilst the decision was of no direct relevance to the advisor, it could potentially be used as a benchmark for what tax advisers are expected to tell their clients in a professional negligence context.

HMRC authorisations: 64-8 and SA1

HMRC has written to all agents setting out procedural changes in its practice. HMRC will no longer accept hard copies of agent authorisation forms (64-8) and applications for UTR and tax returns, where the individual has a national insurance number.

Such applications must be submitted online via the government Gateway's service. The agent must request an authorisation via their Gateway account, following which HMRC will post a letter to the taxpayer containing an authorisation code within seven working days. The code will be valid for 30 days and will need to be entered by the agent via their Gateway account.

Why it matters

It is understood that HMRC will process applications received by the end of May, but any applications received subsequently will be returned to agents. It is hoped that after the inevitable initial delays with HMRC returning already submitted forms, the processing of the forms online will run smoothly and be actioned quicker than is currently the case.

What to look out for

  • June is a busy month for responding to consultations. Analysis of the responses is awaited for a number of consultations, including profit fragmentation and CGT payment on account for residential property gains. Response deadlines to open consultations include: reforms to the tax treatment of charities (open until 6 July 2018); tax treatment of short term business visitors from overseas branches (open until 6 August 2018); and IR35 private sector reform (open until 10 August 2018).
  • In the summer, the government plans to publish a draft Bill creating a register of beneficial owners of overseas companies and other entities that own UK property.
  • HMRC announced an extension of the deadline for registering an interest in settling tax affairs for those who took part in disguised remuneration arrangements, from 31 May 2018 to 30 September 2018.

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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