1. General news
1.1 Reasonable excuse
Four reasonable excuse cases were heard by the First Tier Tribunal on 14 April, the judge in each case being Geraint Jones QC.
Anthony Leachman t/a Whitely and Leachman:TC01125
www.bailii.org/uk/cases/UKFTT/TC/2011/TC01125.html
Ballysillan Community Forum:TC01121
www.bailii.org/uk/cases/UKFTT/TC/2011/TC01121.html
N A Dudley Electrical Contractors Ltd:TC01124
www.bailii.org/uk/cases/UKFTT/TC/2011/TC01124.html
Louise Fernandez:TC01123
www.bailii.org/uk/cases/UKFTT/TC/2011/TC01123.html
In each of the first three cases the judge relied on the decision in the ECtHR case of Jusilla v Finland. The quote below is taken from the Ballysillan case:
"I have to bear in mind that this is a case in which a penalty has been levied. In those circumstances the decision of the European Court of Human Rights in Jusilla v Finland (73053/01) ECtHR (Grand Chamber) is highly material. The Court decided that a penalty or supplement charged by the revenue authorities of a member country is in the nature of a criminal penalty and thus any proceedings in respect of it attract the provisions of article 6 ECHR (right to a fair trial). Thus, in my judgement, it is for HMRC to satisfy me to the criminal standard, so that I can be sure, that the required filing did not take place."
In the Leachman case HMRC levied a penalty notice of £400 because the P35 for 2009/10 was not filed before 19 May 2010.The taxpayer believed the accountant would file the form while the accountant believed the taxpayer would do so personally. The judge decided in the taxpayer's favour saying:
"It follows that in my judgement the appellant has established a reasonable excuse for the failure that has resulted in the penalties being levied by HMRC. I find that his state of mind was that the necessary P35 was being submitted by his agent and that he could rely upon the action of his agent to fulfil his filing obligation. I also find that that state of mind was held genuinely, but mistakenly. That situation is totally different to a situation where a taxpayer relies upon his agent do a particular act but the agent neglects to do it. The two situations are entirely different and different considerations apply to each of them."
In the Ballysillan case HMRC issued a penalty notice of £400 alleging that Ballysillan had not filed the P35 by 19 May. Ballysillan's staff gave evidence that the form was filed online and that they received an electronic confirmation message. The judge decided in favour of Ballysillan saying:
"I have to decide whether HMRC has proved so as to make me sure that the necessary filing did not take place. It seeks to persuade me of that by, inferentially, claiming that computers never get it wrong. I have no hesitation in rejecting that proposition and I equally have no hesitation in accepting the truthfulness of the witnesses on behalf of the appellant. There is, of course, the possibility that although those witnesses may be honest, they may nonetheless be mistaken. If it is to be said that they are mistaken, there would need to be evidence to persuade me that that is so. I do not consider the mere assertion by HMRC that it has not received the P35 to be sufficient evidence to lead me to conclude that these witnesses are each mistaken."
In the Dudley case the company appealed against a penalty imposed for failing to file the 2007/8 P35 on time. The company argued that no P35 had been issued by HMRC apparently because the company had previously filed online. Online filing was not compulsory for 2007/8 and so the company had the choice of filing a hard copy. The judge ruled in favour of the company and his rationale could be very helpful for employers who have been charged substantial penalties which might have been mitigated if HMRC had notified the employer of the apparent failure at an earlier date:
"In this appeal HMRC argues that the appellant must show that it has a "reasonable excuse" for the entire period of default. The default penalty has been levied as £400 for the period 20th May 2008 - 19th of September 2008 and a further £300 for the period 20th September 2008 - 5th December 2008. HMRC argues that a "reasonable excuse" must be some exceptional circumstance which prevented timeous filing. That, as a matter of law, is wrong. Parliament has provided that the penalty will not be due if an appellant can show that it has a "reasonable excuse". If Parliament had intended to say that the penalty would not be due only in exceptional circumstances, it would have said so in those terms. The phrase "reasonable excuse" uses ordinary English words in everyday usage which must be given their plain and ordinary meaning.
I am satisfied that given the ordinary and natural meaning of the words "reasonable excuse" the appellant has established that it had a reasonable excuse throughout the entire default period, given that HMRC accepts that it failed to send a paper return to the appellant. HMRC has failed to satisfy me that it was justified in assuming that it need not send a paper return to the appellant simply because, as a matter of fact, its P35 for the year ended 5 April 2007 had been filed online by its agent.
I should also make it clear that if the first penalty had stood, in the sum of £400, the second penalty, in the sum of £300, could not stand. That is because HMRC , well knowing that the P35 had not been filed on time, desisted from sending a first penalty notice to the appellant until 29 August 2008, being 19 days after the start of the period when a second penalty (£300) could be levied. That is not plain dealing. It might be the case that there is no obligation upon HMRC to issue a reminder but given that it has the statutory power and/or duty to issue a penalty notice, that should be done timeously and well before any second penalty period begins because, as a matter of common fairness and justice, that operates to put the defaulting party on notice that it is in default and gives that party a proper opportunity to remedy that default. In my judgement it is not open to HMRC to take advantage of its own default in sending a timeous default notice to a taxpayer. That would offend the common law principle of fairness and most right thinking members of the public would find it repugnant, especially on the part of a public body. In those circumstances, even if the initial £400 penalty had stood, the second penalty of £300 could not have stood."
In the Fernandez case the taxpayer appealed against two late filing penalties on the basis that the 2008/9 self assessment return had not been filed by 31 January 2010 and then within a further six months. The taxpayer had attempted to file the return online in mid January 2010 and the judge found in her favour regarding the first penalty:
"As the appellant had had difficulty using the online filing facility she sent e-mails to ecustomer.support@hmrc.gsi.gov.uk seeking assistance. There is no evidence that she ever received a reply. In HMRC's Case Statement it is asserted that the appellant sent her e-mails of the 13 and 15 January 2010 to the VAT Online Services Helpdesk "in error". Quite why there was any error in using the e-mail address to which I have referred, I do not understand. HMRC is one organisation and unless it adequately made it clear that the address used by the appellant would not elicit a response to her request for assistance, I find the comment in the Case Statement wholly unconvincing and misconceived.
HMRC further contends that it was the appellant's responsibility to ensure that her tax affairs were dealt with correctly and on time. It argues that that responsibility was not negated by the appellant sending her two emails to the helpdesk. It also contends that it could not reasonably be expected to reply to the appellant's emails prior to the 31 January 2010. I find that proposition startling. I have little doubt that HMRC would expect a business to which it had sent correspondence, both to be able to reply within 14 days and actually to reply. There is no reason why the standards applicable to businesses and commercial organisations should not also apply to an organ of the state.
Whilst it may have been the appellant's responsibility to file her self assessment return on time, it was equally the responsibility of HMRC to provide online filing facilities that worked and provided the promised filing facility. I accept the appellant's evidence that so far as she is concerned, the promised online filing facility did not work and allow her to file on time. I am wholly unimpressed by the argument that there was no obligation on HMRC to reply to the appellant's e-mails to its helpdesk; there is little point in there being a helpdesk if, in fact, it does not provide help. The appellant was, in my judgement, entitled to expect that the requested help would be forthcoming timeously and, in any event, in good time for her to be able to use the online filing facility by 31 January 2010.
In my judgement the appellant had a reasonable excuse for failing to file online by the 31 January 2010. That reasonable excuse was/is that the online filing facility provided by HMRC did not work as it should have worked when she tried to use it and, furthermore, HMRC failed to provide her with the help that she had requested within a reasonable time which, in my judgement, should have been within three days".
There are important customer service messages for HMRC in this judgement particularly about speed of response expected in the real world. The judge did however uphold the second penalty on the basis the taxpayer should have taken action to resolve the impasse in the intervening six months.
1.2 HMRC task forces
HMRC has announced that it will be using specialist teams to focus on particular trades and areas in the near future:
"The first task force will focus on the restaurant trade, targeting businesses in London over the coming weeks.
The specialist teams will undertake intensive bursts of compliance activity in specific high risk trade sectors and locations across the UK. The restaurant trade in Scotland and the North West will be the next areas targeted.
They come as a result of the Government's £900m spending review investment to tackle tax evasion, avoidance and fraud from 2011/12, which aims to raise an additional £7bn each year by 2014/15.
Mike Eland, Director General Enforcement and Compliance, said:
"These task forces are a new approach which uses HMRC's resources to identify and tackle rule-breakers and evaders swiftly and effectively.
"Only those who choose to break the rules, or deliberately evade the tax they should be paying, will be targeted. Honest businesses have absolutely nothing to worry about.
"But the message is clear – if you deliberately seek to evade tax HMRC can and will track you down, and you'll face not only a heavy fine, but possibly a criminal prosecution as well."
HMRC is planning a further nine task forces in 2011/12, with more to follow in 2012/13."
2.1 PAYE and Employment Matters
PAYE – real time information reporting
HMRC has published the Technical Pack for real time information reporting (RTI reporting) using the internet through the Government Gateway.
www.hmrc.gov.uk/softwaredevelopers/rti/improving-rti.htm
On 4 April HMRC announced that it would pilot RTI reporting from April 2012, with all employers submitting RTI by October 2013. The Technical Pack published on 13 May will enable software developers to build payroll software products capable of reporting using the internet through the Government Gateway.
In response to concerns from the software and banking industries about the timescales for developing the ISO standards for use in the Bacs channel, HMRC will accept RTI data through Electronic Data Interchange (EDI) until at least April 2014 in addition to the internet channel.
The timetable for moving employers to the RTI system, announced in 4 April is not affected by this interim solution. Bacs remains HMRC's strategic solution for RTI reporting and further details about the timetable for that channel will be published in due course.
A further communication on message implementation guidelines for EDI will be issued in June.
2.2 Tabled amendments to Finance Bill 2011 disguised remuneration rules
85 amendments to the disguised remuneration rules in Finance Bill 2011 (Schedule 2) have been tabled.
They can be found as follows:
http://services.parliament.uk/bills/2010-11/financeno3/documents.html
www.publications.parliament.uk/pa/cm201011/cmbills/175/amend/pbc1751005a.21-27.html
(the 54 amendments)
www.publications.parliament.uk/pa/cm201011/cmbills/175/amend/pbc1751005a.28-34.html
(a further 29 amendments)
www.publications.parliament.uk/pa/cm201011/cmbills/175/amend/pbc1751005a.35-36.html
(a further 11 amendments).
3. Business tax
3.1 Capital Allowances, dwellings and HMRC Brief 45/10
On 22 October 2010 HMRC issued Brief 45/10 setting out its updated view of the meaning of "dwelling house" for capital allowance purposes, and this was covered in Tax Update of 1 November 2010. www.hmrc.gov.uk/briefs/income-tax/brief4510.htm
HMRC has recently clarified some points with respect to that Brief.
Background
HMRC's interpretation of dwelling house for capital allowance purposes as from 22 October 2010 is now based on the Planning Regulations "Uses Classes Order" which provides that a dwelling house (whether a single household or used as a house in multiple occupation (classes 3 and 4) has the ability to provide the facilities required for day to day private domestic existence.
However the question of whether a property is a dwelling house remains essentially one of fact, so unusual or controversial cases will need to be considered in that light.
In the context of a university hall of residence with separate floors each containing a flat with separate lockable study bedrooms with ensuite facilities, HMRC will regard the bedrooms, together with the communal kitchen and lounge areas (the flat) as a dwelling house in multiple occupation. However common parts of the building block (entrance lobby, lifts, stairs etc) would not comprise a 'dwelling house'.
Some of the changes to HMRC manuals made as a result of the revised brief are discussed below. The position was complicated by the issue on 29 December 2008 of Revenue & Customs Brief 66/08, which appeared to give a different interpretation to houses in multiple occupation compared to student residences.
Points of clarification
Points to note in respect of changes in HMRC guidance effective from 22 October 2010 are the following Holiday accommodation and furnished holiday letting accommodation.
CA11520 used to contain the following comment:
A dwelling house is a building, or part of a building, which is a person's home. A person's second or holiday home is a dwelling house as is a flat that is used as a residence. A block of flats is not a dwelling house although the individual flats within the block may be. University halls of residence, accommodation used for holiday letting, a hospital, a nursing home or a prison are not dwelling houses.
The new text is:
A person's second or holiday home or accommodation used for holiday letting is a dwelling house. A block of flats is not a dwelling house although the individual flats within the block may be. A hospital, a prison, nursing home or hotel (run as a trade and offering services, whether by the owner-occupier or by a tenant) are not dwelling houses.
HMRC has recently clarified that in their view the updated CA11520 guidance in relation to holiday letting accommodation is not inconsistent with the legislation permitting owners of furnished holiday lettings to claim allowances (CA01 s249, now for UK furnished holiday letting businesses). There is a cross reference between CAA01 s15 and s35 so that expenditure that would be qualifying is not qualifying if incurred for use in a dwelling house (which can include holiday accommodation) if the qualifying activity is (i) an ordinary UK property business or (ii) an an ordinary overseas property business, or (iii) special leasing of plant or machinery. These activities do not include the separate classification of furnished holiday letting, thus permitting an FHL business to claim capital allowances.
However as Brief 45/10 clarified, whether a property is a dwelling house is a question of fact, and under the revised interpretation would need to have the ability to provide the facilities required for day to day private domestic existence.
De minimis expenditure on plant or machinery in a dwelling.
CA20020 used to contain the following paragraph:
Expenditure on a central heating system serving the whole of the block should be apportioned between the communal areas, which part qualifies for PMA, and the residential flats, which part does not. This is subject to a de-minimis rule. If the part that would not qualify is 25% or less of the total expenditure, give PMAs on the whole of the expenditure.
The new text is:
Expenditure on a central heating system serving the whole of the building containing two or more dwelling houses should be apportioned between the common parts, which qualify for PMA, and the residential flats or individual dwelling houses, which do not. HMRC has indicated that there was no legislative basis for the 25% de minimis practice, which is why it has been removed (according to Brief 45/10 the new guidance applies to capital expenditure incurred on or after 22 October 2010). CAA01 s35 refers to providing plant or machinery for use in a dwelling house, and that if plant or machinery is partly used for a dwelling house and partly for other purposes, then there must be a just and reasonable apportionment between the two. Whether plant or machinery is incurred for use in a dwelling house or is incurred for other purposes (for example for protecting or maintaining communal property which would not be classified as a dwelling house will again be a question of fact and may require further analysis of the business reasons for incurring such expenditure.
Procedure for tax returns not yet filed. No further clarification has been received from HMRC on what might happen if the claim is filed after 22 October 2010 for expenditure incurred before 29 December 2008. HMRCs most recent communication on the use of old and new guidance includes the inference that where there is some judgement to be made on whether expenditure on plant or machinery is incurred for use in a dwelling, due regard would need to be taken with respect to the definition of dwelling.
For example a company might have a 31 March 2009 year end and have incurred qualifying expenditure between 1 April 2008 and 28 December 2008. A claim for capital allowances can be made by a company for the year ended 31 March 2009 at any time up to 31 March 2011. It is not clear whether the previous HMRC manual guidance would be accepted. In previous communications, however, HMRC has indicated that their new interpretation of dwelling house for capital allowance purposes would only apply for expenditure incurred on or after 22 October 2010. It would therefore seem appropriate to assume that an interpretation based on the previous manual guidance (in contrast to R&C Brief 66/08 or the current Brief 45/10) would be acceptable in this instance.
3.2 Tower MCashback
The Supreme Court has ruled in favour of HMRC in its appeal against the Court of Appeal's decision that the amount of expenditure qualifying for capital allowances included the amount financed by way of loan in the Tower MCashback case, and given a qualified rejection of the taxpayer's appeal against the Court of Appeal's decision that the scope of a closure notice prevented supplementary arguments being raised.
The decision has implications for the tax deductibility of expenditure financed by loan arrangements with limited or non-recourse loan finance where the funds are recycled to the lender rather than being actually used to purchase at market value what is being financed. The conclusion seems to be that a much more rigorous analysis of the level of expenditure actually being incurred is required in order to determine tax relief.
The decision could potentially be extended to call into question the date expenditure is incurred. What may on a legal interpretation of a finance arrangement be regarded as the full amount incurred on the date of the agreement, could potentially be reclassified as being incurred on the dates the funds are ultimately spent by the party using the funds, though this might depend on the extent of circularity and the nature of recourse of the financing arrangements.
The Court of Appeal decision was covered in Tax Update of 15 February 2010 and the case considered two main aspects.
The Scope of a Closure Notice (procedural issue)
In the course of an enquiry into a company's tax return HMRC said that while they had not had time to review every aspect they considered that the claim for first year allowances failed on the grounds of CAA01 s45(4) [on the basis that the expenditure on software was incurred with a view to granting a right to another person to use or deal with any of the software]. In their closure notice the conclusion given was that "the claim for relief under CA2001 s45 was excessive".
At the Tribunal HMRC dropped their assertion that the claim failed because of failure to comply with CAA2001 s45(4) and raised a new argument on the amount of expenditure. The Special Commissioner concluded the scope of the closure notice was such that the matter of the amount of expenditure could be considered. However, the High Court disagreed concluding that the preceding letter setting out HMRC's view at the time (that s45(4) was the reason the claim failed) was the only matter that could be considered.
The Court of Appeal overturned the High Court's decision, holding that the closure notice did not prevent supplementary matters being raised. Lady Justice Arden at the Court of Appeal commented however, that Parliament intended the conclusion in a closure notice should refer to the matters subject to enquiry, and not a broader scope to include supplementary elements that might only be possibilities.
The Supreme Court agreed with the majority Court of Appeal's approach, but commented that where an enquiry clearly only covers a single specific issue, the point should be identified. However where the matter at issue is more complicated, had not been fully investigated and the analysis was controversial, he concluded that the public interest may require the closure notice to be expressed in more general terms. Lord Hope added that HMRC officers should wherever possible set out conclusions they have reached on each point that is the subject of an enquiry in a closure notice.
The amount of qualifying expenditure (expenditure issue)
While the Special Commissioner had disallowed the claim for 75% of the expenditure, this being the amount financed by the non-recourse loan, both the High Court and the Court of Appeal concluded that the full amount of expenditure (including the amount financed) was deductible as the legal amount of expenditure incurred.
At the Supreme Court Lord Walker could not accept that the question of valuation was totally irrelevant in the context of a complex pre-ordained transaction. The Special Commissioner had considered the valuation issue and was sceptical that the value of the software rights was as stated, but decided not to permit a separate reference to expert evidence on valuation. He had rejected 100% of the claim for the LLP1 on the basis it had not been trading and 75% of the claim for LLP2 on the basis that the circularity of the loan finance meant the expenditure had not been incurred. Henderson J at the High Court in his consideration of the amount of expenditure, concluded that the Special Commissioner had confused himself between the prediction of future income and the valuation of predicted income. He applied the principles in Barclays Mercantile Business Finance Ltd (UKHL 51 [2005] ("BMBF")) to conclude that the loan financed expenditure was valid.
Lord Walker commented that the Ensign Tankers case [Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655] had continuing relevance even after BMBF. He agreed with Judge Moses at the Court of Appeal with respect to its relevance to the terms of borrowing, but disagreed with the Court of Appeal's concentration on those terms as an indication of true expenditure. Lord Walker felt that the circularity of finance was similar to the situation in Ensign (in contrast to BMBF) so that the expenditure in relation to the financed element was not 'real' expenditure (it was passed back by the vendor of the software by way of a chain to the original lender). Of the 25% financed by the investor, half related to fees for the arrangement. Lord Walker chose not to consider this in detail, but concluded that on a fair basis the amount of expenditure on which tax relief should be allowed was the 25% contributed directly from the investor.
Background to the financing arrangements
A summary of the financing arrangement and pattern of cashflows using round figures was:
Investor contributes £100, of which £75 would be financed from Tower SPV, as consideration for the purchase of software from MCashback, entitling the investor to a right to receive part of the clearance fees from exploitation of the software (a reward system). £12.50 of this represented fees for the arrangement. Tower SPV had received funds of £75 from Bank 1 (Guernsey based 'Janus') to on lend. Janus had received funds of £75 from bank 2 (Guernsey based 'R&D'). However R&D would only onlend to Janus if it had received security representing £82. Thus MCashback deposited £82 with R&D of the total consideration it received from investors. Further development and marketing work was required by MCashback to fully roll out the project and generate a return. The investors made their investment via a partnership, and claimed capital allowances of £100 for expenditure for the purchase of the software, claiming to offset the resulting loss in year one against their income from other sources.
www.bailii.org/uk/cases/UKSC/2011/19.html
3.3 Capital or revenue expenditure and legal fees on planning applications
The Upper Tribunal has considered the case of Market South West (Holdings) Ltd in their claim for revenue treatment on legal costs in contesting a planning dispute (for defending or maintaining an existing intangible asset). HMRC's contention was that the costs were capital and in respect of establishing an intangible asset of the right to trade from a particular premises on particular days.
The First Tier Tribunal decision was covered in Tax Update of 12 April 2010. They found it difficult to view the expenditure on legal costs in fighting the enforcement order as part of maintaining or defending an existing right, and therefore difficult to view them as revenue expenditure. Thus the costs were held to be capital in nature.
The Upper Tribunal looked at the nature of the disputed expenditure in more detail (the dispute was about the right to trade as a market from an area of land on a Wednesday and how many Wednesdays in the year. It found the appeal against the enforcement notice with respect to the planning dispute related principally to three matters:
(a) that in respect of any breach of planning control which may be constituted by the matters stated in the notice, planning permission ought to be granted or, as the case may be, the condition or limitation ought to be discharged;
(b) that those matters have not occurred;
(c) that those matters (if they had occurred) do not constitute a breach of planning control.
HMRC contended that because the planning appeal included matter (a) this was evidence that the expenditure on that appeal was capital as it was incurred in establishing an asset. The appellant contended that the expenditure was incurred in total maintaining that its asset existed under any category and was therefore revenue. The Upper Tribunal determined therefore that there should be an apportionment and the decision of the First Tier Tribunal that the whole expenditure was capital was an error in law.
The issue was remitted back to the First Tier Tribunal for a determination of the appropriate apportionment. HMRC were granted a direction to suspend the decision for one month from the date of release (6 April 2011) so that they could consider whether to apply for permission to appeal before incurring further costs with the First Tier Tribunal.
www.tribunals.gov.uk/financeandtax/Documents/decisions/Market_South_West_Holdings_Ltd_v_HMRC.pdf
3.4 The UK opposes the EU proposal for CCCTB
The Government resolved on 11 May 2011 (column 1304 Hansard):
"That this House considers that the Draft Directive to introduce a Common Consolidated Corporate Tax Base (European Union Document No. 7263/11) does not comply with the principle of subsidiarity, for the reasons set out in chapter 2 of the Twenty-seventh Report of the European Scrutiny Committee (HC 428-xxv); and, in accordance with Article 6 of the Protocol on the application of the principles of subsidiarity and proportionality, instructs the Clerk of the House to forward this reasoned opinion to the presidents of the European institutions."
4. Tax Publications
A brief guide as to what constitutes a remittances or benefit received in the UK
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.
