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Much like the recent heatwaves, there has been no respite from HMRC’s enforcement agenda this summer.
The Government is pressing ahead with proposals that would extend HMRC’s reach in significant ways: a new criminal offence for reckless statements to HMRC in relation to direct tax, and a formal obligation on taxpayers to correct their own errors or face the consequences. These sit alongside the broader “sanctionable conduct” regime for advisers that came into force in April, and a tax administration framework that is steadily shifting routine compliance burdens onto taxpayers and their advisers. The climate change – more powers, earlier intervention, higher stakes – is undeniable.
And there was no drought in the Courts, with the Supreme Court handing down two significant tax decisions over the summer. In BlueCrest the Supreme Court confirmed that “significant influence” under the LLP salaried members rules must be rooted in enforceable governance rights rather than informal standing, while in HFFX it endorsed a broad reading of the miscellaneous income charge. Both decisions narrow the ground available to taxpayers in ways that will require careful review. Meanwhile, in M R Currell, the Court of Appeal offered some welcome shade to taxpayers, pushing back against HMRC’s inclination to stretch the disguised remuneration rules beyond their intended target.
The picture that emerges is one of creative tension: legislation that is steadily expanding the compliance framework, and a judiciary that is willing – when the arguments warrant it – to say that enough is enough. For taxpayers and their advisers, the message is to take nothing for granted: not the scope of the existing obligations, and not the limits of HMRC’s willingness to test them. Let us hope the autumn offers some more favourable conditions.
We explore these and other recent developments in the articles below.
The final word (for now) on BlueCrest
After years of litigation, the Supreme Court has finally settled key questions around when LLP members fall within the salaried members tax regime, and the answer will require many firms to rethink their governance arrangements. In BlueCrest, the Supreme Court (clarifying the position taken by the Court of Appeal) ruled that for the purposes of Condition B a member’s influence over the partnership must flow from legally grounded rights and structures, not simply from their standing within the business. The matter now returns to the First-tier Tribunal for a decision on the facts, but for LLPs the message is clear: de facto authority alone will not keep members outside of the rules. Read our full article on the Supreme Court’s decision.
Other miscellaneous Supreme Court decisions: HFFX
In another significant tax decision for LLPs, the Supreme Court has handed down its verdict in the long-running case of HFFX. Upholding the decision of the Court of Appeal, it found that while the ordinary profit allocation rules did not bite on the profit-sharing arrangements in question, the amounts received by individual members were caught by the miscellaneous income charge, endorsing a broad view of when a taxable “source” of income exists. For partners and LLP members across sectors who may receive payments outside of the usual profit share, the decision raises questions about how far the miscellaneous income rules extend. Read our commentary on the decision.
Leave it a-loan: the Court of Appeal checks overreach in disguised remuneration
HMRC’s campaign against disguised remuneration arrangements has produced no shortage of litigation, but in M R Currell Limited the Court of Appeal held that a genuine loan routed through an employee benefit trust was not taxable as earnings, and warned HMRC against over-reaching in its pursuit of disguised remuneration. The loan in question was made prior to the introduction of the Part 7A rules, but the decision is still a welcome pushback from the Court as HMRC continues to cast the net wide. Kate Ison and Sophie Rhind consider the case, and the wider background to the disguised remuneration rules.
The (reckless) whispers of a taxpayer
Among the suite of documents published on Legislation Day, the Government launched a consultation proposing a new criminal offence for reckless untrue statements in relation to direct taxes, lowering the threshold from dishonesty to recklessness. The scope is potentially broad, extending beyond tax returns to anything said to HMRC in any form, and applying to advisers as well as taxpayers. Kate Ison and Jackelyn West consider the new offence.
To err is human, to correct, mandatory
The Government has published draft legislation which would place taxpayers under an explicit legal obligation to correct errors in their tax returns once they become aware of them, with a failure to act risking recharacterisation of the error as deliberate. A new Customer Correction Notice would also require a taxpayer to review a specific position without the opening of a full enquiry. The proposals are billed as lighter-touch, but the penalty framework leaves little room for complacency. Kate Ison and Jackelyn West consider the new measures.
This newsletter was written by Jackelyn West, a Senior Associate in the Disputes team.
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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