The Budget
It was an entertaining speech but there was precious little of professional interest. Normally the moment the Chancellor sits down, we are inundated by hundreds of pages of press release, guidance and notes from HMRC which contain all the real details. Not this time.
However, there were a few things worthy of some further explanation beyond the brief comments in the
Budget Bulletin of 19 March.
Tax Schemes
It may be remembered from last month that HMRC are getting seriously heavy with anybody who
promotes (or participates in) marketed tax avoidance schemes. The proposals are mainly concerned
with a requirement for tax to be paid up front in disputed tax cases in various circumstances (most of
which will be determined by HMRC). The proposals were put out for consultation and were universally
condemned, being described by some professional bodies as contrary to natural justice and possibly
unconstitutional.
In a display of staggering disrespect, HMRC are pressing on with their proposals virtually unchanged.
Of course one can understand the policy objectives, and those involved in tax schemes do not attract
much sympathy, but there is a limit.
We are talking here about people being subject to significant penalties for acting in a perfectly lawful
manner - but in a way that HMRC does not like. My old friend Montesquieu had a view on this sort of
thing:
"Liberty is the right to do what the law permits."
I wonder what you call it when merely disagreeing with a government department gives rise to
fines and other disadvantages.
I suppose there is still time for revisions to be made to the more egregious elements (to coin a phrase)
of HMRC’s proposals but I shall not hold my breath.
SDLT
Mr Osborne is pretty keen for residential property not to be acquired by companies.
The 15% rate of SDLT which applies to transfers of residential property worth more than £2 million to a
company will now apply in respect of properties worth more than £500,000. There is the usual relief
for contracts entered into on or before Budget Day. This special rate will not however apply to
residential property which is commercially let to unconnected third parties or is acquired for the
purposes of development.
Otherwise, all the other SDLT rules remain unchanged…at least for the moment.
ATED
The Annual Tax on Enveloped Dwellings is also going to apply to properties in excess of £500,000
which are owned by companies and which are not commercially let or being developed. There are to
be two new rate bands:
From 1 April 2015 properties over £1 million will be subject to an annual charge of £7,000;
From 1 April 2016 properties over £500,000 will be subject to an annual charge of £3,500.
The ATED charge for 2014/15 (which is payable on 30 April 2014) has been increased broadly as
outlined last month. The new figures have now been confirmed and are as follows:
Value £2 million - £5 million £15,400
Value £5 million - £10 million £35,900
Value £10 million - £20 million £71,850
Value more than £20 million £143,750
Where a company is subject to this annual charge, it will also be subject to capital gains tax on disposal
of the properties at a rate of 28%, rather than the normal corporation tax rate - and this applies to UK
as well as offshore companies. At the moment this capital gains tax charge only applies to properties
worth more than £2 million and only on the increase in value from 1 April 2013. This capital gains tax
liability will extend to the lower value properties when they become subject to the ATED charge.
For UK resident individuals, this capital gains tax charge is not particularly overwhelming. If the
company owning the property is UK resident it will be liable to corporation tax anyway (although at a
lower rate). If the company is not UK resident, any gain made on the property would already be liable
to capital gains tax directly in the hands of the UK resident shareholders - without any opportunity to
benefit from the remittance basis even if they were not UK domiciled. So this ATED related CGT
charge really only hurts non resident individuals.
IHT : Debts
Last year, new rules were introduced to prevent a deduction for debts where the borrowings are used
to acquire property which qualifies for certain inheritance tax reliefs, or is used to acquire excluded
property. It was uncertain (but seemed to be generally accepted) that if money borrowed was merely
in a bank account outside the UK, that would be the acquisition of excluded property and therefore
within the new rules. However, deposits in a UK bank account denominated in foreign currency were
not chargeable to inheritance tax but were not within the definition of excluded property either.
This is being tidied up so that funds in a foreign currency bank account will be treated in a similar way
to excluded property and any borrowings for this purpose will not be deductible for IHT purposes.
Dual Contracts
In the Autumn Statement it was announced that dual contracts were for the chop. Where a UK
resident works partly in the UK and partly abroad, the whole of his earnings are taxable. However, if he
is not UK domiciled, any earnings from a separate contract with a foreign employer where the duties
are performed wholly abroad are taxable only on the remittance basis. If this is not genuine, or if the
amounts attributed to the foreign contract are excessive, HMRC have plenty of powers to unravel the
arrangements. For some reason, these powers were thought to be inadequate. Accordingly, the
proposal is that where the foreign contract is with an associated employer in a low tax jurisdiction, the
remittance basis will not apply and the whole lot will be taxable in the UK. A low tax jurisdiction for this purpose was one where the foreign tax on to the overseas earnings is less than 33.75%.
HMRC said that in their view, most contracts are artificially arranged in order to obtain a tax advantage.
However, even if this were true, the proposals were going to catch many innocent employees.
HMRC seem to have concluded that their proposals went too far and they have been significantly
revised.
The new proposals will not now apply where:
the arrangements are not made for tax avoidance reasons
the duties of a UK employment could not lawfully be performed in the overseas territory for
regulatory reasons
the foreign tax on the overseas earnings is more than 29.25%
the earnings are for a period prior to 6 April 2014
There is an exclusion for a director who has less than 5% of the employer’s share capital – but this is
overridden if the individual is “a senior employee” or if he “receives the higher or highest level of
remuneration”. Unfortunately there are no definitions of these rather elastic terms but maybe some will
be forthcoming in due course.
This new regime was never going to apply to overseas income which falls within the three year period
for overseas workday relief in Section 26 ITEPA 2003. Where a foreign domiciled individual comes to
work in the UK, they will continue to be entitled to the remittance basis in respect of the foreign
earnings for the year of arrival and the following two years. It is confirmed that such earnings will be
outside the scope of these new rules.
Capital Gains Tax : Non Residents
The Consultation Document on the extension of CGT to residential property owned by non residents
has now been published. It sets out some general guidelines and the theme is quite clear; to put non
residents in exactly the same CGT position as UK residents as far as residential property is concerned.
There is a clear overlap (indeed conflict) with the ATED related capital gains tax rules which already
apply to properties held by companies. The ATED related charge does not apply to residential
property which is commercially let or is being developed - but there will be no such reliefs from this new
charge.
The other main features of the proposals are as follows:
The charge will apply only to gains arising from April 2015.
Companies, trusts and collective investment schemes will be liable to the charge.
Partnerships will not be included because the transparency rules will place the charge on the
partners.
It will apply to all properties - even those under £500,000.
The tax will be collected by some kind of withholding tax arrangement.
The rate of tax is not specified - but it seems inevitable that it will be 28%
It will not apply to a property qualifying as the only or main residence.
Foreign REITS will not be covered by the new rules.
For a UK resident who has an offshore company and makes a gain on a property which it has
owned for some time, it is going to be a bit complicated. The gain up to April 2008 will probably not be
taxable if he is a non dom; the gain up to April 2013 will be taxable on him personally under section 13;
the gain up to April 2015 will be taxed on the company under the ATED rules and the gain after April
2015 will be subject to the new CGT charge in the company. Or maybe not. One or more of these
charges might not apply - in which case one of the others will probably apply instead. I hope this is
clear.
There is one aspect of the proposals which would affect UK residents. It is suggested that the main
residence rules might be changed either to eliminate the election under section 222 where the taxpayer
has more than one residence (and to make it a purely factual test) or to have an arithmetic test being
the residence in which the taxpayer has spent the most time during the tax year. (You do of course
have to get past the hurdle of the property being a "residence" in the first place).
Professional Negligence
It is clear from the acres of press coverage devoted to people avoiding taxes by arrangements of
varying complexity, that anybody who advises on such things should be cast into the outer wilderness
or the fires beneath.
The case of Mehjoo v Harben Barker last year was therefore a surprise. Mr Mehjoo sold shares in his
company and made a substantial gain which after taper relief gave rise to capital gains tax at only 10%.
Nevertheless, he sued his accountants on the grounds that he was a non dom and should have been
advised to do something to avoid the tax completely – like using bearer warrants to turn his shares into
foreign property enabling him to shelter the gain by reason of the remittance basis.
Opinions differed on whether such arrangements would be effective but the High Court found that the
accountants were negligent in failing to provide such advice or at least failing to refer him to a specialist
in this area who would do so. (This was not completely off the wall. In Slattery v Moore Stephens
(2003) the accountants were sued successfully for not advising their client to divert part of his earnings
to the Channel Islands when he came to work in the UK). The position would seem to be even more
difficult for solicitors because the Solicitors Regulation Authority have warned that solicitors could be
censured and fined if they are involved in implementing schemes to reduce their client’s liability to
SDLT. By heeding this warning, solicitors risked being sued for professional negligence.
However the Court of Appeal has come to the rescue by deciding unanimously that Harben Barker
were not negligent.
Harben Barker were described as a generalist firm of accountants and they advised Mr Mehjoo about a
number of ways to reduce his capital gains tax liability. They had a checklist of 12 points although this
did not include anything relevant to his possible non dom status. The Court of Appeal suggested that
they would have known that on a sale of shares in an English registered company, no tax advantages
were available unless the situs of the shares could be changed. As this was something which they did
not know, nor could have been expected to know, was able to be achieved, there was no reason to
mention it, still less be liable in negligence for not doing so. The Court of Appeal thought that the High
Court decision would impose an open ended and apparently limitless duty upon Harben Barker.
This decision of the Court of Appeal is not inconsistent with Hurlingham v Wilde (1997) where a
solicitor engaged to carry out a conveyancing transaction was held to have a duty to advise on the tax
implications even though he was not asked to advise on that aspect. The tax charge was something
which should have been known to the solicitor and was therefore regarded as covered by his retainer –
whereas in Harben Barker, their retainer did not extend to matters beyond their reasonable knowledge.
I would respectfully suggest that this must be right. Otherwise, if an accountant were to be liable in
negligence for failing to advise his client how to avoid the whole of the capital gains tax liability on a
sale of shares – or if he does not know how, to introduce him to somebody who does - nobody would
ever pay any tax. If any tax arose, the adviser would be liable for failing to advise (directly or indirectly)
how it should be avoided.
Residence
After the euphoria of the taxpayer's victory in Glyn v HMRC we are bumped back down to earth by the
decision of the Tribunal in P Daniel TC 3312. Although this case was nominally about residence, the
whole issue was really about whether Mr Daniel was working full time abroad. If he had left the UK
and worked full time abroad for the whole of the relevant tax year it was common ground that he would
not be UK resident for that year. This was wholly dependent upon the facts and there was a very
detailed examination of Mr Daniel's movements and activities. The Tribunal decided that he was not
working full time abroad for the relevant year - and that was that.
Well almost - because it got worse. Not only did the Tribunal conclude that Mr Daniel did not work full
time abroad for the relevant year, he was so far away from satisfying this test that he was negligent by
submitting his tax return on this basis.
It is difficult to draw any general principle from this decision - other than to note that Mr Daniel's
evidence was not supported by the Tribunal having sight of a single written document. The Tribunal
were "surprised and troubled that every piece of objective evidence in this case, such as fax and email
correspondence, presentations, letters and the very existence of at least 3 computers is and are, all
unavailable to us". Although they had Mr Daniel's sworn testimony (which can be accepted without the
need for any corroboration) it seems likely that some supporting documentary evidence may have been
helpful.
Penalties : Postal Delays
My heart sank when I saw the case of Kestral Guards Limited v HMRC TC 3324 which is yet another
case where HMRC imposed a penalty for late payment occasioned by postal delays. This is getting
ridiculous. The position is quite clear as a series of cases before the Tribunal have shown but for some
reason HMRC keep running the same (bad) arguments which have been rejected time and time again
by the Court.
I make no apology for revisiting this subject because it is really important not only regarding the issue
itself – but also on views of the Tribunal on the approach of HMRC.
If you send a cheque for the tax to HMRC the day before the due date by first class post and properly
addressed, it is now well established that there is no penalty because you have a reasonable excuse if
it does not arrive in time. (There was an aberration in the shape of Panther Parcels & Courier Limited
but I would respectfully suggest that was per incuriam).
I entirely understand that if a payment does not reach HMRC on time, they are entitled to make full
enquiries to see whether the taxpayer was at fault. If they have any doubts about what the taxpayer is
saying, they may want to have his evidence tested on oath. However, they are supposed to have a
reason to doubt that the taxpayer is telling the truth – I think the Taxpayer’s Charter requires HMRC to
treat the taxpayer as honest unless they have reason to believe otherwise.
But that does not justify the continual rehashing of arguments which the Tribunals have said on a
number of occasions are wrong. I would hope that the taxpayer has a good claim for costs because
under the circumstances, HMRC can hardly be behaving reasonably if they keep advancing arguments
which have been repeatedly held to be bad - even if decisions of the FTT are not binding. However, a claim for costs is unlikely to be very profitable because the penalties charged are usually very small
and not worth the expenses of legal representation.
So was there anything special about Kestral Guards Limited? Not really - but there were a couple of
interesting points. HMRC complained that the taxpayer did not provide proof of posting of the letters
containing the cheques. The Tribunal said this was not relevant; they accepted the taxpayer's oral
evidence and although a certificate of proof of posting would have corroborated his evidence, such
corroboration was not needed.
There was a much more worrying passage. The taxpayer had telephoned HMRC regarding the matter
but their record of his call was materially wrong. The Tribunal expressed their concern that this error
could have a seriously adverse effect on the taxpayer's position in the following terms:
"In keeping records and producing them to the Tribunal that untruthfully show the
taxpayer as having refused to pay its tax liability, HMRC is acting unfairly and probably
unlawfully."
I hope that there is somebody in HMRC who cares about this.
FURBS : NIC
The long running saga of Forde & McHugh Limited has now come to a conclusion in the Supreme
Court. The issue was whether contributions to a Funded Unapproved Retirement Benefit Scheme
(they are not called that any more - but never mind) were liable to NIC. There is no doubt that they
were liable to income tax but the question was whether the contribution to the FURBS was "earnings"
for NIC purposes as well.
This question has yo-yoed through the Courts but all that matters now is the Supreme Court decision.
Although there was a time when earnings for NIC and emoluments for income tax purposes might have
been synonymous, this link was specifically abolished a while ago by the Social Security Acts. The
Supreme Court suggested that HMRC's approach was remarkable as they claimed that the
contributions should be chargeable twice - once on the contribution to the FURBS and a second time
when the funds were paid out. This interpretation was abhorrent to the Supreme Court who decided
that the contributions by the Company to the FURBS were not earnings for NIC purposes.
It is welcome to have this clarified but I feel a legislative change coming on.
UK Source Income
Whether income has a UK source is relevant for a number of tax purposes, not least the deduction of
tax at source at the time of payment. For a long time this issue was determined for all practical
purposes by the decision of the House of Lords in Westminster Bank Executor & Trustee Company
(Channel Islands) Limited v National Bank of Greece SA 46 TC 472.
As a result of this case, HMRC set out their view of the position as follows:
"Although the Greek Bank case was concerned with income which turned out not to have
a UK source, inference can be drawn from that case about the factors which would
support the existence of a UK source and HMRC regard the most important as:
(a) the residence of the debtor, that is the place where the debt will be enforced;
(b) the source from which the interest is paid;
(c) where the interest is paid; and
(d) the nature and location of any security.
If all of these are located in the UK then it is likely that the interest will have a UK source."
However, HMRC have recently revised their Manuals (I do not remember any announcement) and now
consider that the most important factor in deciding whether interest has a UK source is the residence of
the debtor and the location of his assets. The other factors referred to above are merely things to be
taken into account.
The whole issue was recently examined by the Tribunal in Perrin v HMRC TC 3363. In this case, Mr
Perrin borrowed money from an EFRBS in the Isle of Man. The law applicable to the loan was that of
the Isle of Man and the interest was paid from funds in the Isle of Man. The loan agreement was
subject to the exclusive jurisdiction of the Isle of Man Courts and the Tribunal accepted that if any
dispute arose in connection with the loan agreement, the Isle of Man would be the proper jurisdiction
and that the UK Courts would decline jurisdiction.
In 1988 the Privy Council confirmed that the residence of the debtor is the usual place where the debt
would be situated because that is, prima facie, the place where he can be sued. However, if the
debtor's country of residence is not the country which has jurisdiction, this prima facie rule does not
apply and the obligation will be situated in the country with the jurisdiction - i.e. the place where he can
be sued.
On the traditional view taken by HMRC there would be no argument. Far from all the factors being
located in the UK which would only make it "likely" that the interest had a UK source, only one of them
was located in the UK - and maybe not even that. The debtor was of course resident in the UK but this
was intended to be the determinant of the place the debt could be enforced, which was not the case
with Mr Perrin who could be sued in the Isle of Man and not in the UK.
Even on the revised HMRC view, the effect would seem to be the same. You would think that having
regard to the facts that:
the proper law of the agreement was the Isle of Man;
the only jurisdiction for enforcement of the loan was the Isle of Man;
the interest was paid in the Isle of Man from funds in the Isle of Man;
it would be reasonable to conclude that the interest paid by Mr Perrin did not have a UK source.
However, the Tribunal found that the interest paid by Mr Perrin did have a UK source. The reason was
Mr Perrin was resident in the UK and if he had to repay the loan, the assets out of which the loan would
be repaid would be mainly found in the UK. The Tribunal said that all the other factors had very little
weight and could therefore be disregarded. Mr Perrin was resident in the UK and that seemed to trump
everything. Whilst it may be generally accepted that in normal circumstances the residence of the
debtor is a highly significant factor, it is difficult to see how it can be so overwhelming in the face of all
the other factors and indeed such celebrated authorities in the House of Lords and Privy Council.
It is true that although Mr Perrin could not be sued in the UK for repayment of the loan, it would be
possible to enforce an Isle of Man judgment against his UK assets under EC Regulation 44/2001. The
relevance of this point is difficult to grasp because even in the Greek Bank case, the interest was not
UK source despite the fact that the obligations were only enforceable in the UK. Indeed, if this were to
be a reason for the interest paid abroad on this foreign debt to be regarded as UK source, the same
reasoning would apply to all judgments in EC member states.
It will be interesting to see how this argument develops.
