Tax mitigation for selling property held in a trust
This case involved a property held in trust and a proposed disposal of the property by the trustees which could lead to a potentially substantial capital gains tax liability. Churchill Tax Advisers advised on a tax efficient route for sale of the property without any capital gains tax to pay and for the proceeds to be distributed to the beneficiaries.
Guedj – Late Submission of Tax Return
This case heard at the First Tier Tribunal concerned two issues surrounding income tax. The first issue related to penalties for late submission of a tax return in the tax year 2013 – 2014. The second dealt with an assessment of a balancing payment in the tax year 2014 – 2015. There was an inadequate explanation of the reason for the balancing payment and the way in which it had been calculated.
The appeal was permitted by the Tribunal.
The appellant, Mr Guedj was required to submit the self assessment return for the tax year 2013 – 2014. However, the return was submitted more than 12 months past the due date and the HMRC issued an initial penalty of £100 in addition to £900 daily penalties, £300 at six months and then a further £300 after 12 months had elapsed. An appeal was lodged against all of these penalties.
During the case the HMRC did not provide any evidence that Mr Guedj had been notified that a tax return was required or provided the tax return form that he was required to complete. Based on the evidence provided by the appellant was adequate to show, regardless of whether he had been notified or not about the necessity to complete a tax return, Mr Guedj had been aware that he was required to complete a tax return. It was also found that the return was submitted late and it was accepted by the appellant that the initial £100 fine for late submission of the return was justified. The appeal against the initial penalty was therefore dismissed.
When reviewing the subsequent delays to determine whether there was ‘reasonable excuse’ for submitting the returns late, it was difficult to reach a definitive answer due to lack of evidence supplied by the appellant and the HMRC. It was accepted that the appellant had made numerous unsuccessful attempts to access the self assessment platform, further passwords had been issued and reasonable attempts had been made to resolve the issue even when the appellant was out of the country and communication was somewhat challenging. Once the paper tax return had been received, the appellant did complete and return the form in a reasonable timeframe.
Consequently the HMRC concluded that the appellant had a genuine excuse as to why the tax return was late and allowed the appeals against the daily, six month and 12 month penalties.
In relation to the second issue concerning the tax year 2014 – 2015, an assessment was made and it was determined that the balancing charge of £480 was attributed to work health insurance. The HMRC did not provide any additional evidence to justify how the figure had been calculated or what it was intended to balance. The appellant was dismissed from his post in March 2014 and he had no income in the year 2014 to 2015. The Tribunal found it increasingly difficult to understand why this balancing payment was necessary. Therefore, in this instance, the appeal was allowed.
Almond – Failure to declare rental income
The First Tier Tribunal case concerned Mr Almond. The Tribunal permitted an appeal against discovery assessments because expenses that the taxpayer deducted from rental income was higher than the 20% deduction applied by the HMRC. The Tribunal also reduced failure to notify penalties because it was concluded that the HMRC abatements for cooperation should have been higher.
Mr Almond rented out properties for a number of years but he did not notify the HMRC of this income source. The properties were occupied but they received rental income which was below market rates. The HMRC investigation resulted in notices of assessment being issued in relation to the rental income along with penalty assessments for failure to notify chargeability.
Based on the evidence presented to the tribunal, it was concluded that expenses can only be deducted from rental income provided that they are revenue expenditure which is solely incurred for the purpose of a rental business.
In this instance, almost all of the rent was obtained from connected persons, specifically for the purpose of the property rental business but also to support Mr Almond’s family. Using stringent legal provisions, only some of the expenses claimed by Mr Almond were allowable. Furthermore, the interest on mortgages taken out to purchase the rental properties can be deducted but the premiums for the endowment policy are non-deductable. Insurance for the structure of the building and landlords contents, service charges, servicing and maintenance, repairing deterioration and council tax for the occupier is permitted provided that it is paid by the landlord out of the rental income.
After careful review, the Tribunal decided to reduce the failure to notify penalties.
Paypoint Collections Ltd & Anor – Payment Processing Appeal
As subsidiaries of Paypoint PLC, Paypoint Network Ltd and Paypoint Collections Ltd are an international provider of payment solutions. The companies have contracts with clients across a diverse range of industries, supplying payment facilities enabling customers to submit payments or top up services. Network provides all of the equipment required for payment processing including cash registers, software and communications with a data centre.
In this first tier tribunal, the issue for consideration was a ruling by the HMRC. It was maintained that that post payment services were exempt under the Value Added Tax Act 1994. The company argued that their clients were provided with the infrastructure and systems including retail equipment enabling customers to process payments for clients. This did not fall within the remit of the payments system and therefore should not be classed as a payment collection service. When customers sent payments to agents, the money did not belong to the Network. Rather, it rests with the utility or telecoms provider.
The HMRC decided that the Network was providing a payment system which involved the collection of cash. Therefore they would be liable for tax on these payments. The company had challenged the ruling based on the fact that its services were ‘standard rated debt collection’. This was upheld.
This case is just another of the many cases involving payment processing through intermediaries. If the HMRC ruling had been supported, it would have had lasting implications for the business. As money was never under the control of the company, the appeal was upheld at the First Tier Tribunal.
Delays in Submitting VAT Returns
In a First Tier Tribunal, Plant Force (Leeds) Ltd submitted an appeal against a HMRC decision which stated the business failed to submit VAT returns as a result of dishonesty. The firm was investigated and it was discovered that they had failed to file the relevant VAT returns for nine consecutive quarters. For the same period the HMRC had also issued central assessments which were based on previous returns. However the firm failed to notify the HMRC that these assessments were too low.
The HMRC decided that the deliberate failure to submit VAT returns amounted to fraud. The Director and shareholder of the firm argued that his actions were not fraudulent, rather the company had simply fallen behind with their VAT returns and he believed that the accountant appointed by the firm had been sending them.
During the hearing the Director of the company stated that the delay in submitting the returns was a result of the accountants at the time not fully understanding what was going on and the VAT issues had occurred when he turned his attention to the management of the company after the book keeper and transport manager left the firm. The HMRC were not contacted because as the Director put it, he was ‘fighting fires’. The Director also stated that he was not aware that the VAT was not being paid until he was notified by the HMRC.
First Tier Tribunal Burden of Proof
The Tribunal established the Director as being a credible witness and he did not try to state that he had been negligent or careless in terms of how the appellant managed the company’s VAT affairs. It was also established that the Plant Force (Leeds) Ltd did settle the amount of outstanding VAT and the Director was not aware that what he had omitted amounted to tax evasion. Furthermore, he did not participate in activities that would deliberately evade tax and he was therefore not dishonest in his conduct.
In this case the burden of proof was firmly on the shoulders of the HMRC who had to demonstrate that on the balance of probabilities, the firm had deliberately evaded VAT and this evasion was a result of dishonesty. Throughout the First Tier Tribunal the HMRC failed to provide any evidence to support the view that the Director of the company had been dishonest.
This case demonstrates the importance of the tax payer attending the tribunal and providing evidence at the hearing so that the First Tier Tribunal can establish whether the witness is honest and credible. Had the Director not provided his own evidence, the outcome of this case may have been quite different.
Salesman Convicted of Double Tax Fraud
In South Yorkshire, an investigation unfolded that resulted in the conviction of a double glazing salesman who had committed fraud valued at £144,000. Jonathan Wright a self employed individual did not declare income of £530,000 over a five year period. After he had been found guilty, the courts postponed his sentence for a further six months to allow him to pay back what he owed, but during this time Mr Wright committed further a further offence. He submitted a false VAT return which reduced his tax liabilities by £20,346.
The Fraud Investigation Service stated that Mr Wright was provided with plenty of opportunities to repay what he owed but during this time, he stole more money from the honest taxpayer.
The HMRC first began investigating Mr Wright as part of a taskforce which had been launched to explore the tax affairs of self employed sales people who worked in the double glazing sector. In the initial interview in February 2015, Mr Wright stated that he believed his tax deductions were made at source and he didn’t need to submit a tax return. When he was interviewed in September 2016 for a second time, he responded to all questions with ‘no comment’.
In court, Mr Wright pleaded guilty to nine counts of knowingly being involved in fraudulent evasion of Income Tax and VAT at his hearing at Leeds Crown Court. The Judge sentenced him to 12 months in prison.
This case goes to show that no matter how elaborate the lengths individuals and businesses go to avoid tax, it will always catch up with them in the end and the consequences are severe. Each week there are more and more reported cases of tax evasion and tax fraud in the media with individuals resorting to even more complex methods to avoid or evade paying their tax bill.
10th May Tax Update
10 May 2017
Tax Investigation for Husband and Wife closed
These clients came to us after HMRC started a tax investigation for undeclared property income. The clients were in panic and extremely nervous. Our team of tax experts considered the case and noticed that the client had made more losses in earlier years which would be offset against any future profits resulting in no tax to be paid. We put forward our position to HMRC which was rejected. After long exchange of correspondence, HMRC finally accepted our client’s position that there was no further tax to pay and closed the case.
IR35 applying to contractors in the Public Sector
From April 2017, new rules apply to contractors in the Public Sector whereby the employing body is required to check if the contractors are subject to IR35 and if not apply PAYE. We have received a large number of enquiries over the last two months in relation to whether some contractors are caught or not. We have noticed that most of the public bodies are applying PAYE to all contractors without considering whether they meet the IR35 rules or not. It must be stressed that the rules for IR35 have not changed at all so if someone was outside the IR35 rules before April 2017, they will continue to do so after this date as well. There is an IR35 tool available onhttps://www.gov.uk/guidance/check-employment-status-for-taxwhich should be a starting point to check whether a contractor is caught or not. However, HMRC have stated that the results of this tool are not always accurate. Our view is that the contractors can consider having their contracts reviewed and appealing against the decision that they are caught by IR35 if they are in fact not.
We have also seen a number of contractors in the Public Sector panic and move to Umbrella companies just before April. There are two main categories of Umbrella companies:
a. Applying PAYE as normal after deduction of travel costs and their commission. This works out to be roughly the same as normal PAYE
b. Setting up an artificial contractor loan arrangement whereby a small salary is paid to the contractor under PAYE and the balance is paid by way of a loan which in reality never has to be repaid. This appears to be a much better option for the contractor. However, as this is tax avoidance scheme, there is a strong likelihood that HMRC will investigate such contractor loans and tax it fully under PAYE together with penalties and interest. We currently have a number of contractors that are under tax investigation for using contractor loans tax avoidance schemes. We strongly advise against using such tax avoidance schemes as these are very likely to fail.
Our firm can offer contract reviews at a nominal fee and make an appeal to the employing body. Please contact for further information.
Foreign Tax Investigation Closed
This client had recently moved to the UK and was investigated by the tax authority of the country he came from. In summary, he was being asked to pay tax on income whilst he was resident in the UK. The foreign tax authority became quite aggressive with their enquiry. The client approached us for help through a referral. Our tax specialists were able to coordinate matters between the UK tax authority and the foreign tax authority by way of Tax Residence and the Double Tax Treaties. After several months of correspondence, the case in the foreign tax jurisdiction was closed with no further tax to pay.
Capital Gains Tax Planning
This client was referred to us from an accounting firm in South London. The client had several properties which he wanted to transfer to his wife as well as sell some business assets. If the properties were simply transferred, there would be capital gains tax at 28% – which came to approximately £300k. However, if the properties were to be left in our client’s estate, there would be inheritance tax payable at 40% on the market value at death. Our tax specialists were able to put together efficient structure for the transfer of properties to the children without any capital gains tax or SDLT to be paid. The structure would also help towards mitigating inheritance tax liability once the client and his wife pass away. Our tax planning saved the client almost £300k in capital gains tax and almost £500k in inheritance tax.