Tax Bites - October 2022

Welcome to the latest edition of RPC's Tax Bites - providing monthly bite-sized updates from the tax world.

As always, if there are any areas you would like more information on (or if you have any questions or feedback), please let us know or get in touch with your usual RPC contact.

News

HMRC has published Spotlight 60 warning agency workers about certain tax avoidance arrangements used by some umbrella companies

HMRC has published Spotlight 60 warning agency workers and contractors employed by umbrella companies about the tax avoidance arrangements used by some umbrella companies.

HMRC is concerned that some umbrella companies use disguised remuneration schemes to claim that certain payments (for example, a loan) made to agency workers and contractors (either directly or indirectly through a chain of companies, trusts or partnerships) are not taxable. The spotlight lists warning signs that may indicate the use of a tax avoidance arrangement, including: short-term contracts, higher pay than that shown on payslips, payments that purport to be non-taxable and umbrella companies retaining higher fees.

HMRC has issued additional guidance on requirement to correct previous offshore tax non-compliance

HMRC has published further guidance on the requirement to correct (RTC). The RTC, originally established in 2017, was an obligation for those taxpayers who had undeclared assets located outside of the UK to make a declaration to HMRC on or before 30 September 2018.

The new guidance outlines that Class 2 and Class 4 National Insurance Contributions for self-employed workers fall within the RTC. The guidance also states that the time limit of 12 years for non-deliberate offshore non-compliance set out in the Taxes Management Act 1970 applies to RTC. The new guidance also makes clear that there is no liability to the RTC for taxpayers who died before 1 October 2018.

Call for evidence on hybrid and distance working

The Office of Tax Simplification has issued a call for evidence on hybrid and distance working.

The call for evidence has been prompted by the surge in the popularity of more flexible working arrangements that has followed the Covid-19 pandemic. Responses are sought from employers and employees from multiple sectors as well as from those who are self-employed. The consultation is set to close on 25 November 2022.

OECD publishes Peer Review Assessments for UAE, Qatar and Thailand and Other Nations

The OECD has published peer review assessments on making tax dispute resolution more effective in a number of jurisdictions. There are a number of updates in these assessments, all of which involve jurisdictions that have committed to bringing in minimum standards on tax-related disputes.

A key development is that the Multilateral Instrument, a convention intended to minimise tax avoidance opportunities for international businesses, has been signed by Qatar, UAE, Vietnam and a number of other countries. Several countries have also boosted the size of their respective competent authorities and streamlined their approach to Mutual Agreement Procedures

Case reports

Tribunal upholds HMRC notice transferring debt from managed service company to its former director

In Nigel Victor Gradidge v HMRC [2022] UKFTT 189 (TC), the First-tier Tribunal (FTT) dismissed an appeal against a debt transfer notice (DTN) issued by HMRC under section 688A(2), Income Tax (Earnings and Pensions) Act 2003 and the Social Security Contributions (Managed Service Companies) Regulations 2007, transferring a debt from a managed service company (MSC) to a former director of the company.

Under the debt transfer rules, HMRC may recover from certain persons (including directors, office-holders and associates of a MSC) amounts which should have been deducted under PAYE by the MSC, if they are irrecoverable from the MSC, by serving a DTN on the relevant person. Importantly, it would appear from this decision that it will not be sufficient for such persons to assert that they were not knowingly involved in the arrangements or sought a tax benefit.

You can read our commentary on the decision here.

HMRC defeated in SEIS risk to capital criteria case

In Cry Me a River Ltd v HMRC [2022] UKFTT 182 (TC), the FTT held that the production of a single film did not prevent the appellant from meeting the SEIS risk to capital criteria. The FTT concluded that it was never intended that Secret Channel Films, a company associated with the appellant, would produce the films itself, but rather that each production would be undertaken by a SPV of which the appellant was one.

The world of film production is no stranger to disputes with HMRC in relation to the availability of tax reliefs, and it is refreshing to see a clear and pragmatic decision in favour of the taxpayer in this context. The EIS and SEIS regimes contain highly technical requirements and anyone contemplating issuing EIS or SEIS-qualifying shares needs to proceed with care.

You can read our commentary on the decision here.

Upper Tribunal allows HMRC's appeal in purpose-based rules case

In HMRC v BlackRock Holdco 5 LLC [2022] UKUT 199 (TCC), the Upper Tribunal (UT) allowed HMRC’s appeal, holding that the FTT was wrong to interpose certain terms (covenants) in loans when conducting its analysis of the counter-factual transaction as between the taxpayer and an unconnected third-party. The UT held that the FTT was wrong to attribute all of the loan debits arising to the taxpayer's commercial main purpose.

The UT in this case appears to have regarded the fact that the transaction would not have been entered into if no relief was available as somehow antithetical to the availability of that relief itself. This is surprising given that the very purpose of a tax relief is to encourage taxpayers to alter their behaviour. Applying the main object test in such a way arguably denies taxpayers the very relief Parliament intended them to receive.

You can read our commentary on the decision here.

And finally...

Relief for research and development (R&D) has been thrust into the headlines lately. HMRC recently sent out nudge letters to targeted taxpayers, indicating that unless they abandoned their claims for R&D relief, they might be subject to criminal investigation.

In our latest episode of Taxing Matters, we discuss the role of R&D tax relief, how to qualify for the relief, how to stay compliant, some common abuses of the system and some of the recently proposed reforms.