Tax Bites – April 2024

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

News

HMRC issues guidance on consequences of failing to comply with a 'stop notice' issued under the POTAS rules

HMRC has issued new guidance which sets out the consequences of  failing to comply with a 'stop notice'. A stop notice is a notice given by HMRC to any person who it suspects of promoting arrangements which meet certain conditions under the promoters of tax avoidance schemes (POTAS) rules.

A stop notice requires the recipient to immediately stop promoting such arrangements and: 

• provide a copy of the notice to any other persons subject to the notice;
• provide HMRC with further information about other persons subject to the notice;
• inform their clients and intermediaries that they are subject to a stop notice; and
• send quarterly returns to HMRC.

It is a criminal offence to continue to promote arrangements subject to a stop notice or fail to give a copy of that notice to other persons subject to it.

HMRC can issue penalties ranging from £5,000 to £100,000 for failing to comply with the requirements listed above.

New regulations made which implement a statutory set-off mechanism to address the over-collection of tax in cases of non-compliance with the off-payroll working rules

The off-payroll working rules are intended to prevent the avoidance or reduction of income tax and National Insurance Contributions (NICs) by the interposition of an intermediary between a client and the worker. They work by establishing whether the worker would have actually been considered an employee of the client save for the interposition of an intermediary. The client then becomes the 'deemed employer' who is required to deduct PAYE and NICs before payment is made to the intermediary.

However, this can create a problem when the intermediary or worker pays PAYE and NICs themselves and HMRC then pursue the 'deemed employer' for tax which has already been paid. New regulations, The Income Tax (Pay As You Earn) (Amendment) (No 2) Regulations 2024 (SI 2024/355), come into force on 6 April 2024 to address this issue by reducing the liability of the 'deemed employer' in certain circumstances to account for any tax or NICs which has already been paid. 

Inclusive Framework on BEPS publishes guidance 

The Pillar 2 / Global Anti-Base Erosion rules are intended to ensure multinational enterprises (MNEs) pay an effective tax rate of at least 15% in each jurisdiction in which they are located. If their effective tax rate is below 15%, a top-up tax will be applied to achieve the internationally agreed rate of 15%. 

In order to mitigate the uncertainty of transitioning to these rules, a temporary country-by-country safe harbour formed part of the proposals which allows MNEs who meet certain conditions to apply less extensive calculations and, in some cases, qualify for a nil top-up rate in specific jurisdictions.

Following these proposals, certain avoidance transactions were marketed to MNEs which sought to utilise inconsistent or duplicative transactions to allow one constituent entity of an MNE to benefit from the safe harbour.

The Inclusive Framework on BEPS recently published guidance which confirmed that such avoidance transactions do not allow a constituent entity to qualify for the safe harbour. 

See page 18 of the guidance for further details.

HMRC publishes a Framework for Co-operative Compliance with large business

HMRC has published a Framework for Co-operative Compliance,  which it will apply when determining whether a large business is exhibiting lower-risk or higher-risk behaviour.

The Framework includes guidelines for both large businesses and HMRC. For example, both parties should:

• work proactively together to resolve tax disputes;
• promote a professional, collaborative relationship which is based on principles of transparency and justified trust;
• engage in open and timely dialogue to discuss tax planning, strategy, risks and significant transactions and businesses should fully disclose any significant uncertainty in relation to their tax matters;
• respond to queries, information and clearance requests in a timely fashion;
• ensure the other party is informed about how issues are progressing, especially those that are complex or difficult; and
• seek to resolve issues before returns are filed where possible.

The Framework also specifies that large businesses should:

• be open and transparent with regard to decision making, governance and tax planning, keeping HMRC informed of who has responsibility, how decisions are reached, how the business is structured and where the different parts of the business are located;
• structure transactions in a way that aligns with commercial and economic activity and does not lead to an abusive tax result; and
• structure transactions in a way that gives a tax result they reasonably believe is not contrary to the intentions of Parliament.

Case reports

Tribunal finds that taxpayer who bought and sold three properties in quick succession was not trading

In Gary Ives v HMRC [2023] UKFTT 968 (TC), the First-tier Tribunal (FTT), found that the taxpayer was not carrying on a trade by buying, renovating and selling three properties in quick succession.

Although each case will of course turn on its own facts, in coming to its decision, the FTT carefully examined several of the badges of trade. This decision should therefore be considered by anyone who has purchased, renovated and sold a number of properties in relatively quick succession, where HMRC is claiming that they are trading in property. 

It is also notable that the FTT criticised HMRC's preparation for the hearing and in particular the quality of the hearing bundle. The FTT noted that the hearing had already been deferred due to "inadequate marshalling of evidence" by HMRC and commented that "in a case where the total amount in dispute is nearly £1 million, we would expect HMRC to take more care in preparing the hearing bundle and making sure that it contains all relevant material properly arranged, particularly so when their failings had already been pointed out to them some months previously by a judge of this Tribunal".

The fact that the taxpayer prepared for the hearing and adduced documentary evidence and witness evidence appears to have assisted him greatly in convincing the FTT that his appeals should be allowed.

Our comment on the decision can be viewed here.

Supreme Court provides clarity on Transfer of Assets Abroad legislation

In Fisher v HMRC [2023] UKSC 44, the Supreme Court (SC) allowed the taxpayers' appeals, finding that they were not "transferors" for the purposes of the Transfer of Assets Abroad (TOAA) provisions contained in the Income and Corporation Taxes Act 1988.

As acknowledged by the SC, the TOAA provisions are notoriously complex, and have perplexed and concerned generations of advisors and judges alike. In recent years, there has been a notable push by HMRC to extend the scope of those provisions beyond what many consider was Parliament's intention when enacting them, and practitioners have keenly awaited the final determination of the issues raised in Fisher for almost a decade. The SC's decision provides a welcome rebuke of HMRC's expansionist approach, and much needed clarity on the application of the TOAA regime and its limitations. 

Our comment on the decision can be viewed here.

FTT rejects HMRC's expert evidence and allows taxpayers' appeals

In Graham Chisnall and Others v HMRC [2023] UKFTT 857 (TC), the FTT held, in allowing the taxpayers' appeals, that evidence derived from the sale price of shares on the Alternative Investment Market was more reliable than evidence provided by a valuer employed by HMRC.

The FTT's comment that '[n]o matter how weak or unsatisfactory the evidence relied on by one party may be, it must in the particular circumstances of the present cases be accepted by the Tribunal if the evidence relied on by the opposing side is even weaker and less satisfactory' is telling. Although the FTT stressed the fact-sensitive nature of its decision and that it was reached on the basis of the particular evidence and arguments relied on by the parties, nonetheless this decision should be considered by anyone involved in a tax dispute in which expert evidence is to feature.

The FTT was critical of HMRC and said that there was apparent bias in the way that it had used its own valuer and in particular the way that they had been instructed not to use the prior FTT decision in Netley as their starting point. It is to be hoped that following this decision and the FTT's critical comments, HMRC will reflect on how it engages with expert evidence.

Our comment on the decision can be viewed here.

And finally …

Adam Craggs and Michelle Sloane recently published an article in Tax Journal which explores the far-reaching powers that HMRC can deploy during a criminal investigation into suspected tax fraud.

The article can be read here (Tax Journal subscription required).