Tax Bites - February 2023

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

News

HMRC publishes new guidance on payroll company fraud

HMRC has published new guidance on how to check for signs of payroll company fraud. The guidance explains how payroll company fraud falls under the broader umbrella of organised labour fraud. The process of payroll company fraud involves criminal operations providing the staffing and payroll administrative work for legitimate businesses. The legitimate business will transfer its employees to the fraudulent business and will then pay the wages and VAT for those employees to that business.

The guidance outlines a series of ways in which businesses can recognise signs of payroll company fraud. These include a payroll company with no physical office or online presence (among other factors).

Given that the new guidance follows publication by HMRC of its August 2022 issue of the employer bulletin, which included a brief definition of payroll company fraud, HMRC appears to be directing its focus on prospective payroll company fraud. Businesses and individuals should be aware of the risks of this type of fraud and take appropriate preventative action.

Regulations published that add transactions in "designated cryptoassets" to the investment transactions list for the purposes of the investment manager exemption

HMRC has published new regulations relating to transactions in cryptoassets (The Investment Manager (Investment Transactions) (Cryptoassets) Regulations 2022).

The regulations have expanded the scope of the UK investment manager exemption (IME). The IME applies to UK investment managers who are acting on behalf of non-UK residents who satisfy certain conditions. When the IME applies, the assessable tax on profits from the transactions entered into by the UK investment manager is limited to the tax amounts deducted at source.

The new regulations have added transactions in "designated cryptoassets" to the list of investment transactions under the IME. Under the regulations, all cryptoassets are designated unless they are specifically excluded. It is also important to note that transactions that are created or issued by non-UK residents are excluded.

The regulations came into force on 1 January 2023. They should enable investment managers who are based in the UK to trade in cryptoassets without exposing any non-UK entities to the risk of being taxed in the UK.

ECJ rules that DAC 6 reporting obligation on lawyers is invalid

The European Court of Justice (ECJ) has published its judgment in Orde van Vlaamse Balies and others v Vlaamse Regering (Case C-694/20) EU:2022:963 and ruled that the DAC 6 obligation on lawyers exempted by legal professional privilege to inform other non-client intermediaries of DAC 6 reporting obligations is invalid.

Under DAC 6, introduced by Council Directive (EU) 2018/822, lawyers who were exempted from disclosing information to tax authorities due to their obligation to maintain legal professional privilege still had to notify any intermediaries of their DAC 6 reporting obligation.

However, the ECJ has confirmed that this reporting obligation is in breach of Article 7 of the Charter of Fundamental Rights of the EU. Article 7 relates to an individual's right to respect for his or her private and family life, home and communications. The ECJ determined that the DAC 6 obligations required that intermediaries and authorities be informed of a lawyer intermediary's identity. In the view of the Court, this went beyond what was strictly necessary to attain the recognised objective.

The ECJ also confirmed that lawyer intermediaries are still required to inform their clients of any reporting obligations under DAC 6.

HMRC issues new guidance on the transfer of assets abroad (ToAA) rules

HMRC has incorporated new guidance on the transfer of assets abroad ToAA rules into its International Manual.

The new guidance covers the important subject of thin capitalisation and lending against asset values. The amendments set out how, under Chapter 2, Part 13, Income Tax Act 2007, income arising offshore may be attributed to a UK individual.

UK taxpayers, particularly those who have moved assets overseas, should be mindful of these changes.

Case reports

Tribunal confirms it has jurisdiction to consider an argument of abuse of process based on excessive delay by HMRC

In Clive Kingdon & Ors v HMRC [2022] UKFTT 407 (TC), the First-tier Tribunal (FTT) allowed the taxpayers' appeals against discovery determinations and penalties on the basis that a company acquired a partnership business earlier than HMRC considered to be the case.

The documents relied on by the taxpayers to demonstrate the earlier date of transfer were more contemporaneous than those relied on by HMRC. That evidence was preferred to the evidence relied upon by HMRC.

The FTT therefore concluded that it was more likely than not that the transfer occurred when the taxpayers claimed it occurred.

The FTT noted that because of the delay caused by HMRC, the taxpayers were not able to recall the exact details of the transfer and were therefore denied a fair trial.

Issues around delay and abuse of process have resurfaced in the FTT in recent months. In this case, the FTT confirmed that (as evidenced in Nuttall v HMRC [2022] UKFTT 192 (TC)) it has jurisdiction to consider an argument of abuse of process on the basis that delay caused by HMRC in investigating a taxpayer's affairs prevents it from having a fair hearing and that if it finds that to be the case, its case management powers allow it to bar HMRC from defending the appeal.

Given that the FTT has made it clear that it considers it has jurisdiction to consider an argument of abuse of process on the basis of delay on the part of HMRC, it is likely that other taxpayers, in appropriate cases, will seek to rely on such an argument.

You can read our commentary on the decision here.

Court of Appeal confirms that management expenses were capital and not deductible for Corporation Tax purposes

In HMRC v Centrica Overseas Holdings Ltd [2022] EWCA Civ 1520, the Court of Appeal (CoA) confirmed that certain professional fees incurred in the run-up to the disposal of a subsidiary were expenses of management but also capital in nature and therefore not deductible for Corporation Tax purposes.

This decision provides helpful guidance on the treatment of expenditure on professional fees incurred in the context of M&A transactions. The CofA's judgment suggests that when a decision is made to buy or sell an asset, professional fees incurred from that point onwards may not be deductible for Corporation Tax Purposes. It is therefore necessary to determine whether a firm decision to sell has in fact been taken. A distinction can be drawn between professional fees incurred in order to help inform the decision as to whether to sell a business, rather than how to sell it. Depending on the exact purpose of the relevant fees, they may be deductible.

Anyone involved in M&A transactions should carefully consider this decision.

You can read our commentary on the decision here.

Tribunal orders HMRC to close its enquiry

In Newpier Charity Ltd v HMRC [2022] UKFTT 373 (TC), the FTT granted the taxpayer's application for a direction requiring HMRC to issue a closure notice on the basis that there were no reasonable grounds to maintain HMRC's enquiry into the taxpayer's claim to charity tax relief.

One of the keenest areas of contention between HMRC and taxpayers is the length of time that enquiries take before they are finally concluded.

Once an enquiry has been commenced by HMRC there is no statutory time period within which it must be concluded and it is not uncommon for enquiries to become long-running and protracted, lasting many years.

Such enquiries can be commercially disruptive, time-consuming and expensive, especially if HMRC issue a number of information requests during the course of the enquiry. There will, therefore, be occasions when a taxpayer decides that an enquiry has gone on for long enough and wishes to bring it to an end. This decision is a reminder that in appropriate circumstances, taxpayers should consider adopting a proactive approach and seek a direction from the FTT requiring HMRC to issue a closure notice within a specified time period.

You can read our commentary on the decision here.

And finally...

Ordinarily in civil litigation, a successful party is entitled to recover their reasonable costs of bringing or defending a claim. However, the approach of the FTT to this issue has not always been consistent. You can read our recent commentary on this important issue in Tax Journal here.