Tax Bites - February 2024

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

News

HMRC updates its International Manual to provide more comprehensive guidance on transfer pricing risk 

HMRC has updated its International Manual with further, "more comprehensive" guidance on transfer pricing risk.

HMRC has published "Transfer pricing operational guidance: accurate delineation of the actual transaction: risk" (INT485025). This provides guidance on HMRC's application of the six-step process for analysing risk within Chapter I of the OECD Transfer Pricing Guidelines (the Guidelines). HMRC has also published guidance on "Transfer pricing operational guidance: Accurate delineation of the actual transaction: Risk allocation"  (INTM485023). This provides a summary of the key aspects of analysing risk in a controlled transaction within Chapter I of the Guidelines.

Given that these matters have been subject to much debate in recent years, the new guidance seeks to provide clarity on the interpretation of the six-step process and its place within a transfer pricing analysis.  

HMRC updates its guidance on informing HMRC about underpaid tax from previous years

HMRC has updated its guidance on informing it about underpaid tax from previous years. 

The online service enables users to inform HMRC about onshore and offshore income, or gains, which have not previously been declared. The service can be used by:

• an individual;
• a designated member of a limited liability company;
• a trustee of a trust;
• a representative of an estate;
• an officer of a company; or
• an agent.

The service provides guidance on making a disclosure including how to prepare a disclosure and what to expect.  

Those needing to make a disclosure to HMRC can use the calculators within the guidance to work out the tax, interest and penalties owed and to determine entitlement to basic personal allowances. 

HMRC publishes draft  guidance for consultation on R&D tax reliefs

HMRC has published draft guidance for consultation on Research & Development (R&D) tax reliefs relating to new contracting out rules and overseas restrictions. 

The draft guidance has been prepared in response to changes to R&D relief under the Finance Bill 2024 (the Bill). These changes will apply for accounting periods beginning on or after 1 April 2024. 

Whilst the Bill is subject to change (as it is yet to receive Royal Assent), the draft guidance addresses the following two changes currently due to be introduced by the Bill: 

• restrictions to the extent to which contractor payments for R&D and payments for externally provided workers can qualify for R&D relief where the R&D activity takes place overseas; and
• new rules for contracted-out R&D. 

HMRC publishes a further call for evidence on tax administration framework

HMRC has published a further call for evidence in relation to the tax administration framework. The call for evidence seeks views on how aspects of tax administration could be reformed so that the government can establish a 'trusted and modern' tax administration system. 

The call for evidence addresses the following areas:

• HMRC's enquiry and assessment powers, such as the potential opportunities, benefits and risks of moving to a single set of powers across all taxes and views as to the potential costs of changes to assessment and enquiry powers;
• Penalties, including views on tax regimes where a differentiated approach to certain penalties may be needed, and particular penalty regimes that may benefit from simplification; and 
• Safeguards, such as the possibility of mandating statutory reviews in certain circumstances and the merits and challenges of aligning the appeals process for direct and indirect taxes. 

The consultation closes on 9 May 2024. 

Case reports

Tribunal varies Schedule 36 information notice as it sought material not reasonably required by HMRC

In Parker Hannifin (GB) Ltd v HMRC [2023] UKFTT 00971 (TC), the First-tier Tribunal (FTT) found that an information notice issued by HMRC, pursuant to Schedule 36, Finance Act 2008 (FA 2008), was not invalid simply because it required electronic searches using a list of specified search terms, but it did seek information that was legally privileged or not "reasonably required". The FTT varied the notice accordingly.

This decision is helpful in clarifying that whilst search terms can be referred to in an information notice issued under Schedule 36, strict parameters must be adhered to by HMRC. The FTT has demonstrated its willingness to reel in HMRC when it seeks documents which are not "reasonably required".  

Whilst each case will depend on its own particular facts and circumstances, it will be interesting to see whether this decision encourages HMRC to use search terms more often when issuing  Schedule 36 information notices. 

Our comment on the decision can be read here.

Upper Tribunal remits CGT appeal back to the Tribunal for rehearing

In M Campbell v HMRC [2023] UKUT 265 (TCC), the Upper Tribunal (UT) remitted the taxpayer's appeals against capital gains tax (CGT) assessments and penalties to the FTT, but upheld the FTT's conclusion that the taxpayer was not trading when he bought and disposed of several residential properties.

The UT remitted the appeals against penalties back to the FTT, as it had not applied the correct test to determine deliberate behaviour on the part of the appellant and had not given any reasons which would justify a finding of a deliberate failure to notify. In addition, the FTT had failed to consider whether HMRC’s approach to mitigation of the penalties was flawed. 

Our comment on the decision can be read here.

Tribunal allows taxpayers' appeals against discovery assessments

In Smith v HMRC [2023] UKFTT 00912 (TC), the FTT allowed the taxpayers' appeals against discovery assessments, finding that a transfer of goodwill did not amount to a distribution under section 1000, Corporation Tax Act 2010, because the goodwill was owned personally by the taxpayers.

While this decision ultimately rested on the supremacy of the GAAP-compliant accounts, the FTT's comments on the nature of goodwill are of wider importance to taxpayers. In particular, the FTT's rejection of HMRC's assertion that goodwill cannot inherently be held or exist separately from the business to which it relates, is likely to be of relevance to a range of businesses whose goodwill is based on an individual's reputation and their relationship with their clients.

Our comment on the decision can be read here.

And finally …

On Wednesday 6 March 2024 from 11am to 12pm, RPC Tax Disputes partners Adam Craggs and Michelle Sloane will run an online classroom providing best practice guidance on managing a 'dawn raid' and how to advise clients through the complexities of a raid. Find out more and book your place here. 

On Tuesday 19 March 2024, Adam Craggs and Michelle Sloane will be speaking at the Crisis Minds in-person conference to discuss 'Successfully navigating dawn raids'. Find out more and book your place here.