Tax Bites - March 2023

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

News

HMRC issues guidance on when it will issue penalties for not registering or maintaining a trust

HMRC has issued new guidance on the penalties that it will impose when a trust is not registered under it's new trust registration service.

The guidance sets out the implications for failure to register a trust, and also how to appeal against or pay penalty charges imposed for any such failure. Trustees need to register any trust that is in scope with HMRC and keep the information provided to HMRC up to date. If trustees fail to do this, they can receive a fixed penalty of £5,000. However, trustees will not be penalised if their failings are not deliberate and they rectify the oversight within any time limits set by HMRC.

OECD publishes manual on the handling of multilateral mutual agreement procedures and advance pricing arrangements

The OECD has published a guidance manual entitled 'Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements' (MoMA). While this document is not binding on domestic tax authorities, it provides a useful insight into the OECD's current perspective on both Mutual Agreement Procedures (MAPs) and Advance Pricing Agreements (APAs).

In its press release announcing the publication of the manual, the OECD states that both MAPs and APAs give more certainty to taxpayers and tax authorities, respectively, when transactions involve a number of different tax treaties. The MoMA is intended to provide guidance to parties involved in the co-ordination of MAPs and APAs in such transactions. It also outlines the extent of the cooperation that will be expected from taxpayers in their dealings with tax authorities.

HMRC publishes guidance on cross-border arrangements

HMRC has published guidance entitled Check if you need to tell HMRC about a cross-border arrangement (CRS) and Cross-border arrangements schema and supporting documents (MDR). These are useful resources for any individuals or businesses in the UK who are subject to the CRS.

The first document provides a broad overview of who needs to inform HMRC about cross-border arrangements (individuals and businesses resident in the UK) and when they need to do so (within 30 days of the arrangement starting or being made available). These arrangements include any that are covered under the CRS.

The second document provides taxpayers with the schema and documents they need to report the cross-border tax arrangements.

HMRC publishes new Litigation and Settlement Strategy manual

HMRC has published a new Litigation and Settlement Strategy (LSS) manual. The LSS manual provides an invaluable insight into how HMRC approaches litigation and settlement of tax disputes. The document emphasises that it is HMRC's duty to apply the law correctly. Indeed, they can only decide to not collect taxes in highly specific circumstances.

The manual includes sections on the approach to be adopted in bringing a dispute to a conclusion. The manual also contains detailed guidance on handling and resolving disputes, and uses a number of case studies to illustrate possible approaches. The document is a useful resource for any taxpayer engaged in a dispute with HMRC. 

Case reports

HMRC ordered to pay taxpayer's costs due to unreasonable behaviour

In Eclipse Consultancy Ltd v HMRC (TC/2018/08155), the First-tier Tribunal (FTT) granted the taxpayer's application for its costs to be paid by HMRC due to HMRC's unreasonable behaviour in not withdrawing from the proceedings at an earlier stage.

The FTT noted the similarities in this case with an earlier case. In Doran Bros (London) Ltd v HMRC [2016] UKFTT 829 (TC), the FTT decided that input tax on professional fees for advice on providing tax efficient incentives to a director was recoverable when the advice was given for the purpose of the business. HMRC did not seek to appeal the decision.

In June 2020, HMRC notified the taxpayer that it was withdrawing one argument but would continue with its other argument that the VAT incurred was exempt. However, as a result of a de minimis rule, exempt input tax under £7,500 could be recovered as if it was taxable input tax. HMRC therefore agreed that the taxpayer could recover the disputed VAT in full and conceded the appeal. HMRC did not advise the FTT of its withdrawal from the appeal until August 2020. In September 2020, the FTT allowed the appeal and in December 2020 the taxpayer applied for its costs under Rule 10(1)(b) of the Tribunal Rules, on the basis that HMRC had acted unreasonably in not withdrawing from the appeal earlier.

As the FTT is not a tribunal of record, HMRC (and indeed taxpayers) have the right to pursue arguments before the FTT that have previously been rejected by the FTT, but the FTT has made clear in this decision that HMRC must turn its mind to the reasonableness of defending an appeal on such a basis at the earliest opportunity. In the absence of any other grounds, where HMRC does not advance any case as to why previously unsuccessful arguments should lead to a different outcome in a separate appeal, it is unlikely that HMRC would be considered to be acting reasonably in defending such an appeal, exposing it to the risk of an adverse costs award.

Our comment on the decision can be read here.

Tribunal allows taxpayers' appeals against Schedule 36 information notices and directs HMRC to issue closure notices

In Barry Davies and Others v HMRC [2022] UKFTT 369 (TC), the FTT allowed the taxpayers' appeals against information notices issued under paragraph 1, Schedule 36, Finance Act 2008, finding that the information requested was not 'reasonably required' and directed HMRC to issue closure notices.

Where a tax return has been submitted, as in this case, one of four further conditions must be satisfied under paragraph 21, Schedule 36, Finance Act 2008. The conditions relevant in this case were Conditions A and B. Condition A is that a notice of enquiry has been given in respect of the return. That was the case in relation to the tax year 2017/18. Condition B is that, as regards the person, an officer of HMRC has reason to suspect that an amount that ought to have been charged to tax may not have been assessed or that relief from tax given for the chargeable period has become excessive. HMRC relied on Condition B in relation to the enquiry year and the earlier years.

The FTT concluded that although Conditions A and B were satisfied, the information and documents requested in the notices were not reasonably required to check the taxpayers' tax position. This was because collating all the information and documents requested would have been a very onerous task and compliance with the notices would not necessarily have produced the information HMRC actually needed to address the issue of interest deduction.

This case demonstrates that it is worthwhile taxpayers carefully scrutinising information notices issued by HMRC because whilst the information requested might be relevant to HMRC's enquiries, it might not be 'reasonably required', especially if the collation of the information requested would be an onerous task.

Our comment on the decision can be read here.

Tribunal confirms that dividends declared but withheld from recipients do not constitute taxable income

In Jays v HMRC [2022] UKFTT 420 (TC), the FTT determined that dividends that had been declared, but due to an undertaking, could not be extracted from the company, had not been paid to shareholders for the purposes of their income tax liability.

This decision, while made against an unusual factual matrix, contains useful comment on the provisions relating to the taxation of dividends and distributions. Although the decision is not binding, if followed, it could have far-reaching consequences in other cases and it would not therefore be surprising if HMRC sought to appeal the decision to the Upper Tribunal.

Our comment on the decision can be read here.

And finally...

Adam Craggs and Harry Smith consider a number of recent costs decisions handed down by the FTT in an article published in Tax Journal.