Tax Bites – May 2024

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

News

TOAA rules to be extended to reverse the Fisher decision

Clause 22 of Finance (No2) Bill 2024, which has passed its second reading in the House of Commons, extends the transfer of assets abroad (TOAA) rules to cover some transfers carried out by closely-held companies. 

The Supreme Court's recent decision in HMRC v Fisher [2023] UKSC 44 (which we reviewed here) limited HMRC's ability to use the TOAA rules to capture minority shareholders in companies carrying out transfers.     

The Bill, if enacted, will partially reverse the Fisher decision, by adding new sections 720A and 727A to the Income Tax Act 2007, which will result in a tax charge where "a relevant transfer [is] carried out by a closely-held company in which an individual has a qualifying interest" provided that the individual is involved in the company and an avoidance condition is met.    

HMRC has updated its draft guidance on the  new contracting out rules and overseas restrictions on R&D tax reliefs 

Following a public consultation, HMRC has updated its draft guidance on the new contracting out rules and overseas restrictions on Research and Development (R&D) tax reliefs that will be codified in the Finance Bill 2024. 

We discussed the previous draft in our February edition of Tax Bites. The updates include: 

• more detailed advice at section 2.1 on record-keeping and other evidence to support any claim for R&D relief;
• explicit acknowledgement at section 4.1 that R&D relief can cover temporary workers from overseas who are exempt from UK taxes under double taxation or social security agreements; and 
• an updated section 6.5 setting out HMRC's views on the permitted conditions under section 1138A(2), Corporation Tax Act 2009, where relief may be claimed on R&D carried out outside the UK.   

HMRC intends to incorporate the guidance into the Corporate Intangibles Research and Development Manual in due course.

HMRC has updated its guidance on claiming enhanced structures and buildings allowance relief in UK Freeport or Investment Zone special tax sites

HMRC has updated its guidance on enhanced structures and buildings allowance relief in UK Freeport or Investment Zone special tax sites.

The guidance has been amended to use the term "special tax sites" rather that "Freeport sites", to reflect the two different types of sites. It also adds links to guidance on Freeports and Investment Zones and a tool to check which specific sites have been designated. 

HMRC has provided simple guidance on how to qualify for and apportion the enhanced relief, as well as worked examples.

HMRC has updated its guidance on non-resident trusts

HMRC has made minor updates to its guidance on the tax treatment of non-resident trusts.

HMRC has removed the provision that "for most discretionary or accumulation trusts, trustees pay tax at the standard rate on the first £1,000 of taxable income". Instead, all trustees of non-resident trusts pay tax on trust income at the higher rates of 39.35% (on dividend income from stocks and shares) or 45% (on all other trust income). This is expected to lead to an increase in the tax liability of virtually all such trusts. However, the definition and tax treatment of non-resident trusts is complex and potentially affected trustees should seek independent expert advice if they are in any doubt as to their tax liability.          

Case reports

Costly objection by HMRC

In Essex Trading Ltd v HMRC [2024] UKFTT 69 (TC), the First-tier Tribunal (FTT) allowed an application for costs by the taxpayer on the basis of HMRC's unreasonable conduct in opposing an application for specific disclosure.

This decision provides useful confirmation that HMRC's opposition to disclosure applications can constitute unreasonable conduct giving rise to a potential costs order against it. The decision also confirms that the correct approach for HMRC to take if it is unsure of its position on disclosure due to a concern about its confidentiality obligations owed to third party taxpayers, is to provide the affected third-party taxpayer with an opportunity to object to disclosure, rather than taking an unnecessarily restricted view of the statutory provisions which permit HMRC to disclose information relating to third party taxpayers.

You can read our commentary on the decision here.

Upper Tribunal upholds penalty imposed for failing to take 'corrective action' in response to a follower notice

In K Pitt v HMRC [2024] UKUT 21 (TCC), the Upper Tribunal (UT) dismissed the taxpayer's appeal and upheld a penalty for failing to take corrective action in response to a follower notice (FN) as the final judicial ruling specified in the FN was relevant to the arrangements the taxpayer had implemented.

The UT rejected the Appellant's argument that Audley v HMRC [2011] UKFTT 219 (TC) was fact-sensitive and the FTT had failed to find the material factual differences between the judicial ruling and his arrangements because it had erroneously compared the 'reconstituted' facts when it was only permitted to compare the primary facts. In the view of the UT, such an argument was not supported by the relevant legislation or the Supreme Court's decision in R (Haworth) v HMRC [2021] UKSC 25. Accordingly, as things currently stand and subject to the outcome of any further appeal, reconstituted facts are to be treated as findings of fact for the purposes of determining whether a final judicial ruling specified in a FN is relevant to the arrangements implemented by the recipient taxpayer.

It is also worthy of note that the UT confirmed, albeit obiter, that the FN regime is not confined to mass-marketed tax avoidance schemes. The UT’s narrative and analysis of the legislation and case law will be useful to anyone who receives a FN.

You can read our commentary on the decision here.

Taxpayers appeals against discovery assessments allowed

In Charles Collier and CB Collier Partnership v HMRC [2023] UKFTT 00993 (TC), the FTT allowed the taxpayers' appeals as the assessed loss of tax was not brought about deliberately (it had occurred due to carelessness). The 6-year time limit therefore applied for HMRC to issue assessments and make amendments and HMRC were out of time to do so.

This decision provides helpful analysis on the test the FTT is likely to apply when determining whether a tax loss has been brought about deliberately. In this case Mr Collier was successful in demonstrating that the omission to include figures in the relevant tax returns was simply due to carelessness and was not deliberate. 

You can read our commentary on the decision here.

And finally …

Adam Craggs and Harry Smith have published a review of contentious tax in Q1 2024 in Tax Journal. Highlights include recent developments in the DOTAS regime, the state of play in relation to R&D reliefs, and some implications of the Economic Crime and Corporate Transparency Act 2023. Find out more here (subscription required).