Tax Bites - November 2023

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

News

HMRC updates its Employment Status Manual on agency and temporary workers

HMRC has updated its guidance on agency and temporary workers in its Employment Status Manual. 

In particular, HMRC has updated its explanation of supervision, direction or control (SDC) (ESM2055) and provided additional guidance as to how to determine if SDC is present (ESM2055a).

Examples of the application of SDC to different workers, such as product demonstrators and drama teachers, have been removed altogether, whereas for some workers, including IT consultants and security officers, some detail has been removed.  

HMRC has also removed from the Manual, guidance relating to the nature of agency contracts, and personal service. 

HMRC publishes its Avoidance Handling Process Manual

HMRC has published its Avoidance Handling Process Manual. The manual explains HMRC’s process for handling tax avoidance arrangements. It notes the difference between tax avoidance and tax planning. In HMRC's view, tax avoidance involves bending the rules of the tax system to gain an advantage that was not intended by Parliament whereas tax planning involves the use of tax reliefs for their intended purposes.

Under HMRC's process, each risk posed by tax avoidance has a project control document, has a strategy as to how to handle the risk which is agreed by the Anti-Avoidance Board (AAB), and is included on HMRC's Avoidance Risk Register (AHP2100).

The manual explains how avoidance risks may be identified and that once identified, the risk must be referred to the AAB Secretariat. The AAB Secretariat will arrange for the risk to be referred to the relevant policy team for consideration. The policy team will liaise with stakeholders and agree a handling strategy for the risk. No action can be taken in relation to the risk until a handling strategy has been agreed.

HMRC updates its PAYE Manual 

HMRC has added guidance to its PAYE Manual regarding the exercise of a special PAYE discretion under section 684(7A)(b) of the Income Tax (Earnings and Pensions) Act 2003. The discretion allows HMRC to effectively disapply compliance with the PAYE Regulations, so long as HMRC is satisfied that the payor's compliance with the Regulations is not appropriate or necessary. The guidance was previously found in HMRC's Avoidance Handling Process Manual but has been moved to make it more accessible to officers of HMRC working in Counter Avoidance.  

There are three categories under which HMRC may consider applying the PAYE discretion: 

Category 1: offshore employer scheme used anytime and offshore trading income scheme used before 2014 (when applying the PAYE discretion to the original loans) (PAYE140015).

Category 2: offshore and onshore trading income scheme used from 2014 (when applying the PAYE discretion to the original loans) (PAYE140020).

Category 3: offshore and onshore trading income scheme used after 2014 (when applying the PAYE discretion to the loan charge) (PAYE140025).

Categories 1 and 2 relate to applying the PAYE discretion to original loans i.e. loans or other payments received via a contractor loan avoidance scheme that HMRC views as taxable as income. Category 3 relates to applying the discretion to the loan charge i.e. a tax charge a person may be liable for if they received a disguised remuneration loan or credit on or after 9 December 2010 where the balance was still outstanding on 5 April 2019. 

OECD/G20 updates its international tax framework 

On 11 October 2023, the Organisation for Economic Co-operation and Development (OECD) released the Multilateral Convention to Implement Amount A of Pillar One (MLC). 

This update to the international tax framework seeks to co-ordinate a reallocation of taxing rights to market jurisdictions in relation to the profits of the largest and most profitable multinational enterprises (MNEs), remove digital service taxes and improve tax certainty.  This forms part of the package of deliverables agreed on 11 July 2023 for the two-pillar solution to address the tax challenges which arise from the digitalisation of the economy. 

The MLC has been published alongside an Explanatory Statement, an Overview, Understanding on the Application of Certainty for Amount A of Pillar One, and a new Minimum Tax Implementation Handbook to assist on the implementation of pillar two regarding the global minimum tax.  

It is likely that the MLC will only be of relevance to a small number of businesses given that it is expected to reallocate the profits of around 100 MNEs.  

Case Reports

Limitation proves to be a magic bullet for Magic Carpets

In Magic Carpets (Commercial) Ltd v HMRC [2023] TC08892, the First-tier Tribunal (FTT) held that although a taxpayer acted carelessly in implementing a tax planning arrangement involving an employee benefit trust, this carelessness did not bring about a loss of tax. HMRC's determinations were therefore out of time as they had been issued after the regular four-year limitation period had expired.

This decision illustrates the importance of considering the entirety of a statutory test.   Although Magic Carpets was considered by the FTT to have acted carelessly, this was not enough to render HMRC's determinations in time since the loss of tax to which they related was not occasioned by that carelessness.  

Our comment on the decision can be read here.

Judicial developments in recent treaty cases

A double taxation treaty (DTT) is designed to reduce juridical double taxation, typically by eliminating or limiting taxation in the country in which the income or gain arises or by requiring the country in which the person subject to taxation is resident to grant relief for source state taxation through a credit or exemption mechanism. A DTT commonly applies to residents of one or both of the contracting states and deals with specified taxes.

In a number of recent cases concerning the application of double tax treaties the tribunals and courts have resisted HMRC's expansionist approach to construction.

For the most part, the (at present) ultimate determination of these cases reveals a positive trend in the development of the jurisprudence in this area. What might best be described as 'common sense' outcomes have been reached, with the tribunals and courts routinely declining to follow the expansionist approach to interpretation advocated by HMRC.

Our comment on recent treaty cases can be read here.

Upper Tribunal confirms that the need to care for close relatives is not an exceptional circumstances for the purposes of the statutory residence test

In HMRC v A Taxpayer [2023] UKUT 00182 (TCC), the UT considered, for the first time, the meaning of "exceptional circumstances" for the purposes of the statutory residency test (SRT) in the Finance Act 2013 (FA 2013). In overturning the decision of the FTT and allowing HMRC's appeal, the UT concluded that moral obligations, specifically the need to care for close relatives, were not exceptional circumstances.

In 2015, the Taxpayer moved to the Republic of Ireland, while her husband remained in the UK. During 2015/16, the Taxpayer’s husband transferred shares to her, on which she received approximately £8 million of dividends. The Taxpayer completed her 2015/16 return on the basis she was not UK resident. HMRC enquired into the return, determining she had exceeded the permissible number of days in the UK and was therefore UK resident for tax purposes. HMRC amended the return, resulting in additional tax of around £3m. The Taxpayer appealed. 

In accordance with the table in paragraph 18, Schedule 45, FA 2013, the Taxpayer would be resident in the UK if she spent more than 45 days in the UK. It was common ground that the Taxpayer had exceeded those 45 days, and that she would be UK resident for the relevant year unless the additional days satisfied the exceptional circumstances test in paragraph 22(4), Schedule 45, FA 2013. 

The appeal focused on two visits the Taxpayer made to the UK in December 2015 and February 2016. The Taxpayer argued that, in respect of both visits, she was in the UK because her twin sister, who suffered from alcoholism and depression, had threatened to commit suicide and such circumstances constituted exceptional circumstances (the primary case). The Taxpayer also argued that her sister was unable to care for her two dependent children, such that the Taxpayer was prevented from leaving the UK until appropriate care had been arranged, which also amounted to exceptional circumstances (the secondary case). 

While managing tax residency status is likely to be relatively straightforward for most individuals, the circumstances in A Taxpayer demonstrate that difficult choices, with potentially significant financial consequences, may arise where challenging family circumstances abut against the hard edges of the rules contained in the SRT.

While the UT has made it clear in A Taxpayer that the run-of-the mill complexities of family life will not satisfy the test in paragraph 22(4), Schedule 45, FA 2013, it is easy to imagine circumstances in which the application of the UT's decision will be less clear-cut. The UT's view in this case of what is "run-of-the-mill" might not be shared by a differently constituted tax tribunal.  

The UT's decision in A Taxpayer presents individuals seeking to avail themselves of paragraph 22(4), with a significant hurdle to overcome. However, when it comes to matters of conscience, the range of circumstances that may fall at the interstices of what can properly be described as "regularly, or routinely, or normally encountered" vis-à-vis circumstances that are truly exceptional are endless and deciding where the boundaries lie may require HMRC and the courts to draw some fine, potentially controversial, distinctions between competing values. Given the increasing complexities of modern life, there is likely to be more for the courts to say on the SRT exceptional circumstances test.

Our comment on the decision can be read here.