Archive for month: April, 2014

First-tier Tribunal case shows the importance of good preparation

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In the case of HMRC v Brown [2014] TC 03439 the taxpayer was an on course bookmaker. HMRC issued discovery assessments on him under the Taxes Management Act 1970 (“TMA 1970”), s.29 as well as closure notice amendments under TMA 1970, s.28A.   The effect of these was that Mr Brown was assessed to further income tax on unexplained bankings which HMRC contended should be treated as additional business income and hence profit.

HMRC also issued associated penalty determinations under TMA 1970, s. 95 (now Finance Act 2007, Sch. 24) for negligently delivering incorrect returns.

The taxpayer appealed against both assessments, closure notice amendments and penalty determinations.

The taxpayer did not dispute the validity of the assessments or amendments but appealed the amounts involved. The taxpayer’s argument was that, on the margins on which the business operated, it would not have been possible for him to generate enough revenue to have achieved such a profit.

The taxpayer also gave evidence that some of the bankings were loans from his father and his father gave evidence to confirm this. The taxpayer also submitted a cash reconciliation prepared by his accountant which showed capital held, cash bets received, payouts, bankings and retained cash carried forward covering a three year period.

The First-tier Tribunal (“FTT”) allowed the taxpayer’s appeal in part. The FTT found that in the absence of any independent or documentary evidence in relation to the betting industry in general and on-course bookmaking in particular, the taxpayer had not adduced sufficient evidence to completely displace the assessments but that it did not follow that they should stand without any alteration given that there was relevant evidence contained in the cash reconciliation to enable the correct amount of tax to be ascertained. Crucially, the FTT accepted the evidence of the taxpayer’s father that he had made loans to his son. The FTT said:-

44. “Unlike Mrs Stevens we have had the benefit of having heard from and seen Mr Brown Senior who gave his evidence on oath. We accept his evidence of how he often ‘lent’ money to his children, usually without expecting it to be repaid, and find that he did make the loans to Mr Brown that he said he did. As such these sums cannot therefore be attributed to the business income of Mr Brown and should not be taken into account in relation to the assessments and amendments.” (page 12).

However, the FTT also found that the taxpayer was liable for penalties because the returns were negligently prepared as they contained errors, arithmetical mistakes and were based on an inaccurate summary of income.

Levy and Levy comment

All officers of HMRC are trained to try and ‘break the records.’ If HMRC can demonstrate that one or more of the business records are incorrect or missing, an opportunity will then present itself for HMRC to argue that profits have been omitted from the takings of the business. In this case, the taxpayer failed to keep good records and this was detrimental for him. What the taxpayer did do correctly, however, was to prepare a thorough case for the Tribunal with credible supporting evidence. Judges and members of the FTT dislike poor case preparation and it is of paramount importance that a case is properly prepared with the right supporting evidence.

Levy & Levy – the tax investigations and resolution specialists in London and Tunbridge Wells

Early payment of tax for those entering into ‘tax avoidance.’

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11 April 2014.

THE WAR ON ‘TAX AVOIDANCE’ CONTINUES

In his budget speech for Budget 2014 the Chancellor of the Exchequer, George Osborne, said that high net earners are contributing the most to tackling the tax deficit, but he promised the government would ensure they ‘pay their taxes, upfront, like everyone else.’

The Government’s war on what is perceives to be ‘aggressive tax avoidance’ has taken yet another step forward with proposals which came out in January 2014 of this year and which will be legislated as part of the Budget 2014 financial package. The key idea is that individuals and companies must pay the tax in dispute during an enquiry or appeal ‘relating to tax avoidance.’  The proposals cover ‘those 65000 people and businesses which have used marketed tax avoidance schemes that need to be investigated and litigated.’ The proposals, which affect those who have entered into tax efficient arrangements and promoters of such arrangements, are part of the Government’s ongoing preoccupation with all forms of ‘tax avoidance.’ HMRC has published these proposals as part of its three pronged attack on tax avoidance namely:-

  • Prevention
  • Detection
  • Counteraction

These proposals are part of the third limb, counteraction. The idea is to make the taxpayer’s life as difficult as possible once HMRC have detected the ‘tax avoidance’ in issue. HMRC’s view is that more robust legislation has led to a reduction ‘in the quantity of marketed tax avoidance schemes’ and ‘a reduction in their likelihood of success.’ One would have thought, therefore, that HMRC would have been content with this situation but this is not so unfortunately. HMRC consider that, despite their successes in tackling tax avoidance, still more is needed to tackle the 65000 taxpayers who have used ‘a wide range of avoidance schemes.’ HMRC say that the major schemes are:-

  • ‘Employee benefit trusts (diverting remuneration via a trust to avoid PAYE and NIC’s);
  • Contractor avoidance (using offshore intermediaries and EBT’s who make loans in place of remuneration to avoid Income Tax and NIC’s);
  • Partnership losses (individuals borrow money to invest in a partnership and claim a tax loss on the whole investment);
  • Stamp Duty Land Tax (Avoiding SDLT by exploiting rules designed to avoid a double charge).

The key HMRC proposal are:-

  • Once a taxpayer receives a Follower Notice, i.e. ‘a notice that the case is the same or substantially the same as a case already decided in the tribunal or court’ he can continue to litigate but must pay the tax to HMRC. In HMRC’s view ‘there is no inherent presumption that the tax under dispute should sit with the taxpayer rather than the Exchequer and point to the fact that ‘Tax is payable following a court or tribunal decision despite a continuing appeal.’  There is, however, a big difference between the taxpayer having lost his own appeal and HMRC deciding that his case is the same as someone elses;
  • The Follower Notice requires the taxpayer to amend the return and pay up if the taxpayer is under enquiry or settle and pay up if there is an appeal against a closure notice;
  • The Follower Notice has a 90 response time;
  • A Payment Notice is issued with the follower Notice ‘to the best of HMRC’s judgement…for the additional tax that would otherwise have been paid if the arrangements had not been entered into.’
  • The Payment Notice becomes due after the 90 days for a Follower Notice has expired unless the taxpayer pays up earlier in which case it is discharged;
  • The Payment Notice is a payment on account and if the taxpayer continues to pursue his claim and is successful then the tax and interest will be repaid to him.  The Payment Notice carries interest from the time when the tax was due under self assessment;
  • The taxpayer can request a reconsideration of the amount of the payment;
  • The Follower Notice will constitute an additional criterion for HMRC to amend any amount of tax previously agreed to have been postponed under section 55 TMA 1970.

Unfortunately, it is HMRC’s judgement as to whether a Follower Notice should be issued and that in turn is purely HMRC’s own view that the issue in dispute has already been decided by any tribunal or court.  So, for example, if there is one decision from the lowest rung of the Tribunal system, the First-tier Tax Tribunal (“FTT”), and that decision is in HMRC’s favour and has not been appealed then this may trigger a Follower Notice even if the case is a very good one and the Taxpayer at the FTT ran out of funds to pursue the matter further. Penalties will also be charged on late payments of tax due under Follower Notices. Unfortunately, there is no right of appeal against a Follower Notice or Payment Notice to an independent Tribunal.

There are substantial penalties, modelled on Schedule 56 FA 2009, for late payment under a Payment Notice.

The penalty is basically 5% for a payment that misses the 90 day deadline, then a further 5% after 5 months and another 5% after 11 months.

The new proposals are also going to be extended to accelerated payment to Disclosure of Tax Avoidance Schemes (“DOTAS”).  HMRC will be able to issue a Payment Notice where there is an enquiry or appeal.  The same 90 day limit will apply. They will also cover cases being challenged under the General Anti-Abuse Rule (“GAAR”).

Levy and Levy comment

 Now is the time to take advice if you or any client of yours has entered in a tax arrangement likely to be affected by the new proposals.  There are various options available for example:

  •  Challenge the issue of a Follower Notice and/or Payment Notice using legal argument (for example on      human rights or judicial review principles);
  • Negotiate the amount and/or timing of payments under a Payment Notice with HMRC;
  • Where there is more than one issue in dispute, take a global look at your or your client’s tax affairs      and seek to negotiate an overall settlement with HMRC;
  • Where the tax arrangements are robust, challenge HMRC in a cost effective manner through Tax Tribunals.

 

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